Puerto Rico Reverts To Leftism, Bankruptcy Looms
The Island of Puerto Rico has long debated the issue of statehood. For the sake of the US I would hope that it would reconsider the idea-we already have Illinois. Once again we see the disastrous results of liberal economic policies. In 2008 Puerto Rico elected Luis Fortuno of the New Progressive Party as Governor. In spite of the leftist connotation of his party's name, Mr. Fortuno's policies were very much conservative. Faced with a $3.3 billion deficit he cut income taxes by half, reduced the corporate income tax from 39% to 30% and eliminated over 38,000 government jobs. the tax cuts apparently worked in that the island experienced a jump in investment and made modest economic gains in 2012.
Unfortunate for Mr. Fortuno, his success was short lived. The public unions that make up one-third of the Island's workforce expressed their displeasure by voting him out of office. Mr. Fortuno was replaced by their candidate, Alejandro Garcia Padilla of the Popular Democratic Party. And true to form he reversed the policies of his predecessor. Padilla re-instated the Pre-Fortuno tax rates, imposed a 1% tax on insurance premiums as well as on the gross income of financial institutions; raised the excise tax on foreign acquisitions, increased sewage rates by 67%, and increased the petroleum products tax.
The higher sewage rates have depressed consumer spending and contributed to slower economic growth. The Island will have to borrow to finance its deficits-which exceed tax revenues by 700%. However there is a small problem: Puerto Rico's $70 billion debt bomb has investors demanding a higher premium on its bonds-which already have yields topping 10%. Add to this mess a $35 billion unfunded pension, default could be in PR's future. Detroit and Puerto Rico should warn other states that liberal tax and spend policies are a recipe for doom.
Unfortunate for Mr. Fortuno, his success was short lived. The public unions that make up one-third of the Island's workforce expressed their displeasure by voting him out of office. Mr. Fortuno was replaced by their candidate, Alejandro Garcia Padilla of the Popular Democratic Party. And true to form he reversed the policies of his predecessor. Padilla re-instated the Pre-Fortuno tax rates, imposed a 1% tax on insurance premiums as well as on the gross income of financial institutions; raised the excise tax on foreign acquisitions, increased sewage rates by 67%, and increased the petroleum products tax.
The higher sewage rates have depressed consumer spending and contributed to slower economic growth. The Island will have to borrow to finance its deficits-which exceed tax revenues by 700%. However there is a small problem: Puerto Rico's $70 billion debt bomb has investors demanding a higher premium on its bonds-which already have yields topping 10%. Add to this mess a $35 billion unfunded pension, default could be in PR's future. Detroit and Puerto Rico should warn other states that liberal tax and spend policies are a recipe for doom.
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