Puerto Rico outranks global jurisdictions with $23B in tax breaks
Tax expenditures in Puerto Rico for this year reach $23.2 billion, a figure that doubles the annual general fund budget and that has been on the rise in recent years.
While on a global level Puerto Rico is one of the jurisdictions that proportionally offers the most incentives, it is also where the benefits provided by those incentives are least accounted for, according to a study by independent nonprofit firm Espacios Abiertos.
The research entitled “Tax Expenditures in Puerto Rico: Internal Challenges and Global Perspective” shows that almost half of these special tax deals continue to be a “hidden budget” item, since it is a tax expense whose details are not known.
Puerto Rico leads 29 jurisdictions in the United States and 92 countries globally, in terms of the fiscal impact of economic incentives (also known as tax incentives or privileges), with respect to the size of its economy using both Gross Domestic Product (21%) as the Gross National Product (31%), Espacios Abiertos concluded.
Tax expenditures are credits, deductions, deferrals, exemptions, and preferential rates. They are designated as expenditures under the assumption that $1 that is not received is economically equivalent to $1 that is spent, according to the study.
Tax expenditures are used to encourage certain activities or behaviors in taxpayers and seek to promote a certain public policy objective of the government.
In Puerto Rico there are 463 such credits, but data is only reported for 53.7%. In 2017, tax expenditures represented $22.5 billion, in 2022 the figure rose to $23.2 billion and, by 2023, the Treasury Department projects that they will reach $23.6 billion, according to its own data.
“Almost half of these special tax breaks continue to be a hidden budget item, since it is a fiscal expense, whose details are not known,” said economist Daniel Santamaría-Ots, senior analyst of Public Policy at EA, who led the study, with Alexis López-Paleo, public policy analyst, and that included interactive data panels created by Analyst Gabriel Ríos-Pérez.
Knowing the economic and social performance of tax expenditures is extremely important for Puerto Rico, just as it is for any jurisdiction, Santamaría-Ots said.
While the federal government has made 100% of this information public since 1974, in Puerto Rico it was not public. Espacios Abiertos has called on the government of Puerto Rico since 2017 to create an official public tax expenditure record or budget, so that it is incorporated into the process of considering and approving the annual public budget.
It was not until September 2019 that the first edition of the “Puerto Rico Tax Expenditure Report” was published on tax expenditure data from 2017, which is now in its third edition.
However, “it still lacks a lot of relevant information both for public officials who have the responsibility of approving the government budget and for citizens who have the right to know where public money goes,” Santamaría-Ots said.
For the study, members of the Espacios Abiertos research team examined the government’s report unveiled in December, along with data from previous reports, and in comparison with other jurisdictions in the United States and other countries, to determine where Puerto Rico ranks with respect to its tax expenditures.
The analysts concluded that the unearned income from these special tax treatments is twice as high as the general fund budget.
“Despite its magnitude, much of the fiscal expenditure is not disclosed, turning it into a hidden budget that does not pass public scrutiny. Because they are kept out of the public eye, it is rare that these expenses are evaluated in terms of costs and benefits,” Santamaría-Ots said.