PUERTO RICO-ECONOMY: Tax Breaks Under Threat

By IPS Correspondents Reprint | | Print |

Scott West

SAN JUAN, Feb 9 1996 (IPS) - Tax incentives which have led to the rapid industrialisation of Puerto Rico, giving the island’s people a standard of living higher than that of most of their neighbours, are being threatened by efforts to cut the U.S. federal budget deficit.

It is not the first time that there has been a threat to the tax breaks which have attracted a range of heavy and light industries to the island. Business leaders here say, however, that it appears that this time the incentives will be either reduced or eliminated.

The removal of the incentives will also affect businesses in 10 countries in the Caribbean Basin which have benefitted from cheap loans from the Puerto Rican government.

The proposals for reducing the tax benefits under Section 936 of the federal revenue Code are contained in the budget proposals in Washington, and which are the source of disagreement between President Bill Clinton and Republican legislators.

Section 936 allows income tax and wage credits to subsidiaries of U.S. companies operating in Puerto Rico. Interest earned on income is also tax free.

These funds amounting to several billion dollars have underwritten the island’s financial stability. The tax incentives have attracted hundreds of companies to Puerto Rico, particularly those involved in pharmaceuticals and electronics, with manufacturing now accounting for about 40 percent of the gross domestic product.

While the budget debate in Washington remains deadlocked, Puerto Rican business is suffering from the uncertainty, says Hector Jiminez Juarbe, vice-president of the Puerto Rican Manufacturers Association.

There has been a slowdown in investment and a reduction of jobs in some sectors such as apparel, he says.

Ironically, the Puerto Rican administration is supporting an end to the tax breaks which have been mainly responsible for the island’s development.

Governor Pedro Rosello, who will seek a second term in the gubernatorial election in November, says Section 936 benefits are not compatible with his administration’s aim of changing the island’s political status to that of a state within the union.

The issue has become enmeshed on the debate about the political future of the island of 3.8 million people. While Rosello’s New Progressive Party supports statehood, the Popular Democratic Party, led by Hector Luis Acevedo, advocates a continuation of the current status.

The island is described as a “commonwealth” which is a “free associated state” of the United States. Puerto Ricans are U.S. citizens, but cannot vote for a president. The island has no senators or congressmen in Washington.

In referenda on the island’s future, the Independence Party has never managed more than five percent of support. In the last plebiscite in 1993, 48 percent of the population voted for the status quo, 46 percent supported statehood, while four percent wanted political independence.

The supporters of the status quo argue that without Section 936 benefits many companies will leave Puerto Rico, leading to economic contraction and increased unemployment, and greater dependence on federal government benefits which now total six billion dollars per year, mainly for social security and Medicaid.

But supporters of statehood reject this, contending that the companies will stay because Puerto Rico is a competitive location for business, and that the island cannot continue indefinitely to depend on tax credits.

By all indications, the tax credits are expected to be phased out. Republican legislators in Washington, saying the federal budget can gain about 20 billion U.S. dollars in five years if Section 936 is dismantled, want it eliminated in 10 years.

In a counter proposal, Clinton is advocating elimination of the income credits in seven years, while maintaining the wage credits.

The Caribbean business sector is growing increasingly concerned at the likely elimination of Section 936 which has been the source of loans of over one billion U.S. dollars.

The termination of the programme would mean that existing loans, granted at lower than market rates, would cost more to service and “the impact on Caribbean development will obviously be severe,” said the Caribbean Association of Industry and Commerce.

The loans, made to countries which had Tax Information Exchange Agreements with the United States, have reached 1.2 billion U.S. dollars. Trinidad and Tobago and Jamaica have been the major beneficiaries, having borrowed 775 million dollars.~