The fiscal team of the Ricardo Rosselló Nevares administration yesterday defended the law of the Executive that would allow the execution of the fiscal plan for Puerto Rico, although it acknowledged that the measure is based on some revenues estimates that differ from the projections included in the document certified by the Oversight Board (OB).
Faced with this scenario, the government intends to identify as soon as possible additional revenue sources, because failing to meet the fiscal objectives set out in the plan would open the door to the imposition of the more extreme austerity measures that the OB anticipated, such as the elimination of the Christmas Bonus for public employees, the reduction of the work day by 20% in the government and a cutback of health services.
The heads of the Treasury Department (DH, by its Spanish acronym), the Puerto Rico Office of Management and Budget (OGP, by its Spanish acronym), the Fiscal Agency and Financial Advisory Authority (FAFAA), and the Government Development Bank (GDB) appeared during a joint public hearing of the Senate and the House to support the bill that the administration submitted on Tuesday which would create the “Law on Compliance with the Fiscal Plan.”
During the long public hearing, the undersecretary of the Treasury, Roxana Cruz Rivera, revealed that the government decided to ease the magnitude of the increase of the excise tax on cigarettes by taking into account the impact that this increase would have on the consumption patters of that product.
Cruz Rivera explained that the proposal contained in the fiscal plan supported by the OB would have increased the excise tax from the $3.40 per packet currently applied to $6.50, which represented a hike of 91%. Now, the bill raises that tax to $5.10 per packet, or 55% more than the current excise tax.
The official noted that the change led to an adjustment in the revenues forecasts, because the fiscal plan estimated that the increase on cigarettes and tobacco-related products would have added $161 million, and now the treasury would only receive about $52 million.
Representative Antonio Soto, president of the House Finance Committee, asked Cruz Rivera how she would remedy that difference, but she could not offer any concrete response.
“At the Treasury Department, we are working on revenue initiatives that are not contained in the fiscal plan, but that is part of our work at the department. We understand that we are going to be able to use or carry out initiatives that will allow us to execute the fiscal plan, as certified,” said the undersecretary during the public hearing.
Soto, for his part, stressed the importance of meeting the metrics on estimates, and warned that the experience with other tax increases of this kind has been that people curtail their consumption or find ways to evade payment ofthe excise tax.
“Common citizens will defend their each and every dollar, and they will look for alternatives. I have no problem with the measure, but I understand that we have to sit and define these measures for additional revenues. We cannot allow that, given the times we are experiencing, our revenue projections should not be met and that we may jeopardize complying with the plan,” said the legislator from the New Progressive Party during his turn at questions.
Edwin Pérez, president of the Puerto Rico Supplies Group, also alerted members of the legislative committees about the effect that other increases of excise taxes on cigarettes have had on the tobacco industry. He said that past increases, instead of achieving the estimated revenues, have damaged the market and decreased income.
The company, engaged in, among other, the processing and distribution of tobacco products, commissioned a study from Estudios Técnicos on the impact of the raise proposed in the project, and the analysis concluded that, if the excise tax were increased to $5.10 per packet, demand for the product would drop by 39%, and revenues from the excise tax would likewise fall by more than $14.2 million.
“The study concludes that the optimal point to optimize revenues would be achieved by increasing the current excise tax to $3.88,” Pérez Hernández stressed.
OB measure under discussion. When leaving the hall where the hearing took place, Soto indicated that, as part of the evaluation to be carried out by the Finance Committee in the upcoming days, steps will be taken to ensure that the estimates that serve as the basis for the bill fall in line with those submitted in the fiscal plan agreed with the OB.
“We have to ensure these revenues because that is part of what was approved in the fiscal plan. Otherwise, we would have to look for other revenue measures or cutback on expenses to achieve the same result,” Soto told reporters.
The House majority representative said, also, that the Legislative Assembly will urgently address the administration project, because the intention is to approve it before April 30, which is the deadline set by the OB for the Executive to submit the budget recommended for the next fiscal year.
“The approval of the measure requires a level of efficiency from us and to work swiftly. The budget that has to be submitted to the OB is also based on assumptions, and part of those assumptions are considered within this bill,” he said.
After completing the legislative work, Soto and House speaker, Carlos “Johnny” Méndez, met with the OB president, José Carrión III, and the entity’s executive director, Natalie Jaresko, in the office of the legislative leader.
While he did not go into details, Soto confirmed to El Nuevo Día that, during the meeting, they discussed certain aspects of the bill for the fiscal plan, and what thescenario would be in the event that estimates fell short.
“We had a dialogue with the on the revenue measures, and how we can mitigate any situation that may arise if the revenue projections are not fully met, how to mitigate it, and the range of action we have to do so. And yes, there is space,” the majority representative limited himself to say.
The bill under discussion not only contemplates the rise of the tax on cigarettes as a measure to stabilize the government’s finances, but it also intends to equate the fringe benefits of all government employees, regardless of whether they work for the central government or a public corporation.
Gerardo Portela, executive director of the FAFAA, said that public corporations spend an average of $10,840 on fringe benefits per employee, while agencies in the central government lay out an average of $2,523 per functionary.
He said that statistics from the Planning Board and the GDB indicate, that for fiscal 2016, the public corporations were responsible for 72.9% of the total public debt.
“The level of debt of public corporations with respect to that of the agencies is very similar to the level of expenses on the benefits for employees in those entities vis-à-vis the rest of public servants,” said Portela.
The legislative piece would also expand the obligatory liability insurance coverage, and increase the corresponding premiums, establish a special dividend to the members of the Joint Underwriters Association of Obligatory Liability Insurance, allow the transfer of any surplus in a public corporation to the General Fund, and it would limit the budget items allocated for purchases in favor of small and medium-sized companies.
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