Policy Report – Tax Expenditures in Puerto Rico: Internal Challenges and Global Perspective

The following is an excerpt from EA’s Policy Report (view related links, references and graphs at the bottom of the page).

RECOMMENDATIONS

If we wish to exercise sound fiscal administration, we need to strengthen the tax expenditure report, allocating the necessary resources to cover the gaps that it still presents.

First of all, Puerto Rico needs to adopt a robust legal framework requiring the preparation of a tax expenditure report. This system must reflect the best practices of disclosure and evaluation of all tax expenditures existing on the island, and would begin with Senate Bill 802 of March 10, 2022. Despite the improvement that S.B. 802 would entail in comparison to the current state of affairs, it must also require that those who benefit from each tax expenditure be identified and include the analysis of the distribution of benefits, in compliance with the best practices of a detailed and analytical PRTER.

Second: We need an updated TER. The report must have more updated data than that included in 2016 and 2017 (for corporations, which represent more than two-thirds of total tax expenditures) or 2019 (for individuals).

Third: In addition to being updated, we need a comprehensive TER to fulfill its purpose. The inclusion of all tax expenditures is necessary to know the true cost of tax expenditures in Puerto Rico. In particular, the tax expenditure enacted by way of Act 154 of 2010, absent in the three reports and representing nearly 20% of the general fund’s income, must be made transparent. Tax expenditures related to property taxes and programs of important social value for people who work in the formal economy, such as the EITC, should also be included.

Fourth: As we have seen with PRTER 2017-2023, the development and inclusion of the delayed years opens the way for incorporating future estimates of tax expenditures and improving public policy decisions in both lines, direct (budgetary) expenditures and indirect (tax) expenditures. Ideally, an expanded PRTER would entail the projection of tax expenditures for the next three years from the budget year under discussion; that is, if the report is filed during the budget process for fiscal year 2022-2023, it is desirable that the projections include 2023, 2024, and 2025. Ideally, the projections would reach up to five years into the future, as has been stated and reiterated in the fiscal plans of the FOMB.

Fifth: the report must be published in open data format to meet the minimum standards of transparency in the collection of public information data provided by the Government of Puerto Rico.

Lastly, and perhaps most importantly of all, it is imperative to have an analysis of the social and economic return that each tax expenditure has and to what extent it fulfills its purpose. The regular production of these analyses is what will allow the TER to be a tool that informs public policy decisions with studies on the impacts of each expenditure. Currently, S.B. 802 proposes that these be performed every three years. We propose that these analyses be performed at least every two years to keep them as up-to-date as possible. In this manner, both the costs and the potential benefits of each tax expenditure will be verified. This would allow us to better understand, in a measurable way, what would happen to government revenues whenever any public policy is proposed that modifies, eliminates, or creates any tax expenditure. To measure the results of the return-on-investment analysis even better, these should be performed based on the economic sector, government program area, and even by company, so that any effort toward improvement can be as precise as possible with regard to the desired outcomes. Additional analyses should also include how tax expenditures in Puerto Rico would be affected by external changes such as the global minimum tax on corporations.

The development and strengthening of the analytical aspect would also help to evaluate the imposition of limits on particular tax expenditures, something which the FOMB has also advocated for. In doing so, a protection is established for the government to prevent these tax expenditures from being exploited indiscriminately, thus protecting the country’s tax revenues.

This is the only way to better understand the anomalies that Puerto Rico’s tax expenditures present in relation to itself as well as other jurisdictions. This is the only way we will have a truly transparent PRTER that enables accountability for the country’s indirect spending. Only then can it be used as the budgeting tool it should and could be.