A New Blueprint For Puerto Rico’s Economic Development

by John Marino

August 8, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. A report by a U.S. conservative think tank released this month concludes what many in Puerto Rico have increasingly begun to realize -- "the myth about the indispensable relationship between U.S. tax incentives and Puerto Rico's economic survival has lost its luster."

The 45-page report prepared by the Texas-based Institute for Policy Innovation lashed out at the federal corporate tax breaks that have served as the basis of Puerto Rico’s industrial lure for the past 60 years. It also criticized the Calderón administration’s push to continue them by replacing the dual Section 936 and Section 30-A tax breaks, slated to expire in 2006, with a new Section 956 proposal.

"Even if the reform proposal to Section 956 is enacted into law, there is little likelihood that it will produce lasting prosperity on the island for the people of Puerto Rico," wrote economist Lawrence Hunter, who authored the report. Hunter is the chief economist for Empower America, the Republican policy institute headed by former U.S. Rep. Jack Kemp and former Education Secretary William Bennett. He is also a former chief economist for the U.S. Chamber of Commerce.

"The proposed successors to the Section 936 tax subsidy will always fail because they perpetuate the myopic policy of subsidizing a few large off-island and largely itinerant companies in particular industries without building a vibrant local economy with indigenous Puerto Rican businesses, entrepreneurs and jobs," the report continues. "Tax subsidy schemes shovel tax benefits to a very small group of off-island concerns doing business in Puerto Rico that neither create broad-based employment for local inhabitants nor increase wealth on the island."

Statehood politicians have pounced on the report as evidence that the commonwealth political status has failed at boosting Puerto Rico’s economic development. And it’s true that many of its major findings -- such as giving federal tax breaks and other aid directly to low-income, aged and disabled individuals -- would make Puerto Rico more state-like by integrating the island a bit more into the U.S. tax system.

The report, however, appears just as critical of industrial tax breaks such as the Section 30-A wage credit, which New Progressive Party officials have continued to praise as a better alternative to the Section 956 tax proposal. And while the report suggests doing away with provisions Puerto Rico appears to enjoy as a "special jurisdiction," such as the rum rebate tax transfer, it calls for other special provisions for Puerto Rico, such as exempting it from the requirement that ocean shipping between U.S. ports be on U.S. vessels.

The fact remains that the report is largely silent on Puerto Rico’s separate taxing jurisdiction, which is one of the biggest economic development benefits of the island’s current political status. So it’s too bad that Gov. Calderón has downplayed its findings.

After all, even former Economic Development and Commerce Secretary Ramón Cantero Frau has acknowledged that a federal industrial incentive won’t make or break the local economy. As he left office last December, Cantero Frau downplayed the failure of the administration to get Congressional approval of its 956 plan, arguing that most manufacturing concerns on the island have reincorporated as controlled foreign corporations, allowing them to benefit from local tax breaks Puerto Rico continues to offer outside investors.

Sure, the report’s recommendation to apply the Supplemental Security Income and Earned Income Credit programs to the island — which would transfer an estimated $2 billion to Puerto Rico residents — would make the commonwealth appear more like a state. But it would be undoubtedly good for Puerto Rico. Not applauding such a recommendation is as ludicrous as calling for an end to Puerto Rico’s fiscal autonomy, which is also good for Puerto Rico.

The report’s major finding is that Puerto Rico’s attempt to win Congressional support for a new federally-backed tax incentive for the island is not the most effective way to boost the local economy. Increasingly, an additional argument against such a plan is that it is highly unlikely to be implemented, given Congressional opposition to programs that can be criticiXed as corporate welfare. One of the few prominent supporters of the 956 plan, U.S. Sen. Orin Hatch, R-Utah, has recently withdrawn that support.

Whether this report’s recommendations — such as the Jones Act exemption and the extension of the SSI and Earned Income Credit — are any more likely to be implemented by the U.S. Congress remains to be seen.

The real lesson here is that Puerto Rico should chart its economic course by concentrating on the substantial local powers it has, and the substantial power it has to influence the economic development landscape by cutting local income taxes and streamlining government and increasing its efficiency, among other measures.

There is ample room for debate over the propriety of Puerto Rico granting million-dollar tax breaks to businesses, while local residents are overtaxed and under served. The corporate welfare debate needs stirring here. And there are many other strategies Puerto Rico’s government could use to try to improve economic development and ease residents off welfare rolls.

Interestingly, a local think tank, the non-partisan Center for a New Economy, has called for the commonwealth government to institute a criollo Earned Income Credit, as a good way to stimulate the local economy and encourage the under-employed or unemployed to better their stations in life. Like the federal tax credit, it would provide a wage supplement to low-income workers that offset income taxes they would normally owe.

Some even say Calderón’s $1 billion anti-poverty plan, which aims to boost infrastructure, housing and job training spending in 686 of the island’s poorest communities, would be more effective at eliminating poverty if it were spent on financing such a tax credit.

Another of the report’s major findings is that Puerto Rico’s "unsettled [political] status situation remains an obstacle to economic growth."

While politicians here will quote that phrase to push for a final resolution of Puerto Rico’s political status, it may be a call for something more easily accomplishable -- to stop the political status debate from influencing economic development policy, as well as the criticism of that policy by those out of power.

The report denies advocating a political status formula for Puerto Rico or promoting a "a hidden agenda that would advantage the ultimate attainment of any particular political status." Local politicians should take the report’s author at his word on this matter and begin discussing its recommendations.

John Marino, City Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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