Puerto Rico governor proposes steep tax plan to help $168 billion debt

Puerto Rico’s Governor filed a new tax reform bill Wednesday he says will help the island get out of its $168 billion debt.

Governor Alejandro Garcia Padilla gave a 10 minute televised speech outlining his new plan. He says that individuals making $40,000 or less a year will not have to file income taxes next year. In addition, those making $35,000 or less will get reimbursed for taxes paid so far this year.

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The meat of the plan is the proposed elimination of the 7% sales tax, known as IVU on the island, and implementing a value-added 16% tax or IVA, reports El Nuevo Dia.

A value-added tax (VAT) is paid during each stage of production, distribution, and sale of goods. For example, let’s say Jane Doe is a distributor of t-shirts in Puerto Rico. She would have to pay a 16% tax on the shirts once they enter the island. If Walmart wanted to buy those shirts from Jane Doe, the large chain will then pay a 16% tax on the same merchandise.

Bloomberg reports that implementing this tax system would help Puerto Rico retain 75% of VAT revenue, compared to only 56% retained from sales taxes. This translates to a possible $2.5 billion generated.

Last week El Nuevo Dia reported that the island is bankrupt. The island’s unemployment rate is a whopping 13.7%, the highest in the country according to the U.S. Department of Labor. The national average is 5.7%.

A VAT system is commonly used in Europe. In his speech last night, Governor Padilla said that a VAT system is a proven success in 160 countries.

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The Associated Press spoke to economist Charles Blitzer, a former World Bank and International Monetary Fund (IMF) official. He confirmed that many countries around the world have adopted a VAT system, however it will be a while before Puerto Rico sees any big economic change.

“Transitions to value-added tax generally take lots of preparation and time,” he said. “And once they’re in place, they don’t normally yield the full expected yields for some time. It takes a while to build up.”