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Behind the approval of the 4% preferential rate for doctors

By on February 10, 2017

SAN JUAN – Just days after the Fiscal Oversight & Management Board reminded Ricardo Rosselló’s administration of its powers as established in Promesa, including the joint discussion of any legislation bearing a fiscal impact, the House of Representatives approved a bill that grants physicians a preferential tax rate of 4% that could cost the island’s general fund some $185 million annually for 15 years.

House Bill 5—Incentives for the Retention and Return of Medical Professionals—was approved with 32 votes in favor and 4 against, with two representatives abstaining after an intense behind-the-scenes struggle that ended with the removal of Treasury and Budget House Committee president Antonio “Tony” Soto from the bill after openly expressing his reservations due to its fiscal impact.

Fiscal Oversight & Management Board Chairman José Carrión III, right, speaks to Elías Sánchez, the government's representative before the Board. (CB Photo)

Fiscal Oversight & Management Board Chairman José Carrión III, right, speaks to Elías Sánchez, the government’s representative before the Board. (CB Photo)

On Thursday, Feb. 2, oversight board Chairman José Carrión III wrote a letter to the governor’s representative in the fiscal entity, Elías Sánchez, in which he clarifies that, in the absence of a fiscal plan, the board has several tools to use in connection with bills—including asking Rosselló to submit within seven days any law he signs along with an estimate of the legislation’s fiscal impact, specifically on spending and revenue.

According to the bill’s positive report—written solely by House Health Committee President Juan Oscar Morales Rodríguez after the Treasury Committee president was relieved for unknown reasons—the cost of the bill for the local Treasury was supposed to be $17.3 million annually if only 500 physicians signed up for the 4% preferential rate. Physicians currently pay 33%, a rate that applies to anyone who earns an income of $66,000 or more.

However, another supplementary report, by Treasury Secretary Raúl Maldonado, dated Jan. 20, acknowledged that “if the benefit is granted to all taxpayers who identified themselves as physicians, the cost is approximately $185 million in 7,670 physicians, regardless of their classification. These $185 million are split into $152 million for medical specialists and $33 million for general practitioners.”

Seven days ago, the board clearly told the Rosselló’s administration in its Feb. 2 letter that compliance actions under Promesa should be the last resort, and Carrión went further in saying that “hopefully they will be unnecessary.”

See also: Fiscal control board is ‘unfocused,’ Elías Sánchez says

“In all events, the Oversight Board hopes and desires the Governor will engage with it in a productive working relationship by discussing and analyzing with the Board in advance the implications of new legislation,” the letter reads.

Despite Carrión’s request, the House approved this physician-exclusive incentive that will be en force for 15 years with the option of renewing it for an additional 15-year period.

This means that if all physicians accept this preferential rate, the General Fund would stop receiving about $2.775 billion in the first 15 years if you take into account the local Treasury’s own estimate that the cost would be $185 million annually.

In a move by the executive branch to point out that the bill does not represent a risk to the island’s coffers, the Treasury secretary sent a letter to House Speaker Carlos “Johnny” Méndez before the bill was discussed, in which he said the spending control measures established by the governor will ease this legislation’s impact.

“We emphasize that the Puerto Rican government’s revenue from taxes paid by physicians would also be lost if physicians leave our island and stop being taxpayers. On the other hand, the physicians that are attracted through this bill will be new taxpayers that are not taken into consideration in our estimate and will have a positive impact on our coffers,” the letter reads.

See also: Fiscal team details plan of action to restructure Puerto Rico debt

Rosselló made clear to the heads of both the House and the Senate his desire to see the doctors’ bill passed because it was one of his campaign promises established in the Plan for Puerto Rico, which said there would be legislation so physicians pay a preferential rate of 4% for 15 years with the option of renewing the term of this incentive for an additional 15 years.

If enacted as law and approved by the fiscal board, physicians will pay less taxes than a person who earns $20,900 annually and currently has a 7% tax rate. Income below that number is not taxed.

Both Physicians & Surgeons Association President Víctor Ramos, and the House Treasury and Budget Committee president, who was removed from the bill to provide the incentive, had said before, during the legislative hearing and also told Caribbean Business, that the preferential rate is not the solution to avoid the exodus of physicians because their main problem are insurance companies that pay late with low rates, as well as the high cost of medical malpractice insurance.

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