Press Release – Nearly three-quarters of PR’s total tax expenditures are exemptions and incentives for corporations

While the municipalities’ audited statements reflect a total of $539 million in unearned revenue from tax expenditures

San Juan, March 19, 2024 – The fourth and most recent Tax Expenditure Report published by the Treasury in Puerto Rico establishes that preferential rates and corporate exemptions constitute $22 billion of the $24 billion in tax expenditures reported in Puerto Rico and the trend continues to increase.

Against this backdrop, and considering the great weight of preferential treatment and tax exemptions for foreign corporations as an incentive to do business in Puerto Rico, Espacios Abiertos (EA) warns of the effect the Global Minimum Tax (GMT) that is being discussed around the world could have on the island’s economy.

On the other hand, Espacios Abiertos’ analysis presents, for the first time, a look at fiscal expenditures at the municipal level.

The non-profit, independent and non-partisan organization analyzed the official report titled Puerto Rico Tax Expenditures 2024 (PRTER) using the standards for audited statements of the Governmental Accounting Standards Board (GASB), which sets accounting and financial reporting standards for state and local administrations in the United States. It also analyzed the audited financial statements of the municipalities, in compliance with GASB 77, a standard that came into force December 31, 2015.

EA’s analysis highlights the need for greater transparency, detail, and granularity in the information about the impact of tax benefits, so that the report, says the report published by economist Daniel Santamaría Ots, director of research at EA.

“Our analysts found that the most recent tax expenditure report of the government of Puerto Rico lacks updated data, necessary for a thorough evaluation and cost-benefit analysis of each of the credits, exemptions and incentives granted,” said Wilmarí de Jesús, Open Space Analyst.  “Accurate information is essential for policymakers, government officials, and citizens to make informed and timely decisions. This ensures that the effects of tax exemption laws are properly assessed and that public resources are managed effectively and efficiently,” de Jesus said.

“Since 2022, Espacios Abiertos has insisted on the need to present PRTERs in an open data format that allows the analysis of these measures with complete, reliable and easy-to-process data,” said Santamaría Ots.

The federal budget law of 1974 defines tax expenditures as the loss of government revenue as a result of laws that reduce or even eliminate the normal tax liability of a group of taxpayers or some defined economic activity. This preferential treatment can take several forms, such as exclusions, exemptions, or special deductions that reduce taxable income; or there may be credits, decrees, deferrals, and special tax rates provided. By causing the reduction of government revenues, they are designated as “expenses” based on the premise that a dollar not entering the treasury is economically equivalent to a dollar of public spending, which is why the term “tax expenditures” is used.

 EA’s Findings on the PRTER 2024 Report

• 52% ($22,222.80 million) of the unearned income from tax expenses in 2021 corresponds to corporate contributions.
• In 2021, a total fiscal expenditure of $24,538.60 million was projected, with 67.28% ($16,510.50 million) going to economic development.
• In 2021, the government bet on indirect or tax expenditures over direct expenditures in areas such as economic development, retirement, and housing.
• In the 2024 PRTER, 61.46% of tax expenditures are estimated, showing an improvement over the 53.7% of the 2023 PRTER. However, Puerto Rico is still below the world median in terms of the share of tax expenditures for which estimates are provided.

EA’s Key Findings on Municipal Tax Expenditures

1. The lack of centralized visibility on tax expenditures at the municipal level compared to state-level reporting is highlighted. Currently, 54 of the 78 municipalities (69.23%) contain complete or partial estimates of tax expenditures.
2. At least $539,163,263 million in additional tax expenses to the $24,538 million identified in the PRTER 2024 are no longer accrued.
3. Of the $539.1 million of unearned income, at least $226.3 million (41.98%) is in personal property taxes, followed by $172.4 million (31.9%) in real property taxes.
4. State laws play a dominant role in enabling 86.84% of total tax expenditures, equivalent to $468,228,427 million.
5. The municipality of Carolina leads with $146,266,526 in unearned revenue, followed by Guayama with $59,580,476 and Vega Baja with $36,601,553.
6. In six cases (Guayama, Juana Díaz, Vega Baja, Carolina, Gurabo and Cidra) tax expenditures exceeded their municipal budget. In 11 cases, tax expenditures exceed 50% of the municipal budget.

EA Recommendations

• Legislate to ensure detailed annual reports on state and municipal tax expenditures that comply with standards and best practices, including specific information on tax exemptions granted, laws supporting them, and unearned income figures.
• Include detailed reports on tax expenditures in the government budget approval process so that legislators and government officials have solid information to make decisions on resource allocation and the continuation of tax breaks. In this way, transparency and effective fiscal management are promoted.
  • In 2023, the tax expenditure report was published on June 30, 2023, one day after the approval of the 2023-2024 budget by the Legislative Assembly, and six months after the deadline set by the Financial Oversight and Management Board for Puerto Rico for the Government’s Certified Fiscal Plan.
• Use up-to-date data in the estimation of fiscal expenditures for greater accuracy and actual effectiveness of the projections.
• Include municipal tax expenditures in all audited municipal statements, in accordance with the provisions of GASB 77.

“By ensuring that all the necessary data is available in the appropriate forms, we will be able to have detailed information on tax expenditures, which will result in better evaluations of the effectiveness of fiscal policies and that the necessary adjustments can be made,” conclude de Jesús.

In 2017, Espacios Abiertos began to insist on the need to know, disseminate and analyze fiscal expenditures in Puerto Rico. Between 2018 and 2019, it took a case to the Supreme Court seeking disclosure of these expenses. In September of 2019, for the first time, the government of Puerto Rico published a report on tax expenditures, something that the federal government, the states, and many countries had done since the 1970s. To date, four fiscal expenditure reports have been published in Puerto Rico, titled Puerto Rico Tax Expenditure Reports (PRTER).