Never underestimate the ability of politicians to come up with creative plans to reach deep into the pockets of taxpayers.
Since Puerto Rico was hit by back-to-back hurricanes nearly a decade ago in 2017, U.S. taxpayers have contributed more than $20 billion in federal recovery funds. Now, local politicians are using the legal system as a weapon to steal even more of your hard-earned tax dollars.
Under the guise of collecting unpaid construction taxes, local governments are attempting to tax Federal Emergency Management Agency (FEMA) reconstruction projects. A federal contractor who rebuilt the island’s infrastructure on behalf of taxpayers is now facing frivolous litigation that serves the interests of bureaucratic elites at the expense of the territory’s residents.
Unless the federal government intervenes, this retroactive tax system could reduce the amount of money left for recovery and set a dangerous precedent that diverts U.S. taxpayer dollars to local government coffers.
Hurricanes Irma and Maria caused the island’s power grid to collapse. With support from FEMA Disaster Relief Funds, the Puerto Rico Electric Power Authority (PREPA) hired private contractors to restore power grid functionality from less than 4% to more than 98%.
Despite the legal action being against Puerto Rico law, more than a dozen local leaders are suing contractors for more than $100 million in unpaid taxes, essentially trying to get a slice of federal disaster funds. PREPA has been expressly exempt from local construction taxes since its creation in 1941, and this law specifically extends that exemption to contractors working on public works projects.
This long-standing legal safeguard protects federal contractors from local taxes on the income they earn from their work. This exemption prevents theft of federal dollars by local authorities.
These pointless lawsuits are not intended to help the island recover. These are just ingenious legal maneuvers devised to line the pockets of cash-strapped local governments. Puerto Rico has lost nearly 700,000 residents since 2000, significantly shrinking its tax base. Faced with declining business and property tax revenues, local governments are now effectively treating FEMA funds as a relief mechanism.
Taxing recovery projects in this way would increase the cost of recovery and further worsen the lives of Puerto Ricans. The possibility of retroactive taxation creates uncertainty for federal contractors, forcing them to relentlessly raise their bids to cover potential liability. Every dollar spent on litigation is a dollar not spent on repairing substations, modernizing the power grid, and hardening our infrastructure for the next storm.
The Department of Energy recently allocated $365 million to modernize the island’s energy grid, but these funds are now at risk of being taxed. Governor Jennifer Gonzalez Colon, for the sake of her constituents and their livelihoods, should publicly oppose attempts by local mayors to drain these funds through superficial legal maneuvering.
Fortunately, not everyone in Washington is turning a blind eye to these attempts to spill taxpayer blood. In early November, Rep. Greg Steube (R-Florida) sent a letter to the White House Office of Management and Budget (OMB) highlighting the risks posed by this retroactive tax. He rightly warned that this approach would only increase the burden on U.S. taxpayers and reduce the resources available for the island’s energy recovery. Mr. Steube’s intervention on this issue exemplifies the oversight Congress should provide for our hard-earned tax dollars.
Federal oversight is essential to protect the interests of both U.S. taxpayers and Puerto Rican residents. Because the island is vulnerable to natural disasters, it is inevitable that at least some of its future restoration costs will be covered by federal recovery funds. Taxing these funds would increase costs, slowing recovery and hitting those who rely on federal aid the hardest.
Alexander Ciccone is the policy and government affairs manager at the National Taxpayers Union.
