Puerto Rico recovery taxes draw scrutiny from oversight board, taxpayer advocates

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(The Center Square) – Puerto Rico Gov. Jenniffer González-Colón faces new scrutiny over a local tax fight that critics say could raise the cost of federally funded disaster recovery work and slow the island’s long-delayed power grid rebuild.

The fight centers on Act 215, a 2024 law that amended Puerto Rico’s municipal code. The law changes municipal procurement rules and narrows an exemption from construction excise taxes.

That matters because Puerto Rico still has billions of dollars in federal disaster recovery work left after Hurricanes Irma and Maria in 2017 and earthquakes in 2019 and 2020.

The U.S. Government Accountability Office said FEMA had given Puerto Rico $23.4 billion in Public Assistance funds for permanent recovery work as of June 2023. Puerto Rico had spent $1.8 billion of that money at the time, and GAO said “a substantial amount” of permanent recovery work remained.

The Financial Oversight and Management Board for Puerto Rico has told the Puerto Rican government and several municipalities not to implement Act 215 unless the board confirms that it complies with PROMESA and Puerto Rico’s certified fiscal plans.

Congress created the oversight board through PROMESA, a 2016 federal law aimed at helping Puerto Rico deal with its public debt crisis and fiscal plans.

In an April 17 letter to the mayors of San Juan, Dorado and Vega Baja, the board said Act 215 changed the law so that an existing construction tax exemption no longer applies to work done by a taxpayer for a legal person or public or private entity, even when the project owner normally has a tax exemption.

The board also said Act 215 doubles the threshold for sealed requests for proposals for municipal work from $100,000 to $200,000 and raises the micro-purchase threshold from $3,000 to $10,000.

The board said those changes could reduce competition and raise costs.

“Please be advised that, pursuant to federal law, neither Act 141 nor Act 215 may be implemented by you or any municipality unless and until the Oversight Board confirms such implementation would comply with the applicable fiscal plans and PROMESA,” the board wrote.

Act 141, another 2024 law, raises the threshold for public auctions on construction and public improvement projects from $200,000 to $500,000. It also lets contracts worth up to $1 million bypass public auction rules during a declared emergency, the oversight board said.

The board has also warned that taxing federally funded projects could threaten federal dollars for Puerto Rico.

The San Juan Daily Star reported in January that the board warned Act 215 could let municipalities impose construction excise taxes on projects funded by commonwealth or federal dollars. The board said the move could put more than $4 billion in obligated federal funds at risk.

“Taxing these projects could be viewed as a misuse of federal funds and discourage future allocations to Puerto Rico,” the board said, according to the newspaper.

The National Taxpayers Union, a taxpayer advocacy group, has also urged federal officials to investigate the issue.

In a December letter to the U.S. Department of Energy inspector general, NTU said Puerto Rican localities were trying to use federal money “as a piggybank.” The group said more than a dozen municipalities have tried to levy over $100 million in combined taxes on Cobra Acquisitions, an Oklahoma-based company that helped restore Puerto Rico’s electric grid after the 2017 storms.

Cobra worked under a contract with the Puerto Rico Electric Power Authority. The Civilian Board of Contract Appeals said in a 2023 decision that PREPA entered into a contract with Cobra on Oct. 19, 2017, to provide power restoration services. The agreement said FEMA funds would cover the contract, and FEMA had reviewed and approved it.

NTU argues that the municipal tax claims against Cobra and other contractors could discourage future companies from bidding on recovery projects. The group also says the taxes would force federal taxpayers to either pay more money or accept smaller projects.

“If the proposed 5% tax scheme is applied to the DOE’s recent $365 million allocation to Puerto Rico, it could potentially divert $14 million away from grid modernization and inflate costs for future projects,” NTU wrote.

Puerto Rico’s power grid remains a big concern for the island’s roughly 3.2 million residents.

At a House Homeland Security Committee hearing this month, U.S. Rep. Pablo José Hernández, D-Puerto Rico, pressed Homeland Security Secretary Markwayne Mullin on the slow pace of federal recovery work.

Hernández said more than $24 billion remained undisbursed and said recovery projects could take decades to finish at the current pace.

Mullin said he opposed a blanket extension for all projects in Puerto Rico. He said some FEMA funds had not gotten where they needed to go.

The oversight board says municipalities cannot implement Act 215 while the PROMESA review remains unresolved.

Taxpayer advocates say Congress and federal agencies should go further and block local governments from taking a cut of federal disaster recovery dollars.

Supporters of the municipal taxes argue that local governments need revenue. However, critics say Puerto Rico cannot afford policies that make recovery projects more expensive while residents still need a more reliable power grid.