Puerto Rico's governor fights critics of tax reform

Puerto Rico's governor fought off criticism of his signature tax reform plan in a televised address on Monday, telling a skeptical public that the measures would benefit the poor and middle class while combating tax evasion in the indebted U.S. territory.
 
Governor Alejandro Garcia Padilla's speech comes after weeks of public hearings where economists, business groups and community organizations voiced opposition to the plan. Protests have occurred on nearly a daily basis. The latest on Sunday at a sports complex in San Juan drew thousands, including business leaders and media personalities.
The Caribbean island of 3.6 million is struggling with debt of more than $70 billion, aneconomy that has been in or near recession for eight years, and a budget that regularly shows a deficit. Some estimates say up to 25 percent of Puerto Rico's economy is informal.
"I am going to fight to the end for what I think is right. I did not come here to put a Band-Aid on the problem," said Padilla. A defeat would be a major blow for Padilla. The governor is facing re-election in 2016 and badly needs his government's economic policies to show results.
The heart of the plan would substitute a 7 percent sales tax with a 16 percent value added tax, while cutting income taxes and eliminating many income tax deductions and credits.
Much of the debate has centered on how much revenue the reform would raise. Treasury Secretary Juan Zaragoza estimated an additional $1.2 billion, with most of the money going to pay Puerto Rico's annual debt obligations and increased pension payments, which add up to about $1 billion.
Senate President Eduardo Bhatia, meanwhile, has called for a government reform and annual cut in spending of up to $1 billion that needs to be imposed along with the tax reform.
Even before Monday's announcement, popular opposition had forced concessions to the plan which the governor first announced on Feb. 10. The governor has already pledged that private education expenses would be exempt from VAT, and House speaker Jaime Perello has said the VAT would not be charged on medical expenses as originally proposed.
Both Moody's and Standard & Poor's downgraded Puerto Rico's credit further into junk territory last month after the reform was announced, in part because of the uncertainty it created regarding government revenue projections. (Reporting by a contributor on San Juan; Writing by Edward Krudy; Editing by Lisa Shumaker)
Puerto Rico's governor fights critics of tax reform

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