Republicans Land Another Death Blow on Puerto
The new Republican tax plan cuts a swath through Puerto Rico’s manufacturing industries that’s even deeper than that wrought by Hurricane Maria.
The portion of the tax-cut law in question, Section 4303, was apparently written primarily as part of a plan to keep U.S. profits on U.S. shores. It includes clauses designed to penalize companies thinking they can make things in overseas tax havens and then resell the goods back to the United States at lower prices. It further incentivizes companies to bring their foreign profits “home” by giving them preferential tax rates if they do so and adds a 10% minimum tax on overseas profits as a further disincentive to attempt to get around U.S. taxes by making profits elsewhere.
The problem is that this part of the law, regardless of how one feels about its fairness, is going to impact the future of Puerto Rico in a disastrous way.
Under previous laws, some kinds of U.S. companies could set up subsidiaries within Puerto Rico that they could then buy from under a special arrangement.
Provided the profits those subsidiaries make on what they sell are 100% attributed to those subsidiaries, the Puerto Rican subsidiaries paid no federal income taxes on what they made. They also paid only minimal local taxes.
To give an example of how this worked in practice, suppose a computer company were to make circuit boards in Puerto Rico for eventual use in its computers. As in most other cases with a company buying something essentially “from itself,” there is a transfer price agreed upon between the two entities. In most cases, that price would need to account for the actual costs as well as the taxes involved. But since the entity that makes the circuit boards does so in Puerto Rico, the corporate parent effectively saves the federal income tax on that sale.
This is a subsidy of sorts – one designed to help the Puerto Rican manufacturing economy. It encouraged companies to invest in Puerto Rico, which many Americans (and, yes, what seems like an even higher
percentage of Republicans) tend to forget or not understand is part of the United States. Puerto Rico is heavily dependent on tourism, and this subsidy – which had been around for a long time – helped diversify its economy.
The subsidy originated back in the 1940s. In a plan known at the time as “Operation Bootstrap,” a series of incentives were put in place to help transition Puerto Rico’s economy into the industrial age. The plan included generous tax exemptions to corporations for everything from capital investments to industrial licenses to exporting. The agricultural sector was phased back somewhat as well. Together, these steps, along with the later ones described above, have helped to diversify the Puerto Rican economy and raise the average incomes of those living on the island. All along, those income earners have still been paying regular federal income tax because citizens of Puerto Rico are citizens of the United States – just like those of all the 50 states and the District of Columbia.
The plan worked, and although it was far from perfect and couldn’t prevent future bad planning, corruption and predatory lending from causing the financial crisis in Puerto Rico that preceded the coming of Hurricane Maria, it did do much of what it was intended to do.
But all that planning will soon come crashing down with the passage of the new tax law.
The new law effectively adds a 20% excise tax on any goods coming to the U.S. mainland from Puerto Rico, even though Puerto Rico is part of the United States. This effectively wipes out the tax benefits for corporations to have a subsidiary on the island. It will also wipe out the Puerto Rican manufacturing economy as well, along with as many as 250,000 jobs in that sector and many more that are supported by manufacturing wages.
Many of those who will lose their jobs due to this Republican idiocy will come to the U.S. mainland, seek public assistance and take jobs away from native-born mainland Americans.
Tax law is, despite what some lawmakers would have one believe, filled with tax breaks designed to care for what one may call a “critical industry,” if you’re for them, or a “loophole” for those against them. The housing industry, with millions of architectural, engineering, construction and other jobs behind it, has been effectively incentivized by the ability in the past to deduct property taxes from income taxes. Education expenses have been deductible to help people who otherwise might not have been able to afford them. And moving-expense deductions have reduced the burden of picking up one’s belongings to get to a new location just to keep working.
The same is true with the Puerto Rican special corporate tax break, which has kept the island’s manufacturing economy going at least moderately strongly for many years. It does treat the location different from that of U.S. states, none of which get any substantial tax break just for being in a particular location but which also don’t have to pay an excise tax. One could argue that this is just a well-overdue elimination of an unfair benefit for this island of approximately 3.4 million U.S. citizens, but that argument would be wrong.
Puerto Rico is still devastated by the mass destruction wrought by Hurricane Maria and the mixed response from the U.S. federal government. While some of the aid has been a lifesaver and greatly welcomed and appreciated, in many cases the feds have made matters worse. Trump quietly reinstating the Jones Act restriction against ships not built in the United States is just one example of how the government has hindered Puerto Rico’s recovery by greatly increasing shipping costs and preventing aid from reaching the island.
Some three months after the storm has passed, an estimated 50% of the country’s population is still without power. A significant percentage is also still without safe water and sewer connections as well as access to either telecommunications services or Internet connectivity. Roadways are still a shambles, the agricultural economy has been almost completely wiped out and manufacturing companies have not even begun the process of picking up and rebuilding. The tourism industry, once the dominant source of income for the island, will take a long time to recover – even under the most ideal of circumstances.
Prior to the devastation of Hurricane Maria, Puerto
Rico was already in default on multiple loans and was, for all practical purposes, in bankruptcy and in need of a bailout or miracle. The hurricane blasted much of the island back to the stone age and ensured that it would stay bankrupt for a very long time.
The situation is seen by many as so devoid of hope that many tens of thousands of former Puerto Rican residents who can afford to do so have already packed up their families and permanently moved to the mainland. They have observed the obvious – that recovery is a very long way off without real help from somewhere and that help is not coming from Washington or their own government.
As Puerto Rico is still attempting to get back up on its own still-wobbly footings, individuals and companies are making their own decisions about what they will do and when they may decide to rebuild the plants that once thrived on the island. If this bill passes as written, many of those decisions will be made for them. With the economics that might have justified seeking a construction loan to rebuild likely now pointing to a clear-cut “no” for going forward, the companies will not rebuild. Those who had stayed on the island prepared to wait for what might happen will now leave, and even the construction jobs that might have appeared will vanish.
With this new law in effect the island’s economy will go down for the third time and there will be no recovery. The first decline was caused by the effective bankruptcy before the hurricane and the second by the devastation of Maria. Each of those cases came with major noise surrounding what had happened. This third decline – the manufacturing economy being stopped before it can even restart again, along with the many people dependent on that diverse economy now making decisions to leave forever – would come, as the saying goes, not with a bang but a whimper.
Perhaps it is not just Republican cruelty and incompetence that is at work here but that the greedy Trump gang really wants to destroy Puerto Rico’s economy and drive people off the island so they can swoop in like vultures and buy up prime real estate for dirt-cheap and start building luxury condos, golf courses and resorts. If Puerto Rico is finally granted the statehood it wants, property values could skyrocket.
Some believe that Puerto Rico should declare independence, walk away from its debt and start afresh. But, for that to work, it would need a different culture that is not dependent upon handouts from Uncle Sam and which doesn't foster corruption and reward incompetence.