Repub­li­cans Land Another Death Blow on Puerto

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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.

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