GLOBAL ECONOMY

Puerto Rican legislators narrowly approve raising sales tax to highest level in U.S.

People gather in front of the Puerto Rico’s Capitol building to protest against Gov. Alejandro Garcia Padilla's budget proposal for the next fiscal year in San Juan, Thursday, April 30, 2015. Legislators struck down a key part of a plan to overhaul the island's tax system early Thursday, raising concerns about the U.S. territory's economic future and its ability to pay off a heavy public debt. (AP Photo/Ricardo Arduengo)

People gather in front of the Puerto Rico’s Capitol building to protest against Gov. Alejandro Garcia Padilla's budget proposal for the next fiscal year in San Juan, Thursday, April 30, 2015. Legislators struck down a key part of a plan to overhaul the island's tax system early Thursday, raising concerns about the U.S. territory's economic future and its ability to pay off a heavy public debt. (AP Photo/Ricardo Arduengo)  ((AP Photo/Ricardo Arduengo))

Legislators on Tuesday narrowly approved an increase in the U.S. territory's sales tax to help generate more revenue and offset a deep fiscal crisis.

Gov. Alejandro García Padilla is expected to sign the bill that would increase the tax from 7 percent to 11.5 percent, as well as create a new 4 percent tax on professional services. The sales tax increase would go into effect July 1 and the new tax on Oct. 1, with a transition to a value-added tax by April 1.

If approved, it would be the highest sales tax compared with any U.S. state.

It is estimated that the proposed increase could help generate $1.2 billion in revenue as Puerto Rico struggles through its eighth year of recession and faces a $72 billion public debt. Officials previously warned the government could shut down soon if emergency measures were not taken.

The approval ends a months-long, heated debate where legislators rejected other proposals to generate money including a 14 percent value-added tax as the U.S. territory's economic crisis worsened.

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If García signs the measure, it will help Puerto Rico access the market and issue up to $2.95 billion in bonds as planned, said economist José Villamil, a former U.N. consultant and the CEO of an economic and planning consulting firm. But government officials still need to take other steps to help boost the economy, including implementing a tax reform, he said in a phone interview.

"Clearly, the fiscal situation will not be solved by this bill," he said, adding that the sales tax increase could have been lower had legislators approved it earlier this year.

"We would be in a much better position today," he said. "A lot of important revenue was lost during that time."

The measure received the minimum 26 votes needed in the island's House of Representatives after the Senate narrowly approved it with amendments on Monday.

Resident Commissioner Pedro Pierluisi of the main opposition party said the measure would have a negative impact on Puerto Rico's economy.

"It will kill your own pocket and our economy little by little," he said. "This new tax will keep leading to closures and lost jobs."

Legislators are now expected to debate a proposed $9.8 billion budget that calls for $674 million in cuts. It also sets aside $1.5 billion to help pay off Puerto Rico's debt, an increase of $400 million from the current fiscal budget. The government has announced that it plans to close nearly 100 schools and 20 public agencies in a bid to save money and cut costs.

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