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Puerto Rico governor unveils $9.8B budget, sales tax to drop to 6.5%

Gov. García-Padilla (at center) arrives at the Legislature to deliver his first Budget and State of the Commonwealth address. Behind him are House Speaker Jaime Perelló and Senate President Eduardo Bhatia. (Credit: La Fortaleza)

Gov. García-Padilla (at center) arrives at the Legislature to deliver his first Budget and State of the Commonwealth address. Behind him are House Speaker Jaime Perelló and Senate President Eduardo Bhatia. (Credit: La Fortaleza)

Puerto Rico Gov. Alejandro García-Padilla presented Thursday a consolidated budget of $29 billion and an operating budget of $9.83 billion for fiscal 2014, representing a $750 million increase when compared to the current budget, which he said will be covered with new revenue.

The proposed operating budget falls about $200 million short of the projected revenue intake for Fiscal 2014 of $9.6 billion. The gap increases to $775 million when the planned financing of $575 million in debt is factored in.

Still, the $775 million deficit is about 66 percent lower than the $2.2 billion gap in last year’s fiscal budget, which García-Padilla’s economic team said earlier in the day would be eliminated by fiscal 2015.

During his first Budget and State of the Commonwealth address, García-Padilla also announced that effective Dec. 1, the sales and use tax would be reduced to 6.5 percent from the current 7 percent.

On the topic of the sales tax, Treasury Secretary Melba Acosta said in a meeting with the media ahead of the governor’s speech that the agency will propose a number of adjustments to close loopholes and improve the level of collections and shore up new revenue.

The list includes tweaking the exemptions granted to resellers, who currently pay no taxes on good purchased for their businesses and effecting a 2 percent surcharge on self-employed people who make up to $200,000 a year. With its approval, Treasury would collect $50 million a year.

“That affects 1,665 out of 184,294 tax returns, or 0.9 percent of the population,” Acosta said.

Another measure in the works entails placing an additional threshold on taxpayers who buy homes worth $1 million or more, limiting their mortgage interest deductions to a maximum of $35,000 a year. That would shore up $16 million in new revenue, Acosta said.

“The budget closes the gaps in corporate contributions and addresses other similar issues, with revenue measures that do not affect the upper-middle class or middle class, or lower middle class, or the poor,” García-Padilla said. “Those who earn more will pay more, and those who earn less will pay less.”

Stagnant growth
During the meeting with the media, Planning Board President Luis García-Pelatti offered economic projections which while positive, basically confirming there will be no growth this or next fiscal year.

Reporters meet with Chief of Staff Ingrid Vila, Treasury Secretary Melba Acosta and Planning Board President Luis García-Pelatti prior to the address. (Credit: La Fortaleza)

Reporters meet with Chief of Staff Ingrid Vila, Treasury Secretary Melba Acosta and Planning Board President Luis García-Pelatti prior to the address. (Credit: La Fortaleza)

“The prior administration said growth would be at 1.2 percent in fiscal 2013. During the transition that was brought down to 0.6 percent. After all of the analysis we’ve done, we’ve corrected that to -0.4 percent,” García-Pelatti said.

He estimated growth at 0.2 percent for fiscal 2014, which in the eyes of most economists is the same as no growth at all.

“The truth is that it doesn’t really matter whether it’s –0.4 percent or –0.7 percent or –0.2 percent. The problem is that the economy has lost the ability to grow and will not recover for several years,” said Economist José J. Villamil, founder of analyst firm Estudios Técnicos. “Since the mid 70s to the present, the economy has grown by just over 2.0 percent per year, which is terrible.”

Meanwhile, Vicente Feliciano, president of Advantage Business Consulting, called the prediction for 2014, “somewhat optimistic but not outlandish.”

“Fiscal adjustments and pension reform were necessary and unavoidable. The alternative was downgrading and junk bond status. However, they would be a burden on the efforts for economic recovery going forward,” Feliciano said.

Author Details
Author Details
Business reporter with 30 years of experience writing for weekly and daily newspapers, as well as trade publications in Puerto Rico. My list of former employers includes Caribbean Business, The San Juan Star, and the Puerto Rico Daily Sun, among others. My areas of expertise include telecommunications, technology, retail, agriculture, tourism, banking and most other segments of Puerto Rico’s economy.
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