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Fiscal Board sends Property Tax Recommendations to Puerto Rico gov’t

By on August 28, 2020

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SAN JUAN – The Financial Oversight and Management Board for Puerto Rico submitted recommendations to the Government of Puerto Rico for legislative changes that the panel believes would improve the island’s property tax system and make it “fairer and more efficient.” 

The board recommends broadening the tax base by removing or reducing exemptions and exonerations, measuring the tax base by the true market value of properties “rather than on the last assessments of real estate values in 1957, and reduce the statutory tax rate,” the board said in its media release.

The board made the recommendations in an Aug. 26 letter to Gov. Wanda Vázquez Garced, Senate President Thomas Rivera Schatz and House Speaker Carlos J. Méndez Núñez. 

“The existing property tax system in Puerto Rico is out of date and the recommendations provide for a more transparent tax system,” said board Executive Director Natalie Jaresko. “The people of Puerto Rico deserve a modernized tax system based on the principles of fairness and equity. All property owners should pay their fair share of taxes, not just those unable to claim exemptions.” 

“Municipalities, meanwhile, are in a difficult fiscal position and property taxes represent the most significant revenue stream,” Jaresko said. “Reforming property tax laws would stabilize municipalities’ finances and help pay for the much-needed services they provide to the people of Puerto Rico.” 

Section 205 of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) gives the board the authority to submit recommendations to the governor or the legislature to “promote financial stability, economic growth, and the efficient delivery of Government service,” the release reads.

The recommended reforms consider the following four categories of changes, as per the media release: 

• Reduce exemption and exonerations: The existing property tax system in Puerto Rico is antiquated, opaque, distortionary, and inequitable. More than 26 general exemptions and exonerations exist under the Municipal Code. Municipalities provide additional exemptions, and yet further exemptions and incentives exist for economic development. 

• Establish a market value basis for property valuation: 58% of the real property tax base in Puerto Rico is exempt or exonerated from taxation. Moving to a market-based system would establish a more equitable distribution of property taxes 

• Levy appropriate property tax rates: The statutory property tax rates of more than 10% are high and only viable because of the extreme undervaluation of property for tax purposes in the present system. These statutory rates translate into real effective tax rates substantially less than 1% for both residential and commercial real property. Puerto Rico should improve the uniformity of the effective tax rate on residential property and evaluate increasing the effective tax rate for commercial property. 

• Use classification to transparently vary effective tax rates: In most U.S. state and m municipal property tax systems, taxes vary by commercial, industrial, residential, and agricultural property. In Puerto Rico, much of the variation in effective rates is accomplished through exemptions and exonerations. To improve transparency, equity, and efficiency, the Oversight Board recommends that Puerto Rico vary tax rates across different types of property. 

The recommendations correspond with the measures in the Fiscal Plan for the Municipal Revenues Collection Center (CRIM by its Spanish acronym), which the board certified in June.

The board recalled in its release that fiscal plan “outlines 10 measures for CRIM to increase collected tax revenue without increasing the tax rate, broaden the tax base by adding properties that were previously untaxed and update appraisals to reflect improvements to properties, and make it easier for property owner to pay taxes.”

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