* Proposal to expand sales tax curbed
* Policymakers to hike corporate, gross sales tax
* Legislative leaders see passage as early as next week
SAN JUAN, June 12 Puerto Rico policymakers have
agreed to hike taxes by $1.5 billion as part of a budget that is
key to the Caribbean island avoiding a Wall Street downgrade of
its massive debts to junk-bond status.
With over $70 billion of municipal debts, Puerto Rico pays
the highest interest rates of any big borrower in the $3.7
trillion U.S. tax-free debt market and since December has been
downgraded by the three major Wall Street ratings agency to near
A loss of investment-grade ratings for Puerto Rico's muni
debt could prompt heavy selling by mutual funds and other
institutional investors, analysts have said.
Treasury Secretary Melba Acosta told local media on
Wednesday that the fiscal 2014 operating budget would sharply
reduce a $1.1 billion revenue proposal by Governor Alejandro
Garcia Padilla. Instead, the budget would rely on an island-wide
levy on gross sales by businesses and increases in corporate
Facing a June 30 deadline to enact a spending plan for the
12 months starting July 1, legislative leaders said they
expected to pass the governor's revised $9.83 billion budget as
early as next week.
Bond investors were mostly indifferent to the sources of
revenues for the budget but worried that the island's economy
may return to recession after a year of tepid expansion,
according to Joseph Rosenblum, director of municipal credit
research at Alliance Bernstein.
"For this credit to move forward, it needs economic growth.
For investors, they want to see a reasonable balanced budget
that has reliable revenue," Rosenblum said. "There were some
questions about the projections for the governor's (sales) tax
The so-called yield spread between 10-year Puerto Rico bonds
and triple-A Municipal Market on Wednesday fell slightly to
around 295 basis points from 300 basis points last week.
Acosta told reporters that policymakers had agreed to scale
back by 73 percent the governor's proposed sales-tax expansion,
which was strongly opposed by local businesses. The expanded
sales tax will be levied only on a small group of industries and
will raise $287 million during fiscal 2014.
To make up for the lost revenue, the government will assess
a business tax on gross sales on a sliding scale, depending on
sales volume. It is expected to generate $522 million.
Another measure would push corporate tax rates back up to
1994 levels, returning the top rate to 39 percent. Rates were
slashed by 30 percent under a tax reform enacted in 2011. The
measure is expected to generate $270 million.
House Speaker Jaime Perello said the House could approve the
full budget by next Wednesday, and Senate President Eduardo
Bhatia said the upper chamber was also ready to act next week.
The U.S. commonwealth, which also has $35 billion in
unfunded pension obligations, has not had a fully funded
operating budget free of borrowing in more than a decade.