CNE advises shelving tax reform until economy improves

Written by  //  March 5, 2015  //  Government  //  No comments

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Sergio Marxuach, economist and director of public policy of the CNE, during his testimony Wednesday.

Sergio Marxuach, economist and director of public policy of the CNE, during his testimony Wednesday.

Saying that it “is a serious attempt to carry out a comprehensive change of the tax system,” the Center for a New Economy suggested during public hearings Wednesday that the reform should be put off until Puerto Rico’s adverse fiscal conditions improve.

In his presentation to the Senate Finance Committee, Sergio Marxuach, economist and director of public policy of the CNE, said the implementation of a value-added tax, included in the proposed reform, “could be the first step to begin a structural reform Puerto Rico’s economy.”

However, he said “unfortunately, the administration has proposed to carry out this necessary reform hastily, in a context of great uncertainty and adverse economic, fiscal and financial conditions.”

Senate Bill 1304, is “not perfect” because it: is not aggressive enough in eliminating tax preferences; does not provide a clearly defined mechanism to mitigate the regressive nature of the VAT; applies the VAT to certain goods and services essential to a good quality of life; promotes ambiguity and confusion in transactions by prohibiting businesses from breaking down the price of goods and services and the amount of the VAT; does not take into account the economic impact of the proposed changes, he said.

“Having said that, we propose putting off the reform, begin restructuring the Treasury Department, and refining the economic analysis to determine the ideal VAT structure for Puerto Rico,” he said.

Furthermore, Marxuach also proposed that the government sit down with bondholders to negotiate at least part of the public debt, and design and implement a short-term fiscal plan to address the Commonwealth’s economic needs until the tax reform is reworked.

In his opinion, the government must choose between complying with the bondholders, providing massive tax relief to Puerto Rico taxpayers, or focusing on growing the economy.

“Doing the three things at once is not possible. That is a public policy decision,” he said.

Senators take in the suggestions offered by the CNE Wednesday.

Senators take in the suggestions offered by the CNE Wednesday.

During the exchange, Senate President Eduardo Bhatia asked him which of the three positions he would choose.

“Economic growth, undoubtedly, because with economic growth the other two are achieved,” Marxuach said.

With regards to renegotiating the debt, Marxuach told lawmakers “30 percent of the debt is with local bondholders, and because they live here it behooves them to care about our economy. From the bondholder’s point of view, in the short term, if Puerto Rico’s economy continues to contract, a default is more likely.”

“If they have a rational argument, if they sit to think about the economy growing in the short term, then the government’s ability to pay its obligations will increase,” he said.

Marxuach suggested some steps to achieve an acceptable budget, including renegotiating the debt, increasing the sales and use tax, cutting government spending, and eliminating certain loans that are not efficient.

“This combination of factors gives us a balance of about $1.5 billion or even $1.8 billion that would help us stabilize the financial situation, while fairly spreading the pain among bondholders, taxpayers, the private sector, and the government agencies that would have to reduce some services,” Marxuach said on behalf of the think-tank.

During the hearing, Bhatia agreed with Marxuach’s rationale.

“I am completely convinced that this must be a three-pronged agenda, it’s a matter of laying out the numbers. We have to reduce government spending, we must renegotiate part of the debt, and we have shore up more money for the government to find that balance. If those three things are achieved, I think Puerto Rico is on its way to recovery,” Bhatia said.

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