Puerto Rico Governor Alejandro Garcia Padilla and lawmakers reached an agreement on a proposal to raise the island’s sales tax, a move that may help it sell debt and ease a cash crunch.
The plan would boost the levy to 11.5 percent from 7 percent for nine months, in a transition to implementing a value-added tax, the governor and members of his Popular Democratic Party told reporters late Thursday in San Juan. The increase is expected to bring in $1.2 billion of revenue. Lawmakers also agreed to recommend $500 million in spending cuts as part of a $9.8 billion budget for fiscal 2016.
The governor and legislators gathered Thursday to draw up the plan, which the island’s House of Representatives and Senate must vote on. The chamber rejected a tax-overhaul proposal from the governor April 30. Following that vote, Garcia Padilla warned that the government would have to cut spending by as much as $1.5 billion without new revenue.
“May 14 will go down in history as the day that Puerto Rico began implementing a responsible budget,” Senate President Eduardo Bhatia told reporters.
The House’s next scheduled session is on Monday.
Puerto Rico general obligations maturing July 2035 rose in price following news of the agreement. The bonds changed hands Friday at an average 79.4 cents on the dollar, up from 79.3 cents the day before, according to data compiled by Bloomberg. The yield was 10.5 percent. The securities were the most actively traded in the municipal-bond market.
Junk-rated Puerto Rico faces a $191 million deficit in this year’s spending plan, and the legislature must approve a fiscal 2016 budget by June 30. A planned sale of $2.9 billion of bonds backed by oil taxes hinges on achieving a balanced budget, a five-year financial framework and new revenue measures, the Government Development Bank has said.
The commonwealth and its agencies have $72 billion of debt. Speculation the territory will struggle to repay it all on time and in full has pushed up yields on Puerto Rico obligations.
The oil-tax bond deal would repay loans that the highway authority owes to the Government Development Bank, which lends to the commonwealth and its localities. The bank had $1.1 billion of net liquidity as of March 31, down from $2 billion in October. It may run out of cash by Sept. 30 if Puerto Rico is unable to sell the oil-tax bonds, according to a quarterly filing.
A sales-tax boost would be a temporary alternative to the governor’s proposal for a value-added tax applied at each level of production and distribution.
A consensus on a tax revamp “gets them some liquidity and buys them more time,” Lyle Fitterer, who helps oversee $34 billion of munis at Wells Capital Management in Menomonee Falls, Wisconsin, said before officials announced the agreement.
For more, read this QuickTake: Puerto Rico's Slide