CNE: Treasury’s revenue collections estimates no sign of economic improvement

Written by  //  July 15, 2011  //  Economy  //  No comments

Print Friendly, PDF & Email

Sergio Marxuach (Credit: © Mauricio Pascual)

The Treasury Department’s preliminary year-end General Fund report released Wednesday showing an uptick in revenue collections may not necessarily be a sign of real economic improvement, the Center for the New Economy said Thursday upon analyzing the results.

Sergio Marxuach, the CNE’s public policy director, said it is not credible to attribute the increase in revenue collections to a rebound in Puerto Rico’s economic activity. The reported increase, he said, is essentially due to the new excise tax imposed by Law 154.

“Had it not been for this new tax, it is likely that revenue for 2011 would have been below 2010’s revenue collections, and would certainly have been below the Treasury Department’s estimates,” he said.

Fiscal 2011’s collections include some $677 million related to Law 154 that imposes a temporary tax on sales between certain local controlled foreign corporations and their international affiliates. The new tax is producing some $135 million a month, which Marxuach said is the “key to Puerto Rico’s fiscal balance.”

“To the extent that projections are satisfied with respect to the tax, Puerto Rico’s fiscal status will improve. To the extent that these companies find a way to avoid or reduce what they pay under Law 154, Puerto Rico’s circumstances will become more complicated,” Marxuach said.

Meanwhile, Marxuach said several other elements in the agency’s report fuel the CNE’s contention that the economy is not yet improving. First, he said income tax revenue shows a reduction of $214 million to $4.9 billion in 2011 from $5.1 billion in 2010. The drop is attributed to the reduction in individual income tax collections as a result of the Tax Reform implemented in January. Revenue under this category declined 14.6 percent, or $377 million to about $2.1 million in 2011 from $2.5 billion in 2010.

On the side of corporations, tax revenue has not increased or decreased, remaining at $1.6 billion over the past two fiscal years.

“However, this picture is inconsistent with the results reported for the month of June,” said Marxuach. “During that month, corporate income tax revenue was $354 million, an increase of $48 million over the $306 million reported in June last year.”

Prepayments help paint better picture
The 15.6 percent increase, said Marxuach, could be the result of “prepayments negotiated by corporations with the Treasury Department. Usually corporations that do that benefit from a discount and at the same time ‘help’ Treasury to meet its projected revenue. If so, this means that revenue for the months of July and August may be adversely affected.”

Individual and corporate taxpayers are still adjusting to this year's Tax Reform. (Credit: © Mauricio Pascual)

“Treasury’s report shows a pattern that seems consistent with the practice of negotiating prepayments to fix the numbers at the end of the fiscal year. This practice, which dates from the age of [Section] 936, is one more patch,” he said. “It makes Treasury look good, but reduces future revenue. It is simply another form of taking from one to give to the other.”

Considering that the island’s internal revenue code was completely overhauled this year, it is probably safe to assume that individuals and corporations are adjusting to the new rules, he said.

“Therefore it is very difficult at this time to project with certainty a trend in General Fund collections,” Marxuach said.

On Wednesday, Treasury offered preliminary results for revenue collections for fiscal 2011, which ended June 30, that showed an $475 million year-over-year increase to $8.1 billion in 2011, from $7.6 billion in 2010.

“Initially, it appears that the fiscal crisis has been overcome, after all, revenue increased by 6 percent. However, a deeper analysis reveals a little more complicated landscape,” Marxuach said.

‘Irregular’ increase
Another issue the economist raised in his analysis is the jump in tax retention to non-residents, which reached $1 billion in 2011, from $830 million in 2010, reflecting a 20.5 percent increase. Nearly half of the increase, or $77 million, was reported in June, when collections generated $151 million, in comparison to the $74 million on record for the same month in 2010.

“This increase of 104 percent seems somewhat irregular, given the current outlook for Puerto Rico’s economy,” Marxuach said. “We believe it is very likely also due to prepayments made by some large foreign corporations with operations on the island. Obviously, if this is so, it will also adversely affect revenue during July and August.”

Meanwhile, collections related to the Sales and Use Tax, known as IVU in Spanish, increased 2.8 percent to $553 million, from $538 million — an increase that is consistent with an economy in which consumer spending is essentially stagnant.

“The same happened to corporate income tax revenue proceeds. Moreover, other economic indicators such as unemployment, the number of people employed, and the [Government Development Bank’s] Economic Activity Index, point to a still shrinking economy, or at best, one that is stagnant,” said Marxuach, who analyzed the government’s report for the private, nonprofit think-tank.

The government’s collections for 2011 also include $246 million related to the special property tax applied through Law 7, a tax that has been eliminated for fiscal 2012. Consequently, that will no longer be a source of income for the government this year.

Leave a Comment

comm comm comm