In the wake of Governor Alejandro García’s June declaration that the Puerto Rican government’s $72bn public debt is unpayable – putting an end to the traditional practice of financing the government’s massive annual deficits and rampant spending through loans – citizen and labor groups have taken to the streets concerned that the burden of paying off the debt will fall disproportionately on the island’s poor, working and middle class residents.
The release last week of the Fiscal and Economic Growth Plan, the product of a special working group commissioned by the government, has not allayed their concerns. Though some of the measures – such as the simplification of tax codes and investment in energy infrastructure – are a necessary condition of reform and recovery, large corporations and the wealthy will wind up almost unscathed by the proposals. On the other hand, those least able to afford to pay the consequences of years of profligate government spending will have to tighten their belts.
For instance, despite past, present and future austerity measures imposed on its citizens, Puerto Rico has become a tax haven for millionaires and the super rich. Current tax laws provide favorable tax conditions to wealthy foreigners who reside in Puerto Rico for as little as 183 days, in effect exempting nearly all of their investment income. The New York Times refers to this group as “under-the-radar millionaires” and one money-manager referred to the tax code’s provisions for foreigners’ investment income as “kind of in a twilight zone” to Forbes. Reuters reports that the island itself has “gained little” economic benefit from sheltering the investment income of people who don’t even live here, and even some members of my ruling Popular Democratic Party (PPD) question its alleged benefits. Still, the working group’s plan leaves that part of the tax code as-is.
Big business, too, would be left untouched by the plan’s proposal – with US-based corporations enjoying favorable tax treatment in Puerto Rico. The local foreign tax rate stands at a mere 4% with the rate scheduled to phase out in 2017. Although the new Plan suggests extending the tax for an additional five years (to 2022), page 25 suggests eventually lowering the nominal corporate tax rate for all business. But, if the government instead permanently increased foreign corporate taxes to 10% – per one senate proposal – it could avoid tax hikes for all Puerto Ricans while remaining extremely competitive, considering that US levels are as high as 39.1%.
Though not included in the working group’s plan under consideration by the governor, some legislators in my party have proposed a special tax on “big box” department stores. Foreign chains have been particularly successful in Puerto Rico with the island being dubbed by business press as a “retail mecca”. Despite the recession under which most residents have labored since 2006, Puerto Rico is home to a high concentration of Wal-marts and Walgreens compared to places with similarly-sized populations. Many such stores obtained government subsidies and incentives to set up shop in Puerto Rico: Walmart, for instance, received millions in direct labor subsidies from the government and generous business and property tax wavers. CVS, meanwhile, is building new stores on government lands. The “big box” tax would recover incentives they clearly did not need to be profitable, effectively relieving the burden that taxpayers have had to shelve through subsidies and incentives.
Puerto Ricans, however, are told that if corporate taxes were increased or tax incentives eliminated, capital and job flight would occur. For example, one legislator from the opposition New Progressive Party criticized a proposed tax for companies with more than $600m in gross earnings in our territory, claiming that those businesses would suffer an “almost mortal blow” and be forced to close shop.
But the opposite is certainly true: cut wages and eliminate benefits too aggressively in lieu of increasing corporate taxes and reducing giveaways and citizens will continue to migrate from the island en masse. Some local media have already reported flight specifically due to personal income tax increases. The working group’s current plan chips away at the often-minimal disposable income that too many Puerto Ricans earn at low-paying, low quality-jobs. Puerto Rico’s gross national income per capita stands at a third of the US level.
Many Puerto Ricans could accept labor reform, some income tax hikes and other austerity measures, particularly if that meant their salvation from more serious austerity measures and further economic turmoil. But as long as the low- and middle-class people feel like they are getting the short end of the austerity stick, citizens will continue to mount heavy opposition to any government plan to fix our debt problem.
Governor García will be faced with many difficult decisions in coming days, and he should carefully weigh the cost and benefit of each of the commission’s proposals. Meanwhile, the legislature and citizenry patiently await the government’s course of action. But in order to make true his statement that “sacrifices must be shared”, big business and high-income taxpayers must share the economic burden of debt repayment as opposed to those who can least afford it.
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