Puerto Rico's best shot at economic recovery

More than three years ago, I led a team preparing a report on Puerto Rico's economy at the request of the Commonwealth. Puerto Rico was in dire straits: real GDP had been falling since 2006; migration out was accelerating; and the Commonwealth's debt had risen to the point where further borrowing could take place, if at all, only at a very high interest rate. The situation has gotten worse. But Puerto Rico now has a once in a generation opportunity to change course.

Recent governments controlling the island believed that Puerto Rico was in recession, and sought to remedy the situation with increased government spending. But Puerto Rico was not in recession: it was in decline. Years of fiscal stimulus failed abysmally. We found that a panoply of growth-inhibiting policies adopted by Puerto Rico and others imposed by the US government had contributed to the dismal performance.

It remains clear to this day that changes in economic policies need to be made, and there will be difficult years of transition. When countries find themselves in such severe difficulty, they can approach international organizations for support.

Puerto Rico, however, has no such lifeline. There is virtually no prospect of a resumption of sustainable growth without policy reforms, funding for pensions has run out, the government is no longer creditworthy, and the tax burden is already relatively high. PROMESA, which mandated the establishment of an Oversight Board to, among other things, oversee the budget and debt-servicing relief, did not authorize any new money.

The situation is further complicated by Irma and Maria. The electric utility, PREPA, inefficient and costly, which had failed to invest in maintenance and resiliency and is saddled with unsustainable debt, has failed completely. Add to this the damage to other infrastructure and productive capacity, and it is no surprise that an additional 200,000 persons have left the island.

Yet there is an opportunity in the midst of this tragedy. The significant hurricane assistance authorized by Congress and continued suspension of debt service could cushion the impact of much-needed reforms through the short-term rebound from the undertaking of construction and other activities.

The most important prescription for change is in Puerto Rico's labor market. Labor force participation is estimated to be under 40 percent (versus 63 percent on the mainland). Reasons for this include costly regulations governing conditions of work and disincentives for participating in the formal labor market (no earned income tax credit and full access to federal welfare programs).

Puerto Rico is also subject to the federal minimum wage, which is harshly binding, deterring employment (Puerto Rico's per capita income of about two-thirds that of the poorest state, hence the requirement bites hard); a required Christmas bonus of one-month's pay compounds the problem. Other areas of structural reform that are needed include improving the business climate, relaxing regulations governing youth employment, and infrastructure modernization (especially the provision of reliable and competitively priced electricity).

Puerto Rico will also have to overcome disadvantages relative to U.S. states and territories. If it were a state, per capita federal support for Medicare and Medicaid (which covers 60 percent of the population) would be 2.5 times larger than present levels. Puerto Rico receives less than half the lowest supported state (Nevada) and the total shortfall (excluding exceptional financing) is about $2 billion a year. The Jones Act requires that Puerto Rico (but not the U.S. Virgin Islands) use more costly U.S. vessels to ship to and from the mainland.

Puerto Rico must seize the opportunity at hand. Federal disaster relief money gives the Island breathing room to offset deflationary pressures from needed targeted fiscal downsizing. Deep structural policy reforms can reverse the negative economic spiral and spur growth. At the same time, debt restructuring should give room for deep economic reforms to put Puerto Rico on a new growth trajectory. The return to creditors will be higher and reforms can turn the Island into the jewel of the Caribbean.

If, however, federal funds are expended without reforms, the prospects will be dismal. The one-time stimulus from the infusion of cash for reconstruction and other relief efforts will have dissipated. The island's economy and population will return to a world of economic contraction.

Commentary by Anne O. Krueger, senior research professor of International Economics, School of Advanced International Studies at Johns Hopkins University.

A man surveys a house that was washed away by heavy surf during the passing of Hurricane Maria in Manati, Puerto Rico on October 6, 2017.

Anne O. Krueger, senior research professor, Johns Hopkins University
Puerto Rico's best shot at economic recovery

Puerto Rico governor reveals details on proposed tax reform, new incentive code

Puerto Rico Gov. Ricardo Rosselló provided more details Wednesday in a televised speech about his proposed tax reform and the new Tax Incentives Code, with which he intends to give back more than $1 billion to taxpayers by 2023 and repeal inefficient industrial incentives.

The new tax plan seeks to redirect incentives to individuals and businesses. The governor’s proposal is aimed at offsetting the blow of President Trump’s tax reform, which treats Puerto Rico as a foreign jurisdiction, forcing corporations to pay higher taxes than stateside companies. Trump’s reform also imposes a 12.5% tax on the intellectual property of local U.S. subsidiaries.

Rosselló proposed increasing from $9,000 to $12,500 the annual salary exempted from paying income tax. He is also proposing cutting from 7% to 1% the individual income tax rate for individuals who make up to $21,000 annually. At the same time, the maximum tax rate for individuals would be cut from 33% to 31%.

“The first thing will be a reduction in the tax rates to individuals. Tax rates won’t be paid for the first $12,500, increasing somewhat what was in the past. From that amount to $21,000, 1% (tax rate) will be paid instead of 7%,” he said in the message broadcast from the Convention Center in San Juan. “And the maximum rate is going to be reduced to 31%. These components are going to start working from now on but will be implemented in 2019 and 2020.”

As for corporations, Rosselló proposed reducing the basic tax rate from 20% to 19% and the maximum tax rate from 39% to 31%. With regard to the business-to-business (B-to-B) tax, he said it would be reduced from 4% to 3% by 2019, and by 2020 it would be completely eliminated. Meanwhile, the sales and use tax (IVU by its Spanish acronym) would be reduced from 11.5% to 7% for restaurant-prepared meals.

“The reduction to the…tax of food prepared in restaurants from 11.5% to 7%, does justice to multiple small and midsize entrepreneurs,” Rosselló said.

On the other hand, the governor said that with the Incentives Code, inefficient subsidies to business operations will be repealed and the money returned to the people.

“For decades, the government has squandered taxpayers’ money to subsidize companies that do not produce jobs or revenue for the treasury. The times when people got no transparency about the return on investment for these incentives, which amount to about $600 million a year, are over,” the governor said.

With the Incentives Code, Rosselló expects to save $300 million to, in turn, finance tax reform. “We are going to return that money that was wasted to the taxpayers,” he reiterated in his speech, which also touched upon a second labor reform.

Puerto Rico Manufacturers Association President Rodrigo Masses said he supported both reforms because, in his opinion, they would create the conditions to create jobs and provide companies and Puerto Rico the tools to be more competitive. Therefore, he anticipated that the entity he represents will be supporting the bills as well.

“All these measures and bills proposed by the governor will be presented to the Legislature, so it remains to be seen what the specific provisions of each bill will be, and the final version of each measure due to the amendments that could be made before becoming law,” a Masses statement reads.

By Eva Llorens Vélez and Dalissa Zeda Sánchez
Puerto Rico governor reveals details on proposed tax reform, new incentive code

UBER Podrá Operar en todo Puerto Rico

El presidente de la Comisión de Servicio Público (CSP), Lcdo. Luis D. García Fraga, anunció este viernes que el nuevo Código de Reglamentos permite la operación de las Empresas de Red de Transporte (UBER) en todo Puerto Rico e iguala la operación que realizan los taxis.

“Cumpliendo con la política pública de nuestro gobernador Ricardo Rosselló Nevares de reducir los reglamentos de las Agencias, la Comisión de Servicio Público culminó las nuevas reglas administrativas que facilitan la obtención de licencias o permisos mediante la aprobación de Permisos Provisionales, y a su vez, regular el transporte de pasajeros, así como los vehículos de alquiler. Esto simplifica y uniforma el procedimiento para la concesión y renovación de autorizaciones, además esta primera fase integra 7 reglamentos en 1 promoviendo la reducción de reglamentos obsoletos” explicó García Fraga.

“El nuevo reglamento pone en igualdad de condiciones a los taxistas y a los conductores de UBER, requiriéndoles la misma documentación y el mismo costo de operación. Esto lo hacemos en beneficio de nuestra población y para promover una competencia leal, entre los distintos servicios de transporte existentes”, manifestó.

Además, explicó que el reglamento elimina las regiones turísticas y considera a todo Puerto Rico como un destino turístico. “Todo Puerto Rico se promueve como un destino turístico. El Gobierno de Puerto Rico no puede continuar haciendo distinciones de áreas por el mero hecho de ser un área de mayor dominio turístico. Todos los ciudadanos nos merecemos un trato similar sin distinción alguna, además de que tenemos que tener la libertad de elegir el servicio que deseamos obtener”, manifestó García Fraga.

Como parte de las nuevas guías, y como garantía de protección al consumidor, las empresas de red de transporte deberán indicarle de antemano al consumidor el costo total de su viaje y no podrán modificar el mismo, a menos que sea debido a negligencia de parte del cliente. También, establece que el cliente puede cancelar el viaje sin cargo alguno, cuando hayan transcurrido más de cinco minutos del tiempo estimado de llegada del conductor.

Por otro lado, el código establece otras medidas para garantizar el mismo trato a los consumidores a través de toda la Isla. Por ejemplo, el reglamento fusiona todos los taxis regionales y los “shopping cars” con los taxis turísticos; uniforma las tarifas metradas a través de todo Puerto Rico y establece nuevas tarifas fijas, incorporando el ajuste por combustible. Igualmente, autoriza el uso de unidades de cabida intermedia para ofrecer el servicio de taxi.

Este reglamento también prohíbe que empresas como UBER dejen pasajeros en ciertas áreas debido al requisito de acceso a los sistemas de telecomunicaciones y su posible falta de disponibilidad en lugares remotos. Por motivos de seguridad de los pasajeros, UBER no podrá dejar pasajeros en áreas de bosques estatales como El Yunque. Además, dispone que las empresas de red de transporte se verán forzadas a utilizar taxistas autorizados, por la CSP, que cumplan con sus requisitos, pero sin discriminar por razón del tipo de tablilla o por su rotulación.

“Entendemos que el futuro del transporte en Puerto Rico, tanto turístico como el servicio a los puertorriqueños, se beneficiará de este cambio. Sabemos que al principio será un proceso de aprendizaje, pero eliminar estas áreas, y propiciar estos cambios, redundará en beneficio para todas las partes involucradas”, sostuvo el presidente de la CSP.

El Reglamento, además, regula otras áreas del transporte y establece lo siguiente: un código de vestimenta mínimo para las empresas de transporte de pasajeros; prohíbe el transporte de pacientes en camilla en unidades que no hayan sido aprobadas como ambulancia por el Departamento de Salud; garantiza que la transportación escolar se brinde en unidades adecuadas para brindarle una mayor seguridad a los estudiantes; requiere una certificación de un ingeniero profesional para las unidades aprobadas como “Party Bus” (Fiestas Rodantes); y convierte a las franquicias de limosina en Transporte de Lujo, estableciendo los requisitos de las unidades y autorizando el uso de unidades de menor cabida, cabida intermedia y mayor cabida.

Por otra parte, el presidente de la CSP destacó que la nueva documentación requerida a todos los transportistas de pasajeros garantiza que el transportista sea una persona que respete al máximo las leyes de tránsito y leyes criminales. “La CSP se encuentra trabajando con el jefe de informática del Gobierno de Puerto Rico, Sr. Luis Arocho, un sistema integrado con el Sistema DAVID, en el cual aquellos transportistas que dejen de cumplir con los requisitos establecidos en la Ley de Tránsito serán suspendidos de manera inmediata”, advirtió el funcionario, quien además mencionó que el nuevo reglamento agiliza la tramitación de quejas y querellas en la agencia, mediante una estructura especial para facilitar que los ciudadanos privados puedan presentar quejas en contra de los que violen la ley.

El Código de Reglamentos de la CSP se culminó tras la celebración de cinco días de vistas públicas en las que participaron líderes de diversas organizaciones como: UTRA, PROTGE y la Federación de Taxistas de Puerto Rico. Además, se realizaron decenas de reuniones con diferentes organizaciones, incluyendo Aerostar, para garantizar que el Reglamento responde a las necesidades de cada sector, cumpliendo con la política pública del gobierno.



El nuevo reglamento elimina las regiones turísticas y considera a todo Puerto Rico como un destino turístico.
UBER podrá operar en todo Puerto Rico