Oversight Board calls Puerto Rico governor’s tax cuts too costly

Puerto Rico Gov. Pedro Pierluisi is proposing several tax cuts to both corporate and individual rates that the Puerto Rico Oversight Board has panned as too costly for the local government to undertake.

The main features of Pierluisi’s proposals, which he sent to the legislature to consider, is a cut to the individual tax rates on those earning between $41,501 and $300,000 and cuts to corporate net income tax rates.

The governor projected the net annual cost of the reform to be $194 million when the additional generated economic activity was factored in. For comparison, Puerto Rico’s fiscal year 2023 General Fund revenues were $13.62 billion.

The rate for those earning $41,501 to $61,500 would go to 22% from 25%. For those earning $61,501 to $81,500, the rate would go to 22% from 33%. And for those earning $81,501 to $300,000 it would be lowered to 30% from 33%.

Puerto Rico residents do not pay federal income taxes.

For corporations with a net income of up to $275,000, the marginal rate would be 17%. Corporations with a net income of $275,000 to $3 million would experience a marginal rate of 27%. Finally, corporations earning more than $3 million would have a 33% rate. The 33% rate would be a reduction from the current maximum of 37.5%.

In direct costs to the budget — without considering the economic activity impact — the proposal would cost Puerto Rico revenues $153.2 million of individual taxes and $283.6 million of corporate taxes per year, according to the governor.

The Oversight Board disagrees with the costs.

“Our analysis points to far greater cost than the governor’s current estimates. Any potential tax reform must be fiscally responsible, meaning it cannot lose revenues in the process that are necessary to fund essential services,” said Matthias Rieker, Puerto Rico Oversight Board spokesman. “Any tax reform or tax law initiative must be revenue neutral. Further, any tax reform must reduce the tax system’s complexity, work to attract new investment without harming local businesses, and incentivize Puerto Rico’s business to expand and hire.”

Rieker said, “The Oversight Board believes that tax reform is essential for Puerto Rico’s return to sustainable economic growth. An effective tax reform must be comprehensive, holistic, and for the long-term.”

Rieker said the board will continue to work with Puerto Rico’s government on tax reform to contribute to Puerto Rico’s economic competitiveness.