Puerto Rico Struggles To Avoid Raising Sales Tax Rate

by Mike Godfrey, Tax-News.com, Washington

01 October 2009

The government of Puerto Rico dismissed nearly 17,000 public employees last week at the behest of the Joint Economic and Fiscal Reconstruction Board (JEFB) in a move to hold back a fiscal deficit which is approaching USD3.2bn. Luis Fortuño, Puerto Rico's governor, claimed that the alternative would have been a 3% hike in sales tax from 7% to 10%.

This is the second round of layoffs this year and the largest ever in Puerto Rico's history. The first involved about 4,500 employees. This second phase, said Carlos Garcia president of JEFB, affects another 16,470 employees. In all 16,970 letters of dismissal were sent out, but 500 employees will be rehired immediately by the Treasury Department for extra tax debt collection work. Education received the heaviest cuts - 7,249 workers lost, or 10% of the workforce.

This new round of layoffs, whilst substantial, is still likely to fall short of meeting the government target of USD2bn in expenditure cuts - savings to date have reached USD1.2bn. Garcia predicted that the balance of savings will come from more reorganizational economies in the government, USD200m from health care, and additional reductions in government contracts. The unemployment rate in Puerto Rico has now grown to 17.1% and the unions have called for a day of protest in mid October.

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