Puerto Rico’s ‘Wal-Mart Tax’ Ruled Unconstitutional

• March 30, 2016

A federal judge has ruled that a law enacted by Puerto Rico’s government to charge Wal-Mart more than three times the rate it charges other companies is patently unconstitutional. Wal-Mart is the only company on the island with revenues anywhere close to the $2.75 billion level to which the law applies.

While Governor Garcia Padilla suggested the decision took $100 million away from the people of Puerto Rico and gave it to Wal-Mart, the decision had the exact opposite effect—a ruling against Wal-Mart would have done far more damage to Puerto Rico and Puerto Ricans.

Wal-Mart operates 48 stores across Puerto Rico, employs about 14,300 people (second only to the Puerto Rican government), pays its workers a minimum of $10 per hour—well above both the minimum ($7.25 an hour) and median ($9.42 an hour) wages in Puerto Rico—purchases about $1.6 billion’s worth of products from local vendors and suppliers, and currently pays about $40 million in income taxes to the Puerto Rican government.

Losing Wal-Mart would be a devastating blow to the struggling Puerto Rican economy—much more so than the alleged $100 million in lost tax revenues. But that’s precisely what the tax would do—drive the retailer off the island.

According to Wal-Mart officials, the tax would have resulted in an effective tax rate of 91.5 percent of net income, with the company paying 114 percent of its island profits in taxes.

Companies that don’t make profits can’t stay in business, and Wal-Mart noted that it would not be able to maintain its Puerto Rico operations for long under the tax.

Fortunately for the people of Puerto Rico who receive jobs, low-priced goods, and a market to sell their products, this unconstitutional tax will not drive Wal-Mart out of Puerto Rico.

In other words, Puerto Rico cannot use Wal-Mart as a cash reserve account. In ruling Puerto Rico’s Wal-Mart tax unconstitutional, the federal judge in San Juan noted that “the Commonwealth should not rely on revenue that it’s not entitled to.”

Rachel Greszler | Contributor

Rachel Greszler is a senior research fellow in workforce and public finance in the Thomas A. Roe Institute for economic policy studies at The Heritage Foundation. Read her research.

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