The Department of Economic Development and Commerce (DEDC), lead by Manuel Laboy, has not yet submitted the promised draft of the Incentive Code to the Legislature(GFR Media) (horizontal-x3)
The Department of Economic Development and Commerce (DEDC), lead by Manuel Laboy, has not yet submitted the promised draft of the Incentive Code to the Legislature. (GFR Media)

According to the new certified fiscal plan, the guidelines for industrial incentives management provide for a cut of $ 184 million in tax credits and subsidies in 2019 fiscal year, and additional cuts of $ 67 million by 2020.

According to the document, 56 percent of the investment in incentives and subsidies for industrial development would be eliminated within the next 25 months. Only a handful of tax benefits would be strengthened in this revision, such as the one that boosts tourism and the one that establishes credits for investments in housing infrastructure.

There is also an incentive - only one-year long- for the special decrees of the film industry. For the rest of the statutes, the certified fiscal plan promotes cuts or complete eliminations of public investment.

The details of the measures that will allow the execution of these changes are still unknown. The Department of Economic Development and Commerce (DEDC) has not yet submitted the promised draft of the Incentive Code to the Legislature, even though that this bill is allegedly vital for the balance of the government's finances during the next year fiscal. The proposal of the administration of Governor Ricardo Rosselló Nevares is to use the savings government would achieve in incentives to cover the income that would stop coming in once taxes are lowered through the tax reform that has been under legislative evaluation for a month.

Yesterday, Manuel Laboy, secretary of the DEDC, was not available to answer this newspaper’s questions regarding the most recent delays in the presentation of the Incentive Code, an initiative that was originally expected to be completed by the end of last year. Meanwhile, the Secretary of Public Affairs at La Fortaleza, Ramón Rosario Cortés, explained, with a tone of frustration, that the analysis process has taken longer than expected, since the elimination or modification of these preferential treatment must be harmonized with other aspects such as, for example, the tax structure associated with Law 154 that established the so-called tax to foreign companies.

"A study was made to determine the famous ROI ('return on investment') and that is one of the elements when we allocate, for example, in the study we did, there about $ 610 million in these incentives. That has to be reduced to about $ 300 million. One of the issues to be considered in order to make that allocation is precisely the ROI of each of the investments to maintain those that produce for the people of Puerto Rico," he said.

Rosario Cortés said that the effectiveness of incentives fluctuates according to changes in the economy, and that, therefore, a model that provides flexibility and allows "to constantly measure what incentives are paying off" needs to be designed.

"We have been careful that what is presented, will be at the end of the day something that results in what we want, somethingdoes not alter the structure we have today, and that we have a flexible mechanism to allocate the money where we will benefit from, " He said.

Impact on manufacturing

And within these changes, some considerations are obvious. For example, those incentives that Puerto Rican manufacturing receives are reduced by 58 percent in the certified fiscal plan. Even so, it is the sector of the economy that would maintain the greatest amount of economic considerations on the part of the government when receiving the equivalent of $ 48.5 million per year in incentives.

On one hand, manufacturing on the island accounts for 49 percent of the wealth produced in Puerto Rico annually. On the other hand, it is an economic sector with a production that will be reduced by about 20 percent due to the new tax policies approved by the US Congress and signed into law by President Donald Trump at the end of 2017.

In the past, the president of the Manufacturers Association has expressed himself in favor of the design of the Incentive Code following a review of the costs and benefits of credits, subsidies and benefits that, in general, the government provides to different industries. However, the manufacturer, who was not available yesterday to comment on the proposals contained in the certified Fiscal Plan, has been cautious with the final product once the legislative process has been completed.

Meanwhile, former president of the Association of Certified Public Accountants, Kenneth Rivera, said that beyond the benefit and the cost implied by each incentive, social considerations should be examined in each of the measures contained in the code.

Social benefits

For example, if the changes that appear in the fiscal plan are legislated, agricultural incentives, which help with food security, and incentives received by hospitals, which reduce the cost of health services, would be disrupted.

"I do not know if those social issues have been included as part of the analysis, but it should be something to look at," Rivera said.

Economist Gustavo Velez expressed himself in similar terms, emphasizing that agricultural incentives seek food security.

 "That problem of food security became clear with (the hurricane) Maria when supplies could not be taken out of the docks. That is something that one can favor as a public policy beyond the return of the investment that the incentive has. In places like Puerto Rico, where labor is not as cheap as in other places, those incentives are what allow you to compete and maintain local production of food," Velez said.

The certified fiscal plan also proposes the elimination of incentives for renewable energy, solid waste management, subsidies to agricultural companies and the benefits for those who, with their properties, participate in conservation easements.

 Benefits for tourism companies, the film industry and the construction of affordable housing are also reduced.

 Performance is rewarded

The positive point about the review is that the focus is to maximize the return on investments. That is to say, those incentives that produce the greatest impact in the economy will be those that will prevail over those that generate fewer benefits. And many of these incentives did not move the economy significantly, explained economist Antonio Fernós Sagebién.

"Most of these credits did not create the jobs or the income they were supposed to create. The multiplier effect did not happen," he said.

Therefore, Fernós Sagebién believes that the elimination of these incentives will not necessarily imply a significant deterioration of the economy.

"I do not think there are many investors waiting for these to continue to exist for additional investment in the short or medium term and, in that case, the effect would be negative, but totally marginal," said Fernós Sagebién.

Even so, probably once  they announce exactly which sector of the economy will lose some incentive, the lobbying of private sector leaders will be intensified for corporate beneficence programs, Rivera explained.

This will happen particularly in those sectors that, somehow, depend on tax credits issued by the government.

The credit system

Usually, tax credits work as a kind of voucher that is credited against contributions. The government issues the loan according to the investment it wants to promote, be it housing or hotels, among other projects. That credit has the value of a portion of the investment made. For example, an investor could receive a 50-cent loan for every dollar that he invested in the construction of houses.

The investor can use that credit for the contributions he has to pay to the government or sell the credit, with discounts, to a taxpayer seeking to receive a reduction in tax obligations. This way, the government stops receiving a portion of its share of contributions while the investor obtains a portion of the investment back from the State.

The evaluation of these incentives is an issue that has been floating for decades and that has resulted in hundreds of millions of dollars not to reach the Treasury, explained Vélez.

Specifically, the government is talking about the evaluation of credits that involve an investment of $ 600 million in public funds. Out of these, the Rosselló Nevares government is considering cutting about $ 200 million to cover a portion of the tax reform proposed by the government.

This change to the tax law is also financed by a better oversight by the Department of Treasury and an increase in what some taxpayers pay with the elimination or limitation of access to deductions.

By provision of the Oversight Board, the tax reform should not reduce the amount of revenue received by the government in a fiscal year.

The debate is also framed within the budget that will rule the government finances during the next fiscal year that begins in July.

The amount of credits and incentives to be reduced will depend on what the Legislature finally approves, as a tax reform, explained Vélez.

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