The governor of Puerto Rico, Luis Fortuno, has just pulled a fast one--literally. In three days he introduced a massive tax increase on large non-domestic companies, got the legislature to pass it and signed it into law--all over a weekend and with no public hearings or comment from the affected parties.
Then the governor, a Republican and a darling of American supply-siders, proposed a large tax cut for Puerto Rican families and domestic businesses, for which he has been widely praised by U.S. conservatives. But the tax increase is law, the tax cut is only a proposal.
He boasts that his tax cut proposal is the largest in Puerto Rican history, reducing the tax burden on families by 50 percent when fully implemented and domestic businesses by 30 percent. Fortuno says letting Puerto Ricans keep more than $1 billion a year over the next seven years will provide a strong economic boost to the struggling economy.
The governor downplays what is likely the largest tax increase in Puerto Rican history--on roughly 40 to 50 mostly U.S. companies that have invested billions of dollars in Puerto Rico and are responsible for so many of the higher-income jobs on the island.
Good tax policy can be a very effective tool to promote economic growth; and Puerto Rico’s tax policy needed fixing, with a top corporate tax rate of 41 percent.
But by ambushing the outside investment that has kept the Puerto Rican economy afloat, Fortuno has embraced a large dose of what is almost certainly harmful tax policy to go along with his more popular measures.
Puerto Rican officials estimate the tax increase--which phases out over six years--will bring in $5.8 billion. That’s more than enough for the affected companies to finance the construction of new plants in other Caribbean locations that might promise less onerous tax policies.
Addressing Puerto Rico’s domestic tax problems is an important undertaking, but paying for it by punishing outside investment is counterproductive and may undermine the goals of the reform. The real solution to the country’s economic struggles is to lure even more investment to the island, not of driving it away.