Washington is finally beginning to ask a question about Puerto Rico that should’ve been asked years ago: are federal disaster recovery dollars being used to rebuild critical infrastructure in the best interests of American taxpayers, or are they being diverted toward corrupt purposes right under our nose?
Puerto Rico receives more disaster recovery funding than any other state, but an illogical and illegal tax is inflating reconstruction costs for the federal government, delaying rebuilding, and redirecting taxpayer dollars to unapproved uses. Allow me to explain.
After Hurricanes Irma and Maria devastated the island nearly a decade ago, Congress began appropriating billions of dollars to rebuild Puerto Rico’s electric grid, strengthen infrastructure against future storms, and help American citizens recover from a historic disaster.
These much-needed funds were intended to help Puerto Ricans, but instead, bankrupt municipalities limited their value by assessing construction excise taxes on recovery projects – including projects undertaken on behalf of tax-exempt public entities. In some cases, local governments have applied these taxes retroactively, years after work was completed.
This is not theoretical. My public policy foundation, Frontiers of Freedom, recently asked the Inspectors General of the Departments of Homeland Security, Housing and Urban Development, and Energy to investigate the tax after I learned about Cobra Acquisitions, a U.S. company facing more than $130 million in construction taxes, tied to work the federal government paid for years ago.
Waste, fraud, and abuse embedded at this scale should concern every taxpayer. Puerto Rican municipalities are forcing higher costs on the federal government – and, by extension, are defrauding the American taxpayer.
In a June hearing in front of the House Homeland Security Committee, Secretary Markwayne Mullin highlighted the issue as “fraud” and said his office would be investigating to ensure “widespread abuses do not occur.”
The federal oversight board – selected by Congress and the President – to stamp out corruption has repeatedly warned that municipal taxation of federally funded projects threatens billions of dollars in federal investment, increases project costs, discourages participation by qualified contractors, and undermines broader recovery efforts. The Board has also stated these taxes violate PROMESA.
As a reminder, Congress did not create PROMESA and the oversight board because Puerto Rico demonstrated a history of fiscal discipline. Congress intervened because years of financial mismanagement and corruption left the territory insolvent and unable and unwilling to act like a state. Federal oversight was designed to ensure accountability and restore confidence that public resources would be used responsibly.
Allowing municipalities to flagrantly violate PROMESA and scam American taxpayers by treating federally appropriated disaster recovery funds as their piggy bank is shameful.
Worse, you’d think that the Republican Governor of Puerto Rico, Jenniffer Gonzalez, would take a strong stance against this tax, right? Wrong. Gonzalez has ignored repeated requests to address the tax, despite being a self-proclaimed fiscal hawk and ally to President Trump.
Fortunately, it appears Congress has identified the problem. The House Appropriations Committee recently advanced language directing FEMA to report on electrical grid recovery funding and determine whether local construction taxes have delayed the disbursement of federal funds. That is precisely the type of oversight taxpayers should expect from their government.
But it should only be the beginning.
Federal disaster aid must go toward rebuilding power grids, roads, substations, and critical infrastructure. It should never become a backdoor bailout for cash-strapped municipalities.
As Puerto Rico approaches peak summer electricity demand, the island has proven unable to adequately supply its customers. This growing energy supply shortfall means there’s an urgent need for new generating capacity. Removing this tax on federal energy recovery is one way to expedite these much-needed projects.
The Trump administration, Congress, and appropriate federal agencies must make clear that any effort to divert recovery dollars from their intended purposes will result in funds being cut off from Puerto Rico.
