|
|
Para ver este documento
en español, oprima aquí.
PR HERALD
Staying the Course
March 6, 1999
©Copyright 1999 The Puerto Rico Herald. All Rights Reserved.
Introduction
After 100 years as a U.S. territory, Puerto Rico's living standards continue to lag behind the 50 States. Income per capita has been stuck at less than a third of the U.S. level for a generation. However tempting it may seem, reinstating IRS Section 936 or making IRS Section 30A permanent for U.S. firms operating in Puerto Rico is not the best way to stimulate sustainable development on the island.
In the past, an unhealthy reliance on tax credits created a crutch preventing the public sector reforms and economic liberalization needed to make Puerto Rico's economy productive and competitive. Puerto Rico should avoid a return to tax gimmick strategies, and push forward with a package of reforms that have demonstrated proven success: deregulation, privatization, fiscal reform, and heavy investment in people and infrastructure.
In contrast to dire predictions, the Puerto Rican economy has not fallen into recession nor has unemployment skyrocketed since Congress voted to eliminate Section 936 in 1996. In fact, the economy continues to grow at a moderate rate and employment is increasing. This performance reinforces Congress' decision to repeal the ineffective and costly tax credit, and demonstrates that Puerto Rico can and should do without it.
Background on Section 936
Established in 1976, Section 936 provided U.S. firms operating in Puerto Rico with tax-free income. Section 936 succeeded previous tax breaks for U.S. firms in Puerto Rico dating back to 1921. During the 1950's and 1960's, federal tax incentives helped to stimulate industrialization and infrastructure development on the island.
By the 1980's, however, Section 936 had long since outlasted its usefulness. As numerous reports from the U.S. Treasury documented, the credit had proven costly to the U.S. Treasury and ineffective in generating the intended economic growth and job creation on the island.[1] Lost tax revenues escalated, employment stagnated, and a few large U.S. corporations experienced huge financial gains.
Section 936 has cost U.S. taxpayers an estimated $72 billion in today's dollars. Despite the phase-out, it is projected to cost $3.6 billion in 1999 alone, and a total of $18.2 billion from 1999 to 2003.[2] In 1993, the U.S. Treasury reported that U.S. corporations received over $13 billion in income from their Puerto Rican operations tax-free.[3]
The credit also proved grossly inefficient. Tax credits per worker actually exceeded worker compensation. U.S. corporations in Puerto Rico received tax benefits of $34,296 per worker, far in excess of what they paid their average worker ($22,817).[4] Pharmaceutical firms were particularly adept at manipulating the tax code, garnering $77,699 in benefits per worker - more than double average worker compensation.
Despite the escalating cost, the tax credit was not achieving its objecting: creating more jobs. Employment in manufacturing has remained virtually stagnant at an average of 150,000 jobs since 1970, despite the billions in annual tax credits. As a percent of total employment, manufacturing has been on the decline, from 20.6% in 1978, 17.7% in 1988, to about 14% today. The economy as a whole stagnated after 1972, with real GNP per capita growth of 1%, less than a quarter of its previous rate.[5] Living standards haven't been catching up with the U.S. – GNP per capita has been stuck at a third of the U.S. level since the early 1970's. In addition, federal tax breaks set local entrepreneurs at a disadvantage against U.S. firms, who created minimal linkages with the local economy.
At the same time that Section 936 fostered a harmful dependence mentality and encouraged government-led, tax incentive - based development, trade liberalization and globalization have placed Puerto Rico under increasing competitive pressure from developing economies within NAFTA and from around the globe.
The Effect of the Phase-Out on the Economy
In 1996, Congress voted to eliminate Section 936 and phase out benefits for existing firms over a ten-year period. The phase-out has not produced economic disaster. Overall economic growth continues at a moderate rate: real GNP increased by 3.2% in 1997 and overall employment grew. Fixed investment by the private sector increased by 10% in 1997 and 1998, almost identical to investment growth prior to the phase-out. While several more years must pass before the full impact can be judged, the initial results are encouraging.[6]
Every major U.S. corporation receiving tax credits has reinvested since Congress' vote to repeal 936. Searle announced a $150 million expansion in May 1998, Hewlett-Packard is investing an additional $100 million in its Aguadilla facilities, and Allergan is building a $25 million complex in Anaxco.[7]
This performance in the face of the phase-out underscores the resilience of the Puerto Rico economy, and demonstrates that the economy can survive without the tax credit. It also reflects an increasingly diversified labor market less dependent on Section 936 and the manufacturing sector. Since 1990, the number of jobs in manufacturing has decreased from 154,000 to 152,000. In contrast, service employment has grown 37% from 132,000 to 181,000, and the number of jobs in trade have jumped by 26% from 154,000 to 194,000.
The Fruits of Economic Reform
Puerto Rico's economic performance also reflects the success of badly needed government reforms initiated by Governor Rossello under the New Economic Development Model. These reforms have already yielded impressive results, reforming the fiscal system, promoting deregulation, investing in infrastructure, and reforming the public sector.
Tax levels are been cut an average of 20 percent for individuals, and collections have increased dramatically. Standard and Poor's recently revised its outlook on Puerto Rico from negative to stable in light of the improved tax collections and a budget surplus. Efforts are underway to reduce red tape and make it easier and faster to do business on the island. Needed investments in the physical infrastructure are also being made, including over 200 miles of highways and a light-rail mass transit system for San Juan. The government has turned over several public corporations to the private sector, including several hotels, an ocean-cargo company, several agricultural businesses, and several utilities, including the telephone company.
Much remains to be done, however, if Puerto Rico is to become a productive economy capable of supporting rising living standards for its people. Government must continue its program of success, removing barriers to individual initiative, upgrading the infrastructure, promoting research and development, and investing in the education and skills of the Puerto Rican people, the island's greatest resource. It would be unfortunate if the reintroduction of tax breaks undermined the successful reform efforts now underway.
- For the most recent report, see Department of Treasury, "The Operation and Effect of the Possessions Corporation System of Taxation, Sixth Report," March 1989.
- Joint Committee on Taxation, "Estimates of Federal Tax Expenditures for Fiscal Years 1999-2003," Table 1, p. 27.
- Sarah Nutter, "U.S. Possessions Corporations, 1993," Fall 1997, Statistics of Income Bulletin.
- Department of Treasury, Statistics of Income, Fall 1997, "U.S. Possessions Corporations, 1993," p. 144.
- Real GNP per capita grew at 4.1% from 1955 to 1975, and 1.1% from 1975 to 1995.
- Regional Financial Associates and the Economist Intelligence Unit, among other analysts, expect a rebound in growth after the economy continues to adjust to the phase-out in 1999.
- See Caribbean Business for coverage of industrial change in Puerto Rico, e.g., Alexander Diaz, "What Crisis," April 30, 1998.
|
