The imposition of taxes on the population by the state is a universally legitimized political power. The perception is that the state government, in order to provide essential services to the population, must collect sufficient funds to cover recurring public expenses, and those funds, in general terms, must be provided by the community. Therefore, all countries impose taxes and set up internal systems for organizing, implementing, supervising and accounting for the imposition and collection of taxes. These taxes come from various sources, such as income and property taxes, and include tariffs on imports, products and services. Because of the continuous need for collections and the variety, complexity and constant transformation of these measures imposed by law, they are spoken of in joint form as a tax system. Each state sets up its own tax system consisting of legislation that is known as the tax code and that incorporates a huge variety of laws that govern tax collection. In Puerto Rico, because of the fiscal autonomy granted by the United States government, which exempts taxpayers from paying taxes to the federal treasury (except in some exceptions), all taxes paid by the citizens go to the Commonwealth of Puerto Rico. This is different from the federated states in the United States, which are subordinate to the central (federal) government. The most recent addition to the Puerto Rican tax system is the IVU (sales and use tax) that the two main political parties agreed to impose during the 2005-2009 term.

Given the tax system’s importance for the government’s ability to function properly, the Constitution of the Commonwealth of Puerto Rico, reaffirming the principle of separation of power, gives the Legislative Assembly the exclusive power to impose taxes and gives the executive branch the responsibility for implementing and administering them. Just as the Legislature approves the state budget each year, sometimes following the executive’s recommendations and sometimes not, depending on the political environment and the particular partisan distribution of political power, democratic principles stipulate that taxes should be authorized only by the body that directly represents the electorate, which is the Legislative Assembly. The executive, therefore, cannot impose taxes. The Constitution requires the governor to present his proposal for public spending for the following fiscal year to the Legislature each year, but it is the Legislature that has the exclusive power to approve the government’s budget.

In addition to reaffirming the principle of separation of government powers to regulate public spending, government finances are also addressed in the Constitution in ways that are aimed at establishing stable principles for public administration, with the purpose of avoiding abuses by the administration in office. One important measure is the requirement that rules for imposing taxes to be uniform throughout Puerto Rico, with no discrimination based on territory (Article 6, Section 3 of the Commonwealth Constitution). But the most important disposition is the requirement for a balanced budget, found in Article 6, Section 7. Under this section, the allocations for a fiscal year “can not exceed the total estimated resources for that fiscal year, unless the imposition of sufficient taxes to cover said allocations is provided by law.” This disposition is of central importance for ethical public administration because it prohibits the excesses of the administrators in office in managing public funds. Despite this constitutional prohibition, there have been recent cases in which the administrations in power, using legal subterfuge and creative accounting practices, have arranged to spend more than the revenues. To a certain point, one of the causes of the government’s financial crisis of recent years has been the persistence of these constitutional violations. See Public Financing.
In the event there is a disagreement between the executive and legislative branches about the authorization of expenditures for a specific fiscal year, which can happen when there is a split government (in other words, one party controls the executive branch while another controls the legislative branch), and the result is that there is no agreement on a budget for the government’s regular spending, the Constitution establishes that the previous year’s budget will be followed until a new budget is approved. The governor, therefore, can authorize necessary spending in an interim form.

But the government also has the ability to complement tax revenues by borrowing money in the financial markets. This public debt, however, is authorized only to finance what are called, in the argot of public administration, permanent improvements. These are expenses aimed at expanding the island’s physical infrastructure, such as construction of buildings and other public works. These funds cannot be used to cover operational expenses. This financial resource is considered to be so important for the development of the island’s infrastructure that the Constitution establishes that when the resources available for a given year are not enough to cover the spending approved for that year (when revenues are less than expected), “the payment of interest and amortization of the public debt will proceed first and then other disbursements will be made in accordance with the priorities established by law.” This priority given to payment of public debt above other government expenses is evidence of the importance of stable financing for public works. But it also presumes that the debt was acquired in a responsible and transparent fashion, based on fundamental ethical principles of public administration.

Today there are two complementary political circumstances that conspire to increase the public debt. On one hand, the multi-national financial businesses recognize that the post-modern states that maintain strong ties with the globalized economy are a stable source of business for lending their investment capital. The security of the payment of financial obligations, as stated in the Constitution, along with the presence of international entities that facilitate access to capital, makes governments today (all public units, even regional and municipal ones) preferred customers for this investment capital. At the same time, borrowing instead of imposing additional taxes to increase government revenue sometimes has the effect of avoiding negative electoral consequences. No political party, aware of voters’ instincts, likes to raise taxes. Borrowing, therefore, is an attractive and viable alternative.

Author: Roberto Gándara Sánchez
Published: September 11, 2014.

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