Puerto Rico’s legislature ratified a series of tax measures that are expected to raise $1.2 billion in revenue and pave the way for additional financing.
The agreement calls for an increase in the sales and use tax from 7% to 11.5% as well as adding a 4% tax on certain professional services.
Puerto Rico officials, who are also aiming to cut at least $500 million in spending, hope the measure will enable the government to avoid a shutdown and raise up to $2.9 billion in new financing.
The House of Representatives passed the tax measure Tuesday, sending it to Governor Alejandro Garcia Padilla for his signature. The Senate had already approved it Monday. Padilla is expected to sign the bill this week.
The approval comes at the end of a month long debate which saw legislators reject other proposals, including a 14% value added tax.
Increasing the sales tax is intended to buy lawmakers more time to work through the financial issues that lowered the credit rating of Puerto Rico bonds below investment grade.
Next on the agenda for legislators is a debate on a $9.8 billion budget that contains $674 million in spending cuts. It would also segregate $1.5 billion to apply toward Puerto Rico’s debt.
The budget plan includes closing approximately 100 schools and 20 public agencies as cost cutting measures.
In the wake of the potential elimination of a cash crunch, Puerto Rico bonds have staged their longest rally of 2015. Puerto Rico’s 8% General Obligation bonds traded recently at 83.625, up from 78.00 just last week.
The Government Development Bank is optimistic that the additional revenue generated by this bill will encourage investors to support a $2.9 billion bond sale backed by oil taxes.
If this financing is successful, proceeds from the oil tax bonds would repay money the Puerto Rico Highway Authority owes to the GDB and restore the bank’s liquidity.
Although there are many other fiscal challenges facing the Commonwealth, this new tax and financing is currently being viewed by the markets as a positive step forward.