Tax, Not Campaign Finance, Reform Is Needed

by John Marino

April 18, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. JOHN MARINOPuerto Rico may be a separate tax jurisdiction from the United States, but come April 15, it certainly doesn’t feel that way.

Sure there’s beauty queens handing out pain relievers outside the Treasury Department, along with blaring salsa and merengue music, but despite the festive atmosphere it’s dreaded Tax Day all the same.

You might not owe federal taxes (actually many island residents — from federal government employees to those with U.S. stock or real estate investments — do pay Uncle Sam or at least have to file with him). But any relief that might have provided is quickly eaten up by high local tax rates. Local income tax rates rival many states along the East Coast, even at times when federal taxes are factored in.

One colleague of mine -- who moved from New York City to San Juan halfway through 2002 -- is probably the most heavily taxed individual in the United States.

That’s too bad. In keeping high income tax rates Puerto Rico is squandering one of its biggest advantages -- having its own taxing jurisdiction.

There are many reasons for the high tax rates. An inefficient government, buoyed by a bloated bureaucracy and the decades-long practice of rewarding political cronies with government jobs, is one of the main reasons.

The other is that Puerto Rico’s tax enforcement efforts, though improving, are not yet good enough to ensure that people are fairly taxed in Puerto Rico. It’s the financially squeezed middle class, scraping by on weekly paychecks, which bear the brunt of the burden.

Large companies are rewarded for their investments here by being offered massive tax rate reductions. Meanwhile, professionals -- such as doctors and lawyers -- who get paid cash often hide a good portion of what they earn from the taxman. There’s not a week that goes by where a local news report does not detail a burglary at a private residence of one of these tax cheats that nets the thief several thousand dollars. ?

The offense to the middle class is compounded by the shoddy state of commonwealth government services. Because of lousy public schools and high crime, many taxpayers must also cough up substantial sums of money for private school tuition for their children and expensive security systems for their homes and cars.

This year’s Tax Day was particularly offensive for many as it occurred as the Popular Democratic Party-controlled Legislature was ramming through to passage Gov. Calderón’s new campaign finance reform proposal, which would give politicians $28.5 million in public funds to campaign each election.

There may be some merit in the plan, but no taxpayer appears in the mood to increase government spending right now -- especially around Tax Day. The fact that the bill was passed — just barely — after a single day of public hearings and staunch minority opposition has increased the criticism.

The administration of former Gov. Pedro Rosselló did lower tax rates, and after stalling for two years, Calderón too has at long last offered the middle class some needed tax relief. She had previously slashed capital gains taxes as well as sweetened industrial investment incentives. But real tax reform is still needed.

The commonwealth government should strive for greater efficiency -- despite the obstacles placed by the unionization of public employees passed into law by Rosselló. Computerization has improved and services have been extended into the evenings and Saturday mornings. But the commonwealth payroll still remains high, and so does outside contract labor.

More radical tax measures are also needed because it’s just not fair that those who get paid with a weekly check shoulder most of the burden of paying taxes. The reason for it is simple -- they are the ones who have no way of hiding their income from the Treasury Department.

While commonwealth income tax rates are sky-high, property taxes are dirt cheap and there is no sales tax. True tax reform also needs to look at these factors, as well as the 6.6 percent excise tax slapped on many imported products. Economists say the excise tax, placed at the start of the distribution chain, is increased exponentially through the sales process, so that the end result is products are marked up more than if a sales tax were slapped on the point of purchase. Meanwhile, federal courts have made it harder for the commonwealth to collect such taxes by arguing it violated interstate commerce laws to force air carriers to charge the tax on its behalf.

The Legislature has begun studying the imposition of a sales tax — an encouraging sign since the PDP has avoided the issue because it would make the commonwealth look more like a state. But the discussion so far has looked mostly at trying to reduce the excise tax. True tax reform needs to take a hard look at the income tax and property tax issues as well. The commonwealth has to own up to its failure that faulty enforcement of tax laws has in itself given an unfair tax burden to the middle class taxpayer who lives off a weekly paycheck.

Tax reform deserves to be addressed with the same force that has gone into the campaign finance reform proposal. It would be an issue that would win tri-partisan consensus — something that the public financing of campaigns has not been able to do.

John Marino, City Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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