Puerto Rico's House narrowly approves sales tax increase to 11.25 percent; bill goes to Senate

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SAN JUAN, Puerto Rico — Legislation that would increase Puerto Rico's sales tax from 7 percent to 11.5 percent squeaked by late Thursday with the minimum amount of votes needed in the U.S. territory's House of Representatives.

The measure also would create a new 4 percent tax on professional services amid a push to generate more revenue during an economic crisis. Two members from the governor's party voted against the bill, which now goes to the Senate for debate.

The narrow approval of 26 votes came just weeks after the House rejected creating a 14 percent value-added tax that the governor said was essential to boosting the economy.

If the Senate approves the latest bill, the sales tax increase would take effect July 1 and the new 4 percent tax would begin Oct. 1. The measure calls for then transitioning to an 11.5 percent value-added tax that would go into effect April 1.

The proposed tax increases could generate $1.2 billion in revenue, which economist Gustavo Velez said would help boost the government's liquidity and strengthen the island's Government Development Bank so it can issue up to $2.95 billion in bonds as planned.

But Velez said it would not solve Puerto Rico's economic problems in the long term.

"We're just buying time," he said in a phone interview. "We have to take advantage of the next year and a half to create a non-political group to pursue a fiscal reform, a tax reform, a government reform and a plan to reactive the economy."

Among those who opposed the bill was Rep. Jenniffer Gonzalez, spokeswoman for the main opposition party. She said in a phone interview that the legislation would give Puerto Rico a higher sales tax than any U.S. state.

"It's going to have a dramatic impact on the economy," she said.

Opposition legislators argued that the government should instead crack down on tax evaders.

The House approved the measure just hours after Moody's warned that the Government Development Bank might run out of cash by late August if officials don't sell more bonds or take emergency actions. The territory is carrying $72 billion in public debt as it struggles through its eighth year in recession.

"Puerto Rico's debt has risen to unsustainable levels," Moody's said as it announced further downgrades for Puerto Rico's bonds and the Government Development Bank.

Legislators are now preparing to debate a $9.8 billion budget that Garcia proposed late Wednesday that includes $674 million in cuts and calls for the closure of nearly 100 schools and 20 public agencies.

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