SAN JUAN, Puerto Rico (Reuters) - Puerto Rico’s Governor on Monday announced plans to cut business and income taxes by more than a $1 billion annually over the next seven years in an attempt to jumpstart the U.S. territory’s economy.
Governor Luis Fortuno laid out the plan in a special address to the Puerto Rican legislature after a weekend vote by lawmakers to slap a six-year tax hike on offshore manufacturing firms operating on the island.
Fortuno called the plan the biggest tax relief package in Puerto Rico’s history and said ordinary taxpayers would see a 50 percent reduction in their taxes when the reform is fully implemented.
Businesses would receive an average 30 percent cut, he said.
“This will give the final push our economy needs to be reborn, to grow and to create jobs,” Fortuno said to loud applause from lawmakers.
The cuts will be applied to the current tax year, he added.
The tax increase on offshore companies will target around 40 to 50 multinational firms that earn $75 million or more a year, bringing $5.8 billion over six years to state coffers, according to administration officials.
Some lawmakers and business groups criticized the measure, which was passed without public hearings, and warned it could deepen the economic crisis confronting the island, which has been in recession since 2006.
In addition to the recession, Fortuno has been battling a $3.2 billion deficit since he entered office in January 2009, which has forced him to cut spending across the board and to fire about 13,000 public sector employees.
Puerto Rico is a U.S. commonwealth, but operates as a separate taxing jurisdiction and allows for the deferral of federal taxes on profits of offshore firms as long as they are not sent back to the United States.
Lured by the tax benefits, some of the offshore firms include pharmaceutical manufacturers, technology and engineering firms ranging from Eli Lilly, Cisco Technologies to Oracle, among others.
The take increase measure will take effect Jan. 1 and run through 2016. The first year a 4 percent tax will be levied on the firms, followed by 3.75 percent in 2012 and 2.75 percent in 2013.
The tax will then shrink gradually from 2.5 percent in 2014 to 2.25 in 2015 and 1 percent in 2016, the final year it will apply.