García Padilla Rallies Behind His Tax Reform
SAN JUAN — Following his recent call for revisiting his failed tax reform, Gov. Alejandro García Padilla rallied behind establishing a 14.5% value-added tax with no income taxes on roughly 90% of Puerto Rico taxpayers, during a briefing to the press at La Fortaleza on Wednesday.
During his last State of the Commonwealth address held Monday, he urged lawmakers to “correct the mistake” of having Puerto Rico residents paying income taxes and a higher sales tax, a result of the controversial tax reform legislation that was approved last summer amid majority opposition to the administration’s original plan.
“This is a proposal of economic development. Why? Because it makes us more competitive,” the governor argued.
García Padilla had initially proposed a 16% VAT and the elimination of income tax returns for those people earning $40,000 or less annually. Following a bumpy legislative road, a compromise was reached to increase the sales & use tax to 11.5%, albeit no relief on the income-tax side. Moreover, the current legislation establishes a 4% business-to-business (B-to-B) tax that kicked in last October, and which now increases to 10.5% on April 1, along with the transition into a VAT system.
Meanwhile, there have been increasing calls from various sectors to delay the next phase of tax reform, including the B-to-B tax hike. The governor’s own party gubernatorial candidate, David Bernier, is one of those urging for postponing some of the changes set to take place April 1. With Bernier stating that the governor should not bring back the divisive issue at this moment, García Padilla said there is no time to be wasted.
Nevertheless, the governor said he has asked Treasury Secretary Juan Zaragoza to evaluate the postponement, but without affecting “other items.” If such analysis concludes it needs to be delayed, the law provides for doing so, the governor said.
Postponing the next phase of tax reform, including the B-to-B tax hike, would delay further the commonwealth’s financial audited statements for fiscal year 2014, since it affects revenue projections for the remainder of fiscal 2016, which ends June 30, García Padilla explained. But he says bringing back his tax reform now — with legislation already in the works at the House — wouldn’t do so, since it doesn’t affect this fiscal year.
Delaying the transition to a VAT system and not eliminating income taxes, as he proposes, is simply not correct for the governor. “There is huge hypocrisy from some sectors, that criticize the government when it implements taxes, but when it wants to do away with the largest of them, they also criticize it,” he said.
García Padilla went further in saying one of the elements Puerto Rico voters should look for come the November general election is which side politicians sided regarding this matter. “My request to the country, to Popular Democratic Party members in the primary, and the rest in the election, that they vote against politicians who want people to keep paying income taxes,” he said.
Other alternatives have been proposed to the governor’s tax reform, from returning to a tax at the point of entry to higher taxes on foreign-based companies. On the latter, García Padilla said this only makes his work tougher.
“I’m fighting now so manufacturing sites looking to expand set shop here and not [elsewhere]…. And all of a sudden you have some Puerto Rico politicians that believe they are so intelligent, who simply decide making it harder for me to bring manufacturing sites,” the governor said. “How do I convince them to set shop in Puerto Rico?”
The governor added that Puerto Rico’s “tax system runs against productivity and makes us less competitive,” while it doesn’t address regressivity. García Padilla stressed that his proposal, Treasury would be able to tap into the informal economy.
Legislation is already in the works to revisit the tax reform, although there have been growing concerns among lawmakers, including majority members on both chambers. Some observers believe that just as it happened last summer, La Fortaleza won’t secure enough votes for passage amid opposition within the governor’s own party.
When asked why use the tax issue within the election context by calling on voters to reject those politicians who are against his proposal, García Padilla said, “I don’t want Bernier to have the same obstacles I have faced in the road. Everybody knows what they are.”