State Viewpoint:

Amid the push for tax reform, Congress must stop treating Puerto Rico as a foreign nation.

When Hurricane Maria devastated Puerto Rico in September, the common refrain was that its residents were, above all other things, American citizens. They deserved the same attention and help provided to Texans as they recovered from Harvey, and Floridians as they rebuilt from Irma. As residents fled the island for other states, there were no discussions of travel restrictions or the legality of residents resettling in places like Orlando. We do not — and should not — treat Puerto Rico’s residents any differently than residents of the 50 states.

So, why would Congress treat businesses in the Commonwealth of Puerto Rico as foreign companies in its tax reform package?

Congress is attempting to make good on the promise to deliver much-needed reform to our 3.8 million-word tax code. It’s been more than 30 years since the last major reform, and over that time the code has turned into a confusing mess. The most visible elements of reform — reducing the number of income tax brackets, lowering rates, cutting corporate taxes, and the myriad deductions and loopholes that should be eliminated — have captured most of our collective attention. But “the devil is in the details,” and there are thousands of less noticeable specifics that will have substantial impact on our economic prosperity.

One shining example is the Commonwealth of Puerto Rico.

A brief explanation: In trying to leverage the complexities of the tax code and maximize profits, multinational companies will often shift some elements of business to other countries. This is a tax strategy called “base erosion.” To counter this, policymakers can enact what is referred to as a base-erosion tax, designed to ultimately help keep economic production and profits within the U.S. Because of the treatment of the commonwealth in the code, Puerto Rico would be subject to this. In one example, if a Florida company buys supplies from a subsidiary in Hawaii, no penalties would be incurred. If that company buys from a subsidiary in Puerto Rico, however, a 20 percent excise tax would be imposed.

This is significant because of the need for Puerto Rico to overhaul its economy, and because of the role that pharmaceutical manufacturing plays in Puerto Rico’s recovery and future prosperity. When thinking about Puerto Rico’s economy, it is easy to first think about tourism. While tourism vital, the fact is one of the biggest drivers of Puerto Rico’s gross domestic product is pharmaceutical and medical-device manufacturing — 30 percent of the commonwealth’s economic activity. Approximately $40 billion in pharmaceuticals alone are produced, more than every state or any single foreign country. The 90,000 people currently employed in the medical-product industry earn 60 percent more than the average manufacturing employee in Puerto Rico — a statistic that should offer hope for the commonwealth’s future economic prospects.

If we are serious about a viable economic recovery for the Commonwealth of Puerto Rico (and we should be), then encouraging the continued growth and success of this industry is critical. Imposing base-erosion taxes on a U.S. territory and effectively chopping off any recovery at the knees is bad policy, no matter how well-intentioned the goal of promoting U.S. jobs may be. We recognize that in almost every other arena, Puerto Rico and its residents are “one of us.” Let’s see that this is true in the tax reform package as well.