Never underestimate politicians’ ability to come up with creative schemes to reach deeper into taxpayers’ pockets.
Since Puerto Rico was hit by back-to-back hurricanes in 2017—almost a decade ago—U.S. taxpayers have contributed over $20 billion in federal recovery funding. Now, local politicians are weaponizing the legal system to grab even more of your hard-earned tax dollars.
Under the guise of collecting unpaid construction taxes, local municipal governments are attempting to tax Federal Emergency Management Agency (FEMA) reconstruction projects. Federal contractors who rebuilt the island’s infrastructure on behalf of taxpayers are now being hit with frivolous lawsuits that serve the interests of bureaucratic elites at the expense of the territory’s residents.
Unless the federal government steps in, this retroactive taxation scheme could set a dangerous precedent that leaves less money for reconstruction and turns U.S. taxpayer dollars into a backstop for local government coffers.
Hurricanes Irma and Maria left the island’s power grid in a state of collapse. With the support of FEMA disaster relief funds, the Puerto Rico Electric Power Authority (PREPA) hired a private contractor that restored the electrical grid from under 4% to over 98% functionality.
Over a dozen local mayors are effectively trying to grab a piece of the federal disaster funds by filing lawsuits demanding more than $100 million from the contractor in back taxes, despite the fact that these legal maneuvers fly in the face of Puerto Rican law. PREPA has been explicitly exempted from municipal construction taxes since its creation in 1941, and the law specifically extends that exemption to contractors working for the public utility.
This long-standing legal safeguard shields federal contractors from local taxes on income derived from their work. This exemption protects federal dollars from being pilfered by local officials.
These meritless lawsuits are not about helping the island recover. They are simply an inventive legal ploy devised to line the pockets of cash-strapped municipal governments. Puerto Rico has lost nearly 700,000 residents since 2000, shrinking its tax base dramatically. Faced with dwindling business and property tax revenues, localities are now effectively treating FEMA funds as a bailout mechanism.
Taxing reconstruction projects in this manner will raise the costs of recovery and leave the people of Puerto Rico worse off. The prospect of retroactive taxation creates uncertainty for federal contractors, which will inexorably lead them to raise bids to cover potential legal liabilities. Every dollar spent on lawsuits is a dollar not spent on repairing substations, modernizing the grid, or hardening infrastructure against the next storm.
The Department of Energy recently allocated $365 million to modernize the island’s energy grid, yet these funds are now at risk of being taxed. For the sake of her constituents and their livelihoods, Governor Jenniffer González-Colón should publicly oppose any attempts by local mayors to drain these funds through specious legal maneuvering.
Fortunately, not everyone in Washington is turning a blind eye to these attempts to bleed taxpayers dry. In early November, Representative Greg Steube (R-FL) wrote a letter to the White House’s Office of Management and Budget (OMB) highlighting the risks posed by this retroactive taxation. The Congressman correctly warned that this approach will simply increase the burden on U.S. taxpayers while leaving fewer resources available for the island’s energy recovery. Stuebe’s intervention on this issue exemplifies the oversight Congress is supposed to provide over our hard-earned tax dollars.
Federal oversight is critical for safeguarding the interests of both U.S. taxpayers and the residents of Puerto Rico. The island’s vulnerability to natural disasters makes it inevitable that future repairs will at least be in part financed by federal recovery funds. Since taxing these funds drive costs upward, rebuilding will slow and those who depend on federal assistance will suffer the most.
Alexander Ciccone is the Policy and Government Affairs Manager at the National Taxpayers Union
