Puerto Rico’s Governor Channels Ronald Reagan

Luis Fortuño wants deep tax cuts to spur growth. Are Republicans in D.C. paying attention?—asks the Wall Street Journal. My question is, what has my poor home island done to deserve him?

Move over, New Jersey Gov. Chris Christie. You’ve got a tax-cutting, pro-growth competitor who may be even bolder than you. His name is Luis Fortuño and he is the governor of Puerto Rico, a place that, if you can believe it, is in worse fiscal shape than the Garden State.

When Mr. Fortuño took office in January 2009, Puerto Rico had a 46% budget shortfall equal to $3.3 billion. Things were so bad, he told me in a telephone interview from San Juan on Tuesday, that he had to fly to New York while still governor-elect to explain his fiscal plan to the investment community in order to avoid a sharp downgrade of Puerto Rican debt. “We were one step from junk status,” he says.

After 22 months in office and a boatload of spending cuts, the deficit is now down to about 11%. That achievement notwithstanding, the commonwealth still is spending more than it takes in. In the Washington political handbook this means Puerto Ricans are not paying enough in taxes.

Mr. Fortuño has a much different view of the problem: He thinks high taxes have destroyed the Puerto Rican economy. He has already signed into law a five-year property tax holiday for real estate purchased through June of next year and waivers on fees for those transactions. Last week he handed his legislature a radical plan to simplify the tax code and sharply reduce corporate and individual rates.

Mr. Fortuño says that Puerto Rico’s recession—which began two years before the U.S. recession—only partly explains the current crisis. “If you look at the past decade, Puerto Rico has had negative growth for the entire period.” (According to his office, the economy contracted 0.2% in the 2000s.) This shows, he argues, that “we are in need of a major overhaul. If we just tweak it a little, we won’t accomplish what we need.”

The governor says he cut 20% of the budget but “it was not enough.” Puerto Rico needs “to provide an environment for our people to flourish and to let their ingenuity take them where they want to go.” He adds: “Puerto Rico has not been competitive. Investors have been going to Singapore and Ireland. Our system was failing us.” And it wasn’t for lack of capital. Commonwealth debt offerings, he says, always sell out quickly. “There is plenty of money here but it has not been worthwhile taking risk” in private-sector ventures.

To change that risk-reward profile, the Fortuño plan dramatically reduces corporate tax rates and raises the income levels in which higher rates kick in. The new schedule will replace six brackets with three and move the top corporate rate of 41% on income over $500,000 down to 30% on income over $2.5 million.

There is also tax relief for individuals, who will have fewer deductions but will also enjoy sizable cuts in rates. Middle and lower-income earners will get the biggest cuts but top marginal rates are also substantially reduced over six years. “And,” says Mr. Fortuño, “we are doing away with the [alternative minimum tax]”—which Puerto Rico can do because it has its own tax code not dictated by the feds.

The plan is not without controversy. To broaden the base it imposes a new 4% tax in 2011—gradually phasing out over six years—on locally manufactured goods purchased by multinational parent companies. Critics are howling that these companies were induced to invest in Puerto Rico by promises of exceedingly low tax rates. (In 2009 the effective rate on the local affiliates of multinationals was 1.46%.) To suddenly hit them with a substantial tax increase, however temporary, suggests an arbitrary investment environment.

But the new tax is an excise tax imposed in lieu of the existing income tax. As such, two different tax experts told me, parent companies domiciled in the U.S. will be able to take it as a credit against their income, and it will not increase the company’s U.S. tax liability. Industry groups counter that the tax liability is unclear at this time.

There may be another problem: Although the cuts up to 2013 are locked in, the planned cuts after that depend on the government meeting spending and revenue targets and the economy meeting growth targets. Mr. Fortuño says that this will put taxpayers on the side of responsible government. But it also could send investors to the sidelines.

Still, the spirit of the plan is worth celebrating, warts and all. If polls are accurate, on the morning after Tuesday’s elections, scores of Republican politicians will wake up with new responsibilities. They have promised voters a new American path to prosperity framed by less government and greater liberty. If they are looking for a role model, they could do worse than Mr. Fortuño.

For the original report go to http://online.wsj.com/article/SB10001424052702303284604575582680391414648.html

James Nadal writes (see comment below) that “in all fairness to your readers, you should mention that this character has major credibility issues, and is making a feeble attempt at reelection,” which is entirely true. If he is re-elected, we are in for a rocky ride.

One thought on “Puerto Rico’s Governor Channels Ronald Reagan

  1. In all fairness to your readers, you should mention that this character has major credibility issues, and is making a feeble attempt at reelection.

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