Puerto Rico Senator Sees Higher Sales Taxes as Budget Fix

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Boosting Puerto Rico’s sales tax may help the junk-rated island avert a cash crisis and balance its fiscal 2016 budget without resorting to new bond sales, according to the chairman of the Senate’s Finance Committee.

Puerto Rico lawmakers must approve a spending plan for the fiscal year beginning July 1 after the island’s lower house last week unexpectedly rejected a tax plan that would have increased revenue and the island’s liquidity. One alternative to the failed tax legislation would be to raise Puerto Rico’s 7 percent sales levy by two to three percentage points, Senator Jose Nadal Power said Tuesday in an interview in San Juan.

“We should look at revenue measures, not ruling out an increase of the existing sales tax,” Nadal Power said in his office at the commonwealth’s capital building. “I think it’s achievable. It could be an option, a ‘Plan B.’”

With Puerto Rico and its agencies having racked up $73 billion of debt, more than all but two states, the U.S. commonwealth needs to raise revenue to pay rising principal and interest payments and health-care costs, Nadal Power said. Governor Alejandro Garcia Padilla has said the government will need to reduce spending by as much as $1.5 billion next year to cover increasing expenses.

Garcia Padilla is expected to release his budget proposal in the next few weeks. For each percentage point increase in the sales tax, the island collects $240 million in revenue, Nadal Power said.

Tax-Exempt

Once prized for being exempt from U.S. federal, state and local taxes, Puerto Rico’s bonds have been trading at distressed levels for more than a year as investors question the island’s ability to repay its obligations on time and in full.

One proposal, which included the rejected tax changes, also called for the government to publish a five-year financial plan before selling $2.9 billion in oil-tax-backed bonds. Proceeds would boost liquidity at the Government Development Bank, which lends to the commonwealth and its localities. The House’s rejection of the tax bill pushed off that borrowing and cast doubt on lawmakers’ ability to reach consensus on fiscal issues.

The GDB had $1.1 billion of net liquidity as of March 31, down from $2 billion in October.

The commonwealth’s financial woes have made selling more debt too costly, Nadal Power said. That means the island of 3.5 million people could have its first budget in at least a decade that doesn’t rely on bond proceeds to fill gaps.

Puerto Rico general obligation bonds maturing in July 2035 traded Tuesday at an average yield of 10.57 percent, or 78.72 cents on the dollar. After the House voted down the tax bill April 30, yields reached an average 10.74 percent May 1, the highest since the debt was sold in March 2014.

“To go to the market, the interest rate is more than 10 percent now, and that’s not acceptable,” Nadal Power said. “We are going to try not to use any borrowing to balance the budget. It will not be part of what we pass.”

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