Reuters’ Luciana Lopez described Puerto Rico’s entrenched underground economy. Unregulated and–critically–not paying taxes at a time when the Puerto Rican government is terribly short of money, the question of how to deal with this is key.
La Prensa, meanwhile, shared a report suggesting that the Puerto Rican government wants to launch the island as a platform for Spanish investment in the United States and broader Latin America.
From the western mountain town of Lares to the capital San Juan, officials are wrestling with how to bring the underground economy out of the shadows and onto the tax rolls without creating such an onerous financial burden that thousands of small and medium businesses can’t survive.
More than a quarter of the island’s economy is informal, some studies say, from large companies evading taxes to individuals selling items for cash at roadside stands. But estimates vary widely because the activity can be so hard to track.
While not new, the problem has become urgent of late. The government desperately needs to find new revenue to bolster a budget full of holes and turn around an economy now eight years in recession. It is scrambling to avoid a painful debt restructuring some view as almost inevitable.
Last month’s $3.5 billion bond sale bought the island some time, but precious little else, with fundamental worries about its shrinking economy still unsolved.
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The divisions between the government and its people leave policymakers in a damned-if-you-do, damned-if-you-don’t position.
“This is the conundrum for the island,” said Emily Raimes, lead analyst on Puerto Rico for Moody’s Investors Service. “Actions that they can take to help their finances may very well be actions that hurt the economy.”
The Huffington Post‘s Adrian Brito notes that statehood in the United States, by removing many of Puerto Rico’s economic advantages as a self-governing commonwealth, would be an economic catastrophe for the island.
Puerto Rico’s government is pushing a strategic plan to transform the Caribbean island into an “investment bridge” from Spain to the United States and Latin America and is offering fiscal and legal incentives to Spanish investors, Puerto Rican Secretary of Economic Development and Commerce Alberto Baco said in an interview with Efe.
The new administration of Gov. Alejandro Padilla intends to reorient the Puerto Rican economy toward foreign services, mainly in the banking sector, securities, engineering and computer technology, Baco said.
The aim is to internationalize the island’s economy, which is fundamentally based on the manufacturing sector, and create a platform for foreign firms wanting to export their services to North America and for local companies who wish to break into the European market.
Baco, on a visit to Madrid to meet with Spanish businessmen, said that Puerto Rico, which is a U.S. commonwealth but maintains its fiscal independence, will invest up to $300 million in the tourist industry, “specializing in sports, culture and adventure” tourism.
The opening in May of the new Air Europa route between Madrid and San Juan could also increase tourist traffic by some 200 percent, Baco said, adding that Iberia could return to the Puerto Rican market.
According to a new report published by the U.S General Accountability Office (GAO), out of the estimated $5.2 billion in new federal spending Puerto Rico would receive, only a range of $2-4 billion would come back in new revenues for the federal government. However, statehood would mean that every day Puerto Ricans would be saddled with $2.3 billion in new federal taxes that they do not pay today.
The GAO report addressed the adverse impact of statehood on the Island’s finances, stating:
… [a]s a result of statehood, changes to Puerto Rico government spending and revenue could ultimately affect the government’s efforts to maintain a balanced budged… statehood could [therefore] result in reduced Puerto Rico tax revenue. If Puerto Rico’s government wished to maintain pre-statehood tax burdens for individual and corporations, it would need to lower its tax rates, which could reduce tax revenues.
Given Puerto Rico’s recent financial struggles and the government of the Commonwealth’s tough economic reform efforts, cutting almost half of the Island’s budget would be disastrous. GAO also notes that Puerto Rico’s current triple tax-exempt bonds would no longer be exempt from federal taxes, which would make it much harder for the Island to reduce its fiscal woes.
U.S. manufacturers in Puerto Rico, in particular pharmaceutical companies, would also face a higher tax-burden under statehood and the U.S GAO report confirms that many of them would leave. This would put in risk more than 80,000 jobs, plus tens of thousands more government jobs that would be at stake if the local government loses billions in tax revenues under statehood.