SAN JUAN, Puerto Rico, June 1, 2015 (AMG) – In a bid to sure up their island’s dire fiscal situation and address its $72 billion in outstanding public debt, Puerto Rican lawmakers narrowly passed a bill last week to significantly raise taxes on the territory’s citizens. The controversial legislation specifically increases Puerto Rico’s sales tax from 7 to 11.5 percent – the highest in the United States – and introduces a new 4 percent tax on professional services. If the bill is ultimately signed by Puerto Rico’s governor Alejandro Garcia Padilla, which seems likely given his avowed pro-austerity views, then the tax hikes will be implemented within the year.
The news also comes after an announcement from San Juan that the government will be closing nearly 100 schools and 20 public agencies in the near future in order to save money.
Puerto Rico is in the midst of a crippling 8-year recession, characterized by devastating unemployment and poverty levels, and an unprecedented population flight. Critics of the bill decried the fact that the burden of the San Juan’s latest austerity scheme falls squarely on Puerto Rican consumers; they argue that the new taxes will seriously undermine already lagging economic demand on the island and ultimately deepen and prolong Puerto Rico’s longstanding recession, making it impossible for the territory to get out from under its smothering debt in the long-term.
Proponents of the legislation, on the other hand, say that such tax increases are desperately needed in order to stave off a government shutdown in the short-term. Foreign creditors, whose ongoing financing of the island’s government has become indispensable, with vested interests in Puerto Rico’s future solvency have long threatened to pull out of the U.S. territory in the absence of substantive austerity measures there.
Policymakers in San Juan are hoping that the $1.2 billion in revenue that the new taxation is expected to yield will calm creditors abroad and attract new investors on the international bond market.