Monday, September 28, 2020

U.S. Treasury gives recommendations on Puerto Rico property tax

By on March 28, 2019

U.S. Treasury Department building in Washington, D.C. (F U M A on

Suggests fixed tax, identifying properties and updating valuations

SAN JUAN – The U.S. Treasury Department has offered its recipe to help improve Puerto Rico’s tax system, which mainly calls for non-agricultural and farming lands to each have a one-size-fits-all tax.

The report examines the current status of the property tax on the island and compares it with standards commonly employed to appraise tax systems. It also provides policy and administrative options and makes recommendations about the tax.

Regarding immediate revenue needs, the report says the government should repeal the personal or business equipment tax and adopt a municipal service fee of $0.11 per square meter to apply to non-agricultural land not classified as “institutional,” as well as municipal service fee of $0.0275 per square meter to all agricultural land.

“The fee will apply only to land, not improvements. Allocate $409 million of the new revenue to municipalities to replace the repealed personal property tax and retain the balance (about $600 million) at the Commonwealth level to fund municipal type services delivered by the Commonwealth. These recommendations provide a path forward for transforming the property tax in Puerto Rico in the years to come while at the same time meeting the immediate revenue targets set by the Commonwealth and the Financial Oversight and Management Board,” the report reads.

The document’s goal is to help resolve problems caused by the reduction of commonwealth government subsidies to municipalities and structural reforms.

In addition to supervision by the commonwealth’s chief financial officer, the island’s fiscal plan includes a substantial reduction in appropriations to towns, ultimately phasing out all subsidies by fiscal year 2024. These transfers currently total about $220 million a year, down from about $370 million.

In a statement, Puerto Rico Treasury Secretary Raúl Maldonado said the objective was to transform the property tax system, not impose a “new tax,” and that the recommendations are being evaluated by the mayors, members of the Municipal Revenue Collection Center (CRIM) Board, legislators, businessmen and the CPA Society.

“The document recommends substitution of the current tax and that it would be temporary to allow time for the valuation process of properties that are not in the registry. Our administration has been characterized for reducing or eliminating the taxes to our towns like, for example, the nefarious IVU [Spanish acronym for the sales and use tax] between businesses (B2B), the reduction of the IVU on prepared food. In addition, we are complying with our taxpayers by sending them refunds on time,” Maldonado said.

The revenue target in the fiscal plan for property tax reform has three components.

“To achieve its target, the Fiscal Plan outlines three concurrent changes in current practice: Improved compliance levels from 65 percent to 85 percent ($150 million). Registering properties not currently on the tax rolls ($150 – 200 million) Reclassifying misclassified properties and updating valuations ($200 – 250 million). Based on estimates developed for this report, the property tax in Puerto Rico could generate an additional $700 to $780 million in new revenue annually,” Treasury said.

As for improving the revenue’s productivity and the fairness of the property tax, commonwealth leaders “must confront five major challenges” with the current system, the report says. These include low compliance rates, which are “well below acceptable levels and the large numbers of properties without registration and/or valuation. In addition, many registered properties have not been valued for tax purposes.”

The government must also deal with exemption policies in which municipalities exempt about 60 percent of the known and valued tax base from taxation.

The report proposes six tasks for reforming the property tax: identifying and designating the senior political leader to spearhead reforms; designing and initiating a public engagement process; and creating a small property tax oversight function and team within the Treasury Department to monitor and report on the effectiveness of Municipal Revenue Collections Center (CRIM by its Spanish acronym) operations.

The suggestions also involve adding trained personnel to conduct pending valuations, as well as at CRIM and the municipalities to identify unregistered properties and improve collections, and modifying the database to incorporate fee appraisal data submitted to CRIM by financial institutions.

Treasury said “these improvements will take years, not months, to achieve. In addition, the inequities embedded in the current system because of outdated valuation methods and current exemption policies will still be present.”

Regarding recommendations affecting municipalities, these should continue to have the flexibility to set final tax rates within limits established by the commonwealth, but the report noted the need to eliminate the ability of municipal governments to grant tax exemptions for economic development beyond those approved by the commonwealth.

“CRIM should establish a procedure to notify municipalities of any undeliverable tax notices expeditiously. Municipalities should accept and process such notices and use their best efforts to notify all property owners of their tax obligation. Each municipality (or region) should develop the administrative capacity to actively review, verify, and update CRIM property tax accounts for their jurisdiction. Corrections and updates submitted by municipalities should be subject to review by CRIM staff, however if not processed by CRIM within 60 days, the changes submitted by the municipalities should become final,” the report says.

See the full text of the report here.

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