SAN JUAN, Puerto Rico — Puerto Rico's governor on Tuesday outlined his plan to overhaul the U.S. territory's tax system, including the creation of a new 16 percent value-added tax.
Gov. Alejandro Garcia Padilla said in a pre-recorded televised message that he would file the measure Wednesday as he seeks to generate more government revenue amid an eight-year recession. He did not disclose the amount of the value-added tax, but an official who was not authorized to speak publicly on the matter confirmed it is 16 percent.
"We currently have a tax system that penalizes work and productivity while encouraging evasion," Garcia said. "It is inefficient and unfair."
Income tax revenues are the government's main source of income, and Garcia noted that many professionals including doctors, lawyers and engineers report a net income of some $16,500. The government is estimated to take in about 56 percent of tax revenues that it should be collecting, losing some $800 million annually.
If approved, Garcia's measure would eliminate the territory's sales-and-use tax and a gross receipts tax in favor of a value-added tax. He said some items, such as certain types of food, prescription medicine and public education, would not be taxed.
The overhaul also would provide tax breaks for more than 850,000 people, with income tax not applied to the first $40,000 earned by individuals or $80,000 for a couple. Currently, those making between $26,000 and nearly $43,000 pay $980 plus 14 percent on income above $26,000.
In addition, the overhaul would provide for those earning up to $35,000 to be reimbursed three times a year for some purchase taxes paid. Those earning $20,000 or less would be fully reimbursed.
"It will be easier to regulate this type of system because the responsibility no longer falls on the shoulders of more than one million taxpayers, but rather on those who import goods," Garcia said, adding that some 220 companies import 75 percent of goods brought into Puerto Rico.
Opposition legislators complained that the governor's 10-minute speech did not provide many details of his plan, and they warned that a value-added tax would hurt the already struggling economy.
"The construction industry, the small to mid-sized businesses and professional services will be hit hard by this measure," Rep. Jenniffer Gonzalez said.
A value-added tax is applied at every stage ranging from a product's manufacture, distribution, while a sales tax is applied only when a product is sold.
Officials have said the tax overhaul could generate some $700 million at a time when Puerto Rico's government is struggling to reduce $73 billion in public debt in a stagnant economy with an unemployment rate hovering above 13 percent.
Garcia's plan was unveiled just a few days after a federal court threw new uncertainties into the government's efforts to get its debt under control. The court ruled Puerto Rico's recent debt-restructuring law unconstitutional. The law aimed to relieve pressure on debt-ridden public corporations by giving them a path to bankruptcy for the first time, an option that would give the agencies some leverage in negotiating with bondholders and unions.
Economist Charles Blitzer, a former World Bank and IMF official, said in a phone interview that while many countries have embraced value-added taxes, it is unclear how much money this will generate for Puerto Rico in the near term.
"Transitions to value-added tax generally take lots of preparation and time," he said. "And once they're in place, they don't normally yield the full expected yields for some time. It takes a while to build up."
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