Months After Storm, Puerto Rico Stares Down Another Blow: The Tax Bill
Posted December 16, 2017 5:21 p.m. EST
Three months after Hurricane Maria slammed into Puerto Rico, the sweeping federal tax overhaul that Congress plans to vote on in the next week could deliver another hit to the island’s economy, which is already crippled by a debt crisis and widespread power losses from the storm.
The final legislation negotiated by the House and Senate would treat mainland companies in Puerto Rico, a U.S. commonwealth, as it does those in foreign countries, and impose a 12.5 percent tax on income they receive from intellectual property. The bankrupt Puerto Rican government, which lobbied intensely for special tax treatment, fears that the bill could endanger crucial industries and thousands of jobs on the island.
“This is really a devastating blow for Puerto Rico, in our greatest time of need,” Gov. Ricardo A. Rosselló said Friday.
The tax bill’s effect on Puerto Rico could have been worse: Had Republicans opted for the House version of the bill, U.S. companies that import goods from their affiliates abroad would have been charged a 20 percent excise tax. That tax, intended to keep U.S. profits from being shifted overseas, would have threatened much of Puerto Rico’s pharmaceutical and medical industry. It ultimately did not make the compromise plan.
Still, the new intellectual property tax was unwelcome news for leaders dealing with an economy in free fall. Mainland companies — mostly in medical manufacturing — make up about a third of Puerto Rico’s tax base, and directly or indirectly employ about 250,000 Americans, according to the Rosselló administration. Maria forced companies to halt production of drugs, medical supplies and devices, leading to worrisome shortages in places as far away as Iowa. Now, the government worries that those businesses, facing a new tax on top of Maria’s vast ruin, could eventually leave the island altogether.
Though Puerto Rico is home to 3.4 million U.S. citizens, the tax code treats the island as both a foreign and domestic entity. U.S. affiliates in Puerto Rico get tax breaks like the ones granted to foreign companies, while the goods they produce are sold as made in the United States.
The tax on intellectual property, which includes patents and design rights, would make Puerto Rico less attractive for business, compared with foreign countries that offer lower tax rates for manufacturers, said Ramón Ponte, president of the Puerto Rico CPA society.
“A lot of companies are going to look at the numbers and decide that, under the circumstances, it’s better to leave,” he said. “The issue is not Puerto Rico versus the mainland: It’s really Puerto Rico versus its competitiveness with other foreign jurisdictions.”
If Republicans want to protect American jobs, as President Donald Trump has pledged, then Congress should consider Puerto Rico a domestic entity, said Rosselló, who spent Wednesday on Capitol Hill, making one last push for support. The governor predicted the tax plan would renew debate on the island about its commonwealth status. A vote on the tax bill could come as early as Monday or Tuesday. Rosselló accused Republican leaders — several of whom made highly publicized trips to Puerto Rico after Maria — of reneging on Congress’ commitment to help the island regain its financial footing.
“Congress essentially turned its back on Puerto Rico, and essentially failed in its mission,” said Rosselló, a member of the island’s pro-statehood New Progressive Party who also identifies as a Democrat. “It’s just penalizing Puerto Rico. It’s putting Puerto Rico in a worse-off position than it was yesterday.”
Last year, a special law — called PROMESA, or “promise” in Spanish — was enacted to restructure Puerto Rico’s more than $70 billion debt. It established an eight-member, bipartisan task force that concluded in a December 2016 report that Congress needed to address the complex federal tax policy for Puerto Rico. The report underscored that jobs on the island and in other territories — including the U.S. Virgin Islands, which were also hammered by Hurricanes Irma and Maria — are American jobs.
“The Task Force believes that Puerto Rico is too often relegated to an afterthought in congressional deliberations over federal business tax reform legislation,” lawmakers wrote.
The group said it was “open” to giving tax incentives to U.S. companies on the island as long as they were geared toward improving Puerto Rico’s economy and raising employment, as opposed to bolstering companies’ bottom lines. A 2012 Senate investigation found that Microsoft employed 177 workers on Puerto Rico, but reported some $4 billion in earnings there from profits channeled to the island to reduce the software giant’s tax burden. Microsoft sold brands and copyrights — that is, intellectual property — to its Puerto Rican affiliate to avoid paying higher mainland taxes.
Among the task force’s recommendations that the final tax bill ignored: allowing lower-income Puerto Rican families with one or two children to qualify for an additional child tax credit that currently kicks in only after a third child.
Last month, House Speaker Paul Ryan said lawmakers would address Puerto Rico’s tax concerns in negotiations with the Senate.
“It is our intention to make improvements to our tax reform legislation as it relates to Puerto Rico when we go to conference,” Ryan said in a Nov. 16 statement issued jointly with Rep. Jenniffer González-Colón, Puerto Rico’s nonvoting member of Congress.
Now, however, it appears Puerto Rico’s requests will have to wait until next year, when Congress could draft bills to extend tax credits or make technical corrections to the law. One of González-Colón’s suggestions, to create “opportunity zones” offering tax incentives for manufacturing, remains a possibility, said Rep. Kevin Brady, chairman of the House Ways and Means Committee. “I think more can be done as well, but I think this is important,” he said. “We are just absolutely committed to helping that island rebuild.”
Still pending before Congress is Puerto Rico’s request for more than $94 billion in hurricane relief aid. The island continues to suffer deeply after Maria: Only 65 percent of its power generation has been restored. An exodus of Puerto Ricans has taken away workers crucial to reigniting the economy. More than 243,000 people have landed in Florida from the island since Oct. 3.
Puerto Rico is sensitive to tax decisions made in Washington. In 1996, President Bill Clinton authorized the repeal of a 1976 provision that gave U.S. companies significant tax incentives to establish their subsidiaries on the island. Those perks helped turn the island into a biotech manufacturing hub, but critics countered that most of the benefit went to wealthy investors, not local workers.
Once the incentives were fully phased out in 2006, at a time when manufacturing was declining across the nation, Puerto Rico plunged into a recession that has lasted for more than a decade.