Last week, the Fiscal Oversight Board (FOB), the federal agency in charge of overseeing Puerto Rico's public finances, revived the debate surrounding the elimination of the inventory tax. The inventory tax represents a cost of doing business for merchants who have to pay taxes on the products they have in storage, regardless of whether or not they sell the merchandise. In other words, if a businessman has a food inventory valued at $1 million and has to pay 6% tax, he will have to pay about $60,000 in tax to the municipal government where he operates.
If the following year, that businessman still retains $500,000 of the same merchandise from that inventory, he will have to pay 6% again, or $30,000 in addition to the $60,000 he already paid the previous year. Thus, the inventory tax has several effects. The first is that it discourages importers and distributors from keeping certain levels of goods and merchandise in Puerto Rico. As a result, when natural disasters occur, shortages of certain products arise.
The inventory tax represents a cost of doing business for merchants who are taxed on the products they have in stock, regardless of whether or not they sell the merchandise. (El Nuevo Día)
Second, the tax removes efficiency from the distribution chain, which is essential for an island highly dependent on imports. Finally, the vast majority of distributors pass on the cost of inventory at the final prices paid by the consumer. Thus, the big loser of this tax is the people who have to pay higher prices for the products.
Political suicide to eliminate the tax on inventories.
For a long time, economists, certified public accountants and business leaders have promoted the elimination of the inventory tax, but Mayors have resisted these attempts, arguing that they need to replace the revenues generated by the personal property tax ($490 million) to the municipalities with some other tax mechanism. Recent legislatures have looked the other way in the face of proposals to eliminate the inventory tax, under pressure from the Mayors who are the political bosses of the legislators. For any legislator of the two traditional parties, it would be political suicide to recommend the repeal of this tax without proposing a replacement of the revenues it generates.
The discussion seems to miss several important aspects. First, with the acute population loss, does Puerto Rico need 78 municipalities? Given the bankruptcy of the central government, would it not be appropriate to begin consolidating municipalities into regional consortiums? Why should the burdened consumers continue to pay at the end of the chain in the form of higher prices? As with all relevant issues, the discussion always goes off on tangents and demagoguery. There will always be pretexts for leaving things as they are, even if in the long run it is unsustainable. The rise of digital commerce will gradually erode the traditional revenue base linked to the inventory tax. Sooner rather than later, a combination of demographic, economic and technological factors will make this tax obsolete, and many municipalities will fall irreversibly into insolvency.
Government bankruptcy condemns us to high taxes.
Beyond the discussion regarding the elimination of the inventory tax, the basic problem we face as a society, in the future, is that the bankruptcy of the central government and its main public corporations makes it unfeasible -at least in the short term- to reduce other taxes or implement a comprehensive tax reform. Although the current administration has twice proposed through legislation to implement tax relief of nearly $550 million, the FOB has raised objections.
The federal agency argues that any relief measure must be fiscally neutral, i.e., a dollar in tax revenue reduction must go hand in hand with a dollar in spending reductions, or new economic activity must be generated to immediately offset the tax revenue forgone by the government. The FOB seems focused on ensuring the integrity of tax revenues to honor the payment of the restructured debt going forward. Meanwhile, in the Legislature, measures to ease the tax burden have been bombarded by the political opposition to avoid conceding a victory to the Governor.
As it is, merchants and citizens will continue to be condemned to high tax burdens and will have to continue paying the inventory tax, the second highest corporate rate in the world (37.5%), a SUT of 11.5%, the highest in the United States, as well as a high-income tax rate for individuals (33%).
In the short term, the only way out is for the FOB itself to define essential services and begin to reduce government agencies and cut expenses in order to return savings to the people through tax relief. The other alternative has already been taken by the 600,000 Puerto Ricans who emigrated seeking to reduce their tax burden and a better quality of life.
This article was originally published in Spanish in El Nuevo Dia.
