The government’s attempt to overhaul Puerto Rico’s tax code into an easy-to-monitor regime “adds yet another layer of complexity” to the island’s already complicated situation, the H. Calero Consulting firm concluded in its latest “Pulse” publication.
In it, the economist firm concludes that the combination of controversial public debt negotiations and haphazard reconstruction efforts in Hurricane María’s wake has put the island at a crossroads, “this time, however, with a much more critical end-game.”
The government’s proposed new tax code seeks to transform Puerto Rico’s current incentives system, which the Department of Economic Development and Commerce estimated at $7.3 billion in 2017 into a smaller package of sector-targeted grants. Elidibility would be based on the sector’s return on investment of those incentives already in place. The DDEC, as the government agency is known for its initials in Spanish, has already done an ROI study.
The agency’s definition “should be examined carefully though,” H. Calero Consulting noted.
“Returns on incentives, defined as a monetary figure only, will always fail to capture the policy’s full impact on economic development,” the firm said in its report.
“This is particularly evident for sectors like green energy where any move away from conventional energy would undoubtedly introduce competitiveness. Moreover, since the proposed incentives code is to operate prospectively, the existing decrees will not generate any new income to the government, something sorely needed at the moment,” the firm added.
H. Calero Consulting stated that the new incentives “need to balance the island’s multi-level economic reconstruction needs with its changing sociodemographic fundamentals.”
While the proposed incentives call for a 56 percent cut in subsidies and credits, it is expected to generate some $300 million in savings. Current tax credits and exemptions would be phased out, including credits for investments and purchases of locally manufactured products, which KPMG estimated at $103 million and $40.5 million, respectively in 2014.
“However, consistent with a shrinking production base, the value of claims had contracted to $154.9 million by the end of 2015,” H. Calero Consulting noted.
“As it stands, the proposed Incentives Code will create some winners and a rather long list of losers. Relying on ROI as a standard metric to ascertain the desirability of granting incentives could dwarf Puerto Rico’s more fundamental economic needs,” the firm noted.
While the agriculture sector stands to be the biggest loser from the proposed tax incentives overhaul, the manufacturing sector would receive ample government support with little or no tax burden.