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Puerto Rico To Ask For New Business Tax Incentives
By Kristin Roberts
April 10, 2003
MIAMI - Puerto Rico, lobbying Congress for new business tax incentives, plans to release to a report saying the scheduled end to current tax breaks for companies on the island will have a "devastating" effect on the economy.
Citing the threat of spiraling island unemployment and a mass migration of Puerto Ricans to the United States, the Commonwealth says Congress must pass new incentives to keep U.S. companies from moving operations to Mexico and Malaysia.
"The economy is in a very delicate situation," said Milton Segarra, the Commonwealth's economic development and commerce secretary.
"(Incentives) will provide the U.S. and Puerto Rico, which is America, with the opportunity to maintain U.S. corporations on American soil, avoiding seeing those investments go to other locations," he said in a telephone interview.
Puerto Rico, a U.S. territory, said its key manufacturing sector has shed 26,000 jobs, or 17 percent of the industry work force, in the six years since federal incentives for U.S. businesses began winding down under a 10-year phase-out plan. The apparel and electronics industries have lost 18,000 jobs.
The rate of job losses, according to the report, hit 10 percent in the last two years and is expected to accelerate as the 2005 deadline for elimination of incentives approaches.
With Congress weighing economic stimulus measures, Puerto Rico officials say lawmakers should now also reconsider incentives that would support the Commonwealth's economy.
Puerto Rico has benefited from more than 75 years of various incentives that lured American businesses to the island. But they cost the U.S. government billions in lost tax revenue, a total of $4 billion in 2001 alone, according to data.
In 1996, Congress voted to slowly discontinue incentives to regain revenue needed to compensate for a number of tax relief provisions meant to help small U.S.-located businesses overcome the impact of a minimum wage increase.
Now, the Commonwealth, in its "white paper" on U.S. tax policy, asks Congress to modify rules under section 956 of the tax code on U.S.-controlled foreign corporations, or CFCs.
Under the proposal, estimated to cost $600 million a year, CFCs in Puerto Rico would be given an incentive to invest in the United States the surplus income earned from island operations. This would give Puerto Rico an edge over other countries that offer businesses lower-wage employees.
Puerto Rico tried this before but the bill died in the last Congress.
Anibal Acevedo-Vila, Puerto Rico's resident commissioner on Capitol Hill, said it is now the right time to raise incentives again, given that stimulus plans being considered by Congress involve changes to the U.S. personal income tax or taxpayer rebates, which would not affect Puerto Rico's economy because Commonwealth residents are exempt from the federal income tax.
While the picture of the economy painted by the Commonwealth's report appears to contradict previous statements about the health of Puerto Rico's important pharmaceuticals manufacturing industry, officials dismissed the difference.
They say the loss of tax incentives on top of general U.S. economic weakness has accelerated job losses in Puerto Rico's manufacturing industry, the island's largest sector, accounting for 42 percent of the gross domestic product and generating $29.9 billion in 2002.
Those job losses have helped push the Commonwealth's unemployment rate to 12 percent, more than double the national rate, officials said.
Drug companies, however, which established manufacturing operations on the island in part due to tax incentives, have continued to boost investment in Puerto Rico. Major players in the industry, such as Eli Lilly (LLY.N) and Abbott Laboratories Inc. (ABT.N), have broken ground on new facilities.
But Peter Hiebert, who wrote the report for Puerto Rico, said many of the pharmaceutical companies have already restructured as CFCs and are taking income earned in Puerto Rico and investing it outside of the United States - something the section 956 proposal could help eliminate.
"They're investing their excess profits overseas, using those profits to expand in other countries when they could expand in Puerto Rico if they had an advantage," Hiebert said.