Open Spaces: Puerto Rico grants $22B in tax breaks
The latest Tax Expenditure Report from the Puerto Rico Treasury Department reveals that $22 billion of the island’s $24 billion in tax expenditures are due to preferential rates and corporate exemptions.
This increasing trend is highlighted by the Open Spaces in light of the potential impact of the Global Minimum Tax (GMT) on Puerto Rico’s economy. The nonprofit’s analysis also delves into municipal tax expenditures for the first time.
Open Spaces analyzed the 2024 Puerto Rico Tax Expenditures Report (PRTER) using the standards for audited financial statements set by the Governmental Accounting Standards Board (GASB), the independent organization that establishes accounting and financial reporting standards for state and local governments in the mainland U.S.
The government watchdog’s analysis also emphasizes the need for more “transparency, detail and granularity in information regarding the fiscal impact of tax benefits.”
“Accurate information is essential for lawmakers, government officials and citizens to make informed and timely decisions,” noted Wilmarí de Jesús, an analyst at Open Spaces. “This ensures that the effects of tax exemption laws are properly assessed and that public resources are managed effectively and efficiently.”
Daniel Santamaría-Ots, the report’s author and research director at Open Spaces, said: “Since 2022, Open Spaces has insisted on the need to present PRTER in an open data format that allows for the analysis of these measures with complete, reliable and easily processed data.”
Tax expenditures are defined as revenue losses due to laws that lower the tax liability for certain taxpayers or economic activities. These can include various forms of preferential treatment – such as exclusions, exemptions or special deductions that reduce taxable income; or they can be credits, decrees, deferrals and special tax rates – all of which reduce government revenue and are thus considered expenditures.
Key findings from the PRTER 2024 report include:
- 72.52% ($22.2 billion) of unearned revenues from tax expenditures in 2021 were due to corporate contributions.
- A total of $24.5 billion in tax expenditures was projected for 2021, with 67.28% allocated to economic development.
- In 2021, the government favored indirect tax expenditures over direct spending in sectors such as economic development, retirement and housing.
- In the PRTER, 61.46% of tax expenditures are estimated, an improvement from 53.7% in the previous year’s report but still below the global median for estimated tax expenditures.
Main findings on municipal tax expenditures:
- The report highlights the lack of centralized visibility on municipal tax expenditures compared to state-level reports. Currently, 54 out of 78 municipalities (69.23%) contain complete or partial estimates of tax expenditures.
- At least $539 million in additional tax expenditures are not accounted for beyond the $24.5 billion identified in the PRTER.
- Of the $539.1 million in unearned revenues, at least $226.3 million (41.98%) correspond to personal property taxes, followed by $172.4 million (31.9%) for real estate taxes.
- State laws play a dominant role in enabling 86.84% of total tax expenditures, which is equivalent to $468 million.
- The municipality of Carolina leads with $146,266,526 in unearned revenues, followed by Guayama with $59,580,476 and Vega Baja with $36,601,553.
- In six cases (Guayama, Juana Díaz, Vega Baja, Carolina, Gurabo and Cidra), tax expenditures exceed the municipal budget. In 11 cases, tax expenditures surpass 50% of the municipal budget.
Recommendations:
- Enact a law to ensure detailed annual reports on tax expenditures at both the state and municipal levels adhering to standards and best practices, including specific information on granted tax exemptions, the laws supporting them, and figures of unearned revenues.
- Include detailed reports on tax expenditures in the government budget approval process so lawmakers and government officials have solid information to make decisions on resource allocation and the continuation of tax exemptions. This promotes transparency and effective fiscal management.
- In 2023, the tax expenditure report was published on June 30, 2023, one day after the Legislative Assembly passed the 2023-24 budget, and six months past the deadline set by the Puerto Rico Financial Oversight and Management Board for the government’s certified fiscal plan.
- Utilize updated data when estimating tax expenditures for greater accuracy and real effectiveness of projections.
- Include municipal tax expenditures in all municipal audited financial statements, as established by GASB 77.
“By ensuring that all necessary data is available in appropriate forms, we will have detailed information on tax expenditures, which will result in better assessments of the effectiveness of fiscal policies and enable necessary adjustments,” concluded de Jesús.
