Tax cuts for everyone, as promised by Gov. Fortuño, appear to be a political no-brainer — but the question remains how the government will keep operating, even as inefficiently as some critics say, once the revenues are lowered.
Economists and others point out that in these tough economic times, if you cut taxes, you had better come up with other ways to raise revenue for the government to keep offering services.
“When the economy is in a recession, cutting taxes is a problem,” said Sergio Marxuach of the island’s Center for the New Economy. “Obviously, you have to come up with new methods of getting additional revenues … If you’re going to lower rates, you’re going to have to expand the tax base, possibly be eliminating deductions and credits.”
Jon Shure, a senior fellow at the Center on Budget and Policy Priorities, a left-of-center D.C. think tank, notes that revenues of states are plummeting as never before. If Puerto Rico’s fiscal problems can be compared to those in the states, then: “This is not the time to reduce any revenue stream. This is the time to increase them to meet growing public needs,” Shure said.
Reducing taxes in the current recession, “is like cutting off your legs so you can run faster,” Shure said.
He added: “I can’t see any scenario for any of the 35 states with fiscal problems and Puerto Rico where reducing taxes will help them out fiscally or meet the needs of their people.”
Dan Mitchell, of the libertarian-leaning CATO Institute, said so far as he’s followed the Puerto Rico situation, the Fortuño administration was off to “a great start” in trying to trim “a bloated bureaucracy.”
He added: “I like the sound of tax cuts, but if loopholes remain, this won’t help the economy. I would definitely advise states, as well as Puerto Rico, to cut tax rates, but it has to be done in a smart way.”
There has been plenty of rhetoric, but, so far, little information on how the cuts would be made and if other revenue-raisers would be mandated. A six-member committee of top administration officials, including Treasury Secretary Juan Carlos Puig and Government Development Bank President Carlos García, is working on the reform, which is expected to be ready by August.
Last week, Fortuño insisted that the tax cuts will be not only for the middle class but “for everyone.” He said: “We are going to reward everyone who works from sunup to sundown. I am convinced this is going to be an additional tool to push our economy forward.”
He acknowledged that the tax cuts could hurt the commonwealth coffers at first, but insisted that, in the long-term, the cuts will spur the private sector and increase Treasury’s revenues.
While islanders are waiting for the benefits to kick in, Marxuach suggested, the government could explore, as has been suggested, payoffs from island slot machines, as well as making permanent the temporary property tax provision in Law 7, this time having the revenues go to the central government instead of the municipal governments.
Marxuach, and others, have noted that the island’s considerable underground economy further complicates the fiscal picture.
The governor insisted that those in the underground economy “must start paying” their taxes, but so far no plan seems to have been worked out to accomplish this.
Meanwhile, the Washington Times reported that many fiscally strapped states are trying to raise money without technically raising taxes. This is being done through fee hikes, increased penalties or fines and eliminating tax exemptions, among other methods.
States actually raised taxes and fees by $23.9 billion in fiscal 2010, nearly tripling the $8.1 billion in such increases the year before, according to the National Association of State Budget Officers.