Puerto Rico's economic future in limbo after legislators vote down governor's tax proposal

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SAN JUAN, Puerto Rico — Gov. Alejandro Garcia Padilla pledged Thursday to negotiate with legislators after they voted down an overhaul of Puerto Rico's tax system, raising concerns about the U.S. territory's economic future. But he warned he would act independently if needed to rectify the government's financial problems.

"Puerto Rico is facing one of the biggest fiscal and economic crisis in its modern history," Garcia said in his yearly televised commonwealth address. "I will not stand by idly. The island can no longer bear the uncertainty of inaction. With you, or in spite of some of you, this island will rise."

The address came just hours after legislators rejected Garcia's call for a 16 percent value-added tax, and then voted 28-22 against an alternative way to raise revenue, including a 13 percent goods-and-services tax following some nine hours of debate and weeks of negotiations.

Garcia said he would take immediate action to reduce the government's costs, restructure the Treasury Department to help cut down on rampant tax evasion and push for Puerto Rico's right to file for bankruptcy under Chapter 9. He said he plans to create two working groups to find ways to boost liquidity and help reorganize the government to ensure the continuity of essential services.

He noted his administration already has reduced a $2.2 billion deficit to less than $200 million this year and also cut 16,000 government positions without resorting to layoffs.

Garcia criticized those who voted against his tax measure before dawn, calling it an "egotistical and disloyal" act.

"However, they will not derail us," he said. "The path we're going to take will be harder, but not impossible."

An opponent of the tax plan, Rep. Manuel Natal, said he and the other legislators who voted against the measure want a tax overhaul that reflects the island's fiscal realities and does not hit the working class hard.

"In the end, (the measure) did not address Puerto Rico's biggest fiscal problem: its monumental public debt," Natal said.

With Puerto Rico in its eighth year of recession, the government is struggling with $73 billion in public debt and investors are becoming concerned that some of the island's public agencies could go bankrupt. The island's Government Development Bank recently warned that the government could shut down within three months if no action is taken.

Bank President Melba Acosta told The Associated Press that Garcia's rejected tax plan would have captured revenue from the island's vast underground economy. She said the government will analyze other ways to generate revenue, but declined to provide specifics.

"It's a lengthy war, and one can lose many battles along the way," she said.

Opposition legislators accused Garcia of offering only vague promises on how to fix the economy during his address and criticized his warning of acting alone if he decides that is needed.

"No one accepts a dialogue under threat," legislator Lourdes Ramos said.

Economist Gustavo Velez said in a phone interview that the government needs to act quickly to deal with its financial problems, saying it should reduce spending by up to $800 million. He said the legislature's vote means Puerto Rico will likely not be able to issue more than $2 billion in bonds as planned to help raise revenue for the government.

"This forces us to look beyond the traditional solution of more debt and more taxes," Velez said. "It forces officials to reduce expenditures and reconsider the size of the government."

The governor said he expects to submit a budget proposal for the 2016 fiscal year in the coming weeks along with a five-year fiscal adjustment plan.

"But if we don't reach a consensus on that, I will take all the actions that my constitutional powers allow without legislative intervention," Garcia said to thunderous applause from hundreds of supporters gathered at the seaside Capitol.


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