On the heels of testimony presented before the Senate the prior day, the Center for a New Economy on Thursday offered seven strategies to jumpstart Puerto Rico’s economy, that sidestep the government’s proposed tax reform — for now.
Sergio Marxuach, director of public policy for the CNE, said to move forward, “we must rethink an economic strategy that clearly has reached the end of its usefulness for Puerto Rico.”
Rather than fast-tracking the implementation of a tax reform that includes imposing a 16 percent value-added tax to replace the current 7 percent sales and use tax structure, the government would be wise to postpone that and:
- Postpone the proposed tax reform;
- Restructure the Treasury Department;
- Start with a pilot plan to convert the current sales and use tax into a VAT system;
- Refine the analysis and determine the best option in the context of a deep tax reform;
- Renegotiate debt service associated with the island’s General Obligation bonds;
- Design a two-year fiscal plan that spreads the burden among different sectors; and,
- Outline a new economic development strategy.
“Puerto Rico’s economy is facing a ‘trilema,’ product of a conflict between bondholders, taxpayers and the imperative need to reactivate the economy,” said Marxuach.
“In our opinion, the government wants to resolve the three objectives through the proposed tax reform. The problem is that in the current state Puerto Rico is in, it’s impossible to achieve those three objectives simultaneously, and if we don’t think about this reform in a better way, we could fail at all of them,” Marxuach said.
Imposing such a drastic overhaul as Gov. García-Padilla’s administration is proposing would be “unwise” under current economic conditions, he said.
Instead, the government would do well in converting the current sales and use tax system into a value-added tax structure, only after the Treasury Department is completely restructured to handle that change, as well as the rest of the proposed reform.
“The KPMG report points out in several instances that the successful implementation of a tax reform depends on a deep restructuring of Treasury’s processes and operations,” he said, referring to the firm the government hired to prepare the roadmap for the overhaul.
‘Lack of transparency’
Another point Marxuach brought up was the issue of transparency, saying the government has failed to properly outline how it plans to use the additional revenue it expects the VAT to shore up.
“If the intention is to use it to make another gift at the altar of the bondholders, or worse, to borrow more money through the Sales Tax Financing Corp. to fund pork barrels, the people’s reaction might be visceral, plus those would not be the best uses for these funds at the moment,” he said.
Furthermore, he said the government has not been upfront about the impact the tax reform would have over Puerto Rico’s economic growth. It has also fallen short in establishing a link between the reform and an economic development strategy for the mid- and long-terms.
“The KPMG study states that the reform they propose as its base scenario would result in the short term, in a contraction of the GDP of 0.53 percent,” he said. “In fact, 30 of the 31 simulations of the tax reform published by KPMG result in economic contraction of between 0.22 percent and 0.94 percent of the GDP.”