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Pierluisi submits bill to increase tax benefits to offset inflation

Gov. Pedro Pierluisi announced he will submit a bill to the Legislature that would introduce a cost-of-living adjustment to Puerto Rico’s Internal Revenue Code to increase tax benefits and offset the effects of inflation on individuals.

“The COVID-19 pandemic and other global factors have contributed to the increase in the cost of living for Puerto Ricans. We’ve seen how supply and distribution chains around the world have been affected and this, in turn, has caused an increase in the price of goods and services, along with a reduction in the value of money,” Pierluisi said.

“With the Cost-of-Living Adjustment, we seek to provide relief to taxpayers by reducing or eliminating the indirect increase in income taxes caused by this inflation,” said the governor, who was flanked during a news conference by the Executive Directors of the Office of Management and Budget (OGP, in Spanish), Juan Carlos Blanco, and the Fiscal Agency and Financial Advisory Authority (AAFAF, in Spanish), Omar Marrero, who is also secretary of the Department of State.

The bill proposes the Cost-of-Living Adjustment, both for the current tax scales, and to increase the maximum limit that can be claimed in certain existing deductions and exemptions.

Treasury Secretary Francisco Parés said this measure would increase the line of income based on which an individual would begin to pay taxes in a particular tax scale, from tax year 2023 onward.

“This bill also adjusts the deduction limits for mortgage interest, contributions to individual retirement plans (IRAs) and contributions to educational accounts. Likewise, the personal and dependent exemption increases, which since 2011 remain at $3,500 and $2,500, respectively. The Cost-of-Living Adjustment does not alter the tax rates and will only apply to individuals,” Parés said.

To extend the benefits to this taxable year 2022, the law would establish a Cost-of-Living Adjustment Incentive. Under this incentive, Treasury must calculate the impact that the Cost-of-Living Adjustment would have had on the taxpayer’s tax liability, if any, and send them a payment, which would go out on two dates: June 30, 2023 for returns filed on or before April 17, 2023, and Jan. 31, 2024 for returns filed after April 17, 2023, but on or before on Oct. 15, 2023.

The bill, which would have to get approval from both the Puerto Rico House and Senate as well as the Financial Oversight and Management Board for Puerto Rico, has an associated cost of about $67 million.

“AAFAF and OGP will integrate this law, once approved, into the projections of the Fiscal Plan and the budgets of the Government of Puerto Rico, for which we believe that the fiscal impact will be minimal and can be absorbed given the economic progress we’re making,” he said.

The bill indicates that inflation is reflected in the Consumer Price Index, which in June 2022 increased 9.1% over the previous year. The formula for the Cost-of-Living Adjustment will be the percentage, if any, by which the CPI for the previous calendar year exceeds the CPI for the calendar year prior to this one.

So, to determine the Cost-of-Living Adjustment for taxable year 2023, the percentage by which the CPI for the year 2022 exceeds the CPI for the year 2021 must be measured.

On the other hand, for the incentive that will apply only this taxable year 2022, the percentage by which the CPI for the year 2021 exceeds the CPI for the year 2020 will be measured. The Treasury Department will determine the adjustments to the items every year, based on this formula.

In Puerto Rico, the individual tax lines have not been reviewed since 2013. Even though a 5% discount on the normal individual tax was introduced through Act 257-2018 and 8% through Act 40-2020, said discount does not compensate for the inflation experienced on the Island since 2013.

“This measure, for the first time, tempers the tax lines to the impact of inflation that we have faced in the last decade and that is projected to continue for the next few years,” Pierluisi said.

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This story was written by our staff based on a press release.

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