Home Local News Governor inks tax reform; $1.2B in annual relief
Issued : Monday, January 31, 2011 10:25 PM
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Governor inks tax reform; $1.2B in annual relief


Gov. Luis Fortuño enacted Monday the second phase of tax reform that will provide an average $1.2 billion in annual tax relief to individuals and corporations over the next six years.

The governor said it is the largest tax relief provided in island history, and it comes on the heels of prior legislation that provided some $240 million in relief to taxpayers for the 2010 tax year, with tax returns and payments due April 15.

“Everyone, from heads of households to small and midsize businesses, will see a significant tax savings because we are convinced that a dollar in the hands of a citizen returns much more than a dollar in the hands of the government,” Fortuño said during a bill-signing ceremony in Bayamón. “We are doing justice to Puerto Rico workers.”

Government officials are betting that the relief, a Fortuño campaign pledge in 2008, will help spark the economy through “dramatic reductions” in tax rates and incentives for work. It also provides extra help to the island’s elderly who are on a fixed income.

One of the reform’s biggest benefits, according to the governor, is that those who earn less than $20,000 will not pay any income taxes. This represents 46% of all taxpayers.

The tax relief will average a 50% cut for individual taxpayers and a 30% cut for businesses in Puerto Rico. That translates into $1,500 in yearly average savings for the average taxpayer. Corporate tax relief, meanwhile, will average $260 million annually over the next six years. The new tax package also will incentivize charitable giving, simplifies the tax code and contains new tools for fighting tax evasion.

The reform initially will be financed through Law 154, which levies a controversial, six-year excise tax on the offshore affiliates of island manufacturing operations, as well as through continuing efforts to clamp down on public spending and increase efficiency in tax collection. The manufacturing operations have tax-exemption decrees that cover most of their island-based profits.

Manufacturing and business groups have railed against the plan, saying it would inflict particular damage on the island’s pharmaceutical and life-sciences manufacturing sectors, which despite years of downsizing, still comprise Puerto Rico’s most productive and profitable economic sectors.

Administration officials, however, argue that the plan strikes a “good balance” between the need to finance the tax reform and the needs of companies, providing flexibility that will help companies reduce any undue burden imposed on them.

“Tax reform, along with the other efforts being undertaken under the New Strategic Economic Model, will serve to bring economic development, promote entrepreneurship and help create jobs,” Fortuño said. “We are not only providing direct relief to all taxpayers, we are also establishing improved tax conditions for the economic development of our island.”

The plan calls for these new reduced rates to be phased in over the six-year period:

— 0% tax rate for those who earn less than $20,000 annually

— 7% rate for those who earn $20,000 to $30,000

— 14% rate for those who earn $30,000 to $70,000

— 25% rate for those who earn $70,000 to $125,000

— 30% rate for those who earn over $125,000.

The reform also cuts the maximum tax rate for businesses to 30% from 39%. Firms earning $750,000 to $2.5 million in profits will pay at a 25% rate and firms with profits below $750,000 will pay at 20%.

The new code also streamlines the tax code, whittling down to six allowable general deductions from gross income that include:

— Mortgage interest, limited to 30% of the sum of the adjusted gross income

— Charitable donations, limited to 50% of the adjusted gross income

— Health and orthopedic-equipment expenses that aren’t covered by a healthcare plan and exceed 10% of the taxpayer’s adjusted gross income

— Student-loan interest

— Contributions to the government retirement system

— Contributions to individual-retirement accounts (limited to $5,000 in the case of individuals and $10,000 in the case of married couples filing joint tax returns), to education-contribution accounts (limited to $500) and to health-savings accounts.

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