Counting our blessings? Commonwealth tax reform - five years later. (CB Analysis) (Column)

Nearly five years after enactment of Puerto Rico's 1987 tax reform, the results speak for themselves. Income tax collections from individuals and companies, which, when combined, constitute almost 60% of the government's tax revenues, have risen by more than expected under the reform, thus refuting the naysayers who felt that a sharp drop in tax rates would lead to a decline in collections.

But the good news on that front comes with bad news on tax evasion and excise taxes, as highlighted by the current controversy surrounding the higher excise taxes being imposed arbitrarily by the Puerto Rico Treasury Department (Hacienda). Interest group politicking during the reform process, along with lack of follow-through at Hacienda on seeking out tax evaders have taken their toll.

Personal income taxes, which have historically constituted the single biggest component of total government tax revenues at roughly 30%, rose from $928.5 million in fiscal 1987 to an estimated $1.2 billion this year.

Likewise with corporate income taxes, which have grown at an even faster pace than personal taxes under the reform, rising from $857.6 million or 26.1% of total revenues in 1987 to $1.1 billion or 28.7% of revenues estimated for this fiscal year. This includes taxes imposed on all local and mainland-based companies, as well as on special partnerships, and the "tollgate" tax imposed on repatriated profits of 936 companies. The latter are the local subsidiaries of mainland-based corporations operating under Section 936 of the US. Internal Revenue Code.

Personal and corporate tax collections would have been even higher during the last two years had it not been for the economic slowdown.

"In these areas, it is clear that the tax reform has worked. Lower rates have produced a wider tax base and less tax evasion," said Carlos J. Nieves, who heads the tax division at the local accounting firm Velez Semprit Nieves & Co. "And this is so even though the third phase (of the reform) was first postponed and later altered. I'm convinced the numbers would have been even better had the reform been implemented as originally enacted."

The 1987 reform reduced the number of individual and corporate income tax brackets along with a reduction in tax rates, thus matching a similar reform enacted on the mainland by the federal government one year earlier.