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12:44pm June 11, 2013

Puerto Rico Resorts to Taxes and Gambling to Avert Budget Crisis

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As Puerto Rico’s fiscal year comes to a close, Governor Garcia’s Padilla’s party (Popular Democratic Party, or PPD in Spanish) is facing close to an $800 million dollar deficit and no easy way to close it. The current crisis is due to the result of decades of borrowing that have left Puerto Rico unable to refinance any more of its debt, coupled with $775 million dollars in debt payments knocking on the door. With the true owners of Puerto Rico (the Credit Agencies) threatening to downgrade Puerto Rico bonds to junk status, a four year old economic report has been leaked to the press about what would happen if such a downgrade occurred. In short, the report commissioned by then Governor Luis Fortuño and produced by Advantage Business Consulting in 2009, stated that a junk-level downgrade would result in 60,000 public employees being laid off and a sales tax of 18% (up from 7% now) to balance the budget.

This dire panaroma plays side-by-side with Puerto Rico’s poor economy, leaving many wondering if the Island’s economy will ever recover. One such analist, Cate Long, posed this question in a recent article, adding:

“The GDB is currently rated Baa3. It could be downgraded to junk and see its borrowing costs soar. The government intends to raise taxes on corporations to help with the massive public deficit, and banks are lending at a lower level, both of which can inhabit private sector growth. What will provide growth for Puerto Rico and allow the commonwealth’s $58 billion of tax-supported debt to be serviced?”

Facing a shrinking economy, stagnant job creation, increased migration to the Continental United States and low wages, Governor Garcia Padilla’s party is investing in two main solutions: Gambling and taxes. On the gambling side, the Government plans on offering doubling certain lottery games in hopes of raising $35 million dollars in income.  Puerto Rico is already one of the few U.S. jurisdictions in which casinos are legal and numerous, with several state lottery games being used to increase state income. The new move, going into effect this month, will seek to continue tapping the Island’s growing gambling problem to make a slight dent in the deficit.

On the taxing side, the PPD is planning on expanding the current sales tax into a business to business tax by applying it to the entire commercial chain. Similar to a value added tax, the proposal would expand the 7% sales tax to the entire distribution chain. Local business associations have fiercely rejected the idea, claiming it would kill a barely surviving economy. Governor Garcia Padilla has proposed a trade-off in the manner of a .05% reduction in the sales tax, a move that satisfies no one. Additional tax options include increase the tobacco tax, imposing an Island-wide business permit tax (“patente” in Spanish), and filing civil lawsuits against ordinary citizens who owe taxes to the Island’s tax department.

The short term solution proposed by the Government would only impact the economy more without providing for a long term solution. Miguel Soto, of the Center for the New Economy, aptly summarized Puerto Rico’s eternal spending problem in a recent article published on News is my Business, adding:

“We’re running out of flexibility to cover that gap. We have to make a decision as a country: if we want world-class services and education, we have to pay for them. If we can not spend on that, then we have to make adjustments… You can’t buy a Ferrari with the money you have set aside for a Toyota, you’re just not going to have enough.”

Soto’s description hits the nail given that Governor Garcia Padilla is proposing more gambling and more taxes, but no real cuts in the massive government spending. The PPD would hardly move to raise tuition rates at the public university or stand a hard line against unions for lower wages in the public sector, just like it will not cut the ever growing government healthcare program which has run the Department of Health into the red since its beginning in the ’90s.

With a prescription of more taxes and less growth, one has to wonder if the Island’s economy will ever recover, or if we will end up doubling Japan’s lost decade.



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