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In-Depth Study Probes Puerto Rico’s Economic Situation

Unsettled Status A Major Obstacle To Economic Growth


August 14, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Top U.S. economist proposes three fundamental reforms to re-energize local economy; says resolution of status issue is ‘the most critical factor’ in effective implementation of long-term economic planning in Puerto Rico

WASHINGTON, D.C.--"Puerto Rico represents a responsibility and an excellent opportunity for United States policy makers to fight poverty and promote economic growth," according to prominent economist Dr. Lawrence A. Hunter of the Institute for Policy Innovation (IPI), a respected conservative free market think tank."If the U.S. government takes the right steps, Puerto Rico can become a thriving international center of commerce and innovation, to the benefit of both the island and the mainland," said Hunter in his in depth report, "Leave No Territory Behind: Formulating a Pro-Growth Economic Strategy for Puerto Rico."But Hunter cautions that, to do so, both the island and the mainland "must be willing to pursue three fundamental reforms of the U.S.-Puerto Rico relationship." They are:

  • Replace the tax-credit economic development strategy. "Instead of the current tax-credit economic strategy, Puerto Rico should cut taxes, and the U.S. government should treat Puerto Rico as an islandwide enterprise zone, giving companies the choice of being taxed under the current system, or under a reformed federal tax code," said Hunter.
  • Enact fiscal reforms. "Puerto Rico needs to commit to meeting the national education standards established in the "No Child Left Behind" legislation of 2001," said Hunter. "Additionally, Puerto Rico should act to restrain the growth of Puerto Rican government spending and employment, and should phase out ‘cover-overs’ of federal excise taxes. The federal government should consider extending coverage of the Earned Income Tax Credit (EITC) and Supplemental Social Insurance (SSI) benefit to Puerto Rican residents who qualify."
  • Enact regulatory reforms. "Puerto Rico must reduce counterproductive regulations especially the system of business permitting, which retards business start-ups and expansions," said Hunter.

"Today, Puerto Rico faces a daunting economic challenge," said Hunter. "Nearly half of the population is below the federal poverty line, and [it has] a 13% unemployment rate. Its manufacturing base has eroded, and other developing nations are eliminating Puerto Rico’s past wage advantage."Indicating "the U.S. can do better by Puerto Rico, and Puerto Rico can become a dynamo of economic growth and a great asset to the U.S.," Hunter said, "If Puerto Rico and the federal government enact the reforms outlined in this report, Puerto Rico can function as a demonstration project for tax reform and enterprise zones, and could also present a possible solution to the corporate inversion controversy. And a successful tax reform demonstration in Puerto Rico could help put additional pressure on the federal government for tax reform and enterprise zones on the mainland, to the benefit of all Americans."Regarding replacing the tax-credit economic development strategy, Hunter argues for "scrapping the failed government-centered economic development strategy to which Puerto Rico has become addicted. Puerto Rico should reduce tax rates across the board on all corporations and individuals, both foreign, U.S. mainland and domestic, and devise a new pro-growth, pro-family tax system that rewards work, saving, investing and risk-taking, which will be conducive to all types of economic activity and generate revenues for the legitimate activities of government."

Could alleviate adverse impacts of free-trade initiatives

Hunter further argues that "rather than treating Puerto Rico as a special political dependent, reliant on handouts, Congress should create nationwide super enterprise zones in which Puerto Rico and poor regions of the [U.S.] mainland, particularly those adversely affected by free-trade initiatives, could participate."Specifically, the IPI report recommends Puerto Rico "petition Congress to treat Puerto Rico as an islandwide enterprise zone in which all companies would be allowed to elect whether they are taxed under the current Internal Revenue Code or under a reformed federal tax code."With respect to enacting fiscal reforms, Hunter said "the Puerto Rican welfare state needs reform and reining in because it breeds dependency and retards private sector growth." In particular, the report recommends restraining the growth of Puerto Rico government spending and employment in order to reduce the size and scope of government on the island to something more comparable to that on the mainland."Among the goals recommended by the report are:

  • Puerto Rico commit itself to meeting the national education standards established for all 50 states in the "No Child Left Behind" legislation of 2001;
  • Puerto Rico agree to phase out "cover-overs" on federal excise taxes; and
  • the federal government extend coverage of the EITC and SSI benefits to Puerto Rican residents. "A good argument can be made that such a change not only is equitable but will target those working poor most in need," observes Hunter.

Regarding enacting regulatory reforms, the IPI report recommends "reducing counterproductive regulations, especially the system of business permitting, which retard business start-ups and expansions and generally clog up the economy. Puerto Rico should participate actively in regulatory reform efforts by state and local government associations to achieve relief from harmful federal regulations, the spirit of which can more appropriately and efficiently be implemented by state, local, and territorial governments."

Puerto Rico at a critical juncture

Warning that Puerto Rico "has arrived at a critical juncture," the report observes "the old tax subsidy development strategy is ending with the phase-out of Sections 936 and 30A leaving a choice among three alternative paths for the future."Hunter enumerates the three as:

  • Abandon the old tax subsidy development strategy altogether without replacing it;
  • Resort again to the old tax subsidy development strategy "with the hope that new variants on the old theme (say expansion of Section 956) will produce sufficient economic acceleration to catch up with the [U.S.] mainland"; or
  • Replace the old tax subsidy development strategy altogether with a new economic growth strategy that "combines status-neutral incentives for off-island investment in Puerto Rico with powerful local incentives to spur indigenous entrepreneurialism and small business formation."

The report suggests the last alternative is the only viable option. In particular, it suggests the U.S. government "establish firm guidelines on Puerto Rico to eliminate existing antigrowth policies and replace those with pro-growth, pro-family, pro-entrepreneur policies that will unleash the awesome productive and creative potential of Puerto Rico’s people and businesses."Describing the Puerto Rico government as "obese," the report said "it has imposed a dead-weight burden on the island. In order to gain a full appreciation of the magnitude of the government sector in Puerto Rico, one must combine spending at all levels of government (Commonwealth and its subdivisions and the federal government) and compare the overall level of government spending to Puerto Rico’s domestic product."Indicating Puerto Rico "has allowed government growth to get out of control," the report said government obesity is not an uncommon phenomenon in stagnant economies. It’s an almost inevitable consequence of elected politicians not knowing how to revive economic growth and finding it difficult to resist using the public payroll as a means to provide voters with the financial support they cannot secure for themselves in a stagnant economy."The report takes no position on Puerto Rico’s political status but notes that "the specter of the debate over the island’s political status hovers over these ideas, as it does over any serious discussion of Puerto Rico." It calls on the federal government to adopt "a new perspective on Puerto Rico that will fashion a new economic framework for the island in which impediments to economic growth are eliminated."This new perspective is based on the premise that a free people engaged in commerce and trade in free and open markets—not government bureaucrats, elected officials, and government-owned enterprises directing and often misdirecting, guiding, and often misguiding markets through industrial policy—is the driving force behind economic growth and prosperity. In that direction lies the only sure way to achieve social progress for all Puerto Ricans."

Unsettled status a major obstacle

Noting "the unsettled status situation remains a major obstacle to economic growth and prosperity," the report warns "instability and uncertainty caused by the unsettled political situation limits the interest and desire of investors to commit capital to the island."It also argues "it is essential that the Congress enable and facilitate an expeditious process by which the people of Puerto Rico soon can choose conclusively what the island’s permanent political status will be. It is time to break the chains of political deadlock. Puerto Ricans, like all American citizens, should be able to look forward to a better life and a democratic future, and exploit opportunities, whatever the island’s ultimate relationship with the mainland turns out to be."Arguing that "resolution of the serious status issue is the most critical factor in effective implementation of long-term economic planning in Puerto Rico," Hunter warns that "without a definitive resolution of the relationship between the island and the U.S., neither government officials nor companies can chart their fiscal and economic courses."

With great hope and promise

In his conclusion to the 41-page report, Hunter argues "the federal government’s direct cost of implementing the policies suggested will be less than the cost of providing [U.S.] mainland businesses doing business in Puerto Rico new tax subsidies through Section 956 of the Internal Revenue Code as was proposed in the last Congress. If the policies recommended are adopted in lieu of more tax-subsidy schemes, Puerto Rico can become a thriving international center of commerce and innovation. Puerto Rico can meet the challenge of the 21st century with great hope and promise, but to do so, both the mainland and Puerto Rico must enter into a new contract that rejects the failed policies of the past," the report concluded.

Hunter has impressive credentials

Dr. Lawrence A. Hunter is chief economist at Empower America in Washington. He served as a member of presidential candidate Bob Dole’s Task Force on Tax Reduction and Tax Reform. During the 103rd and 104th Congresses, Hunter served onthe staff of the Joint Economic Committee (JEC), first as Republican staff director and later as the chief economic adviser to the vice chairman, where he was the lead staff person in charge of putting together the economic growth and tax-cut component of the Contract With America. Prior to joining the JEC, Hunter was with the U.S. Chamber of Commerce for five years, where he served as deputy chief economist and later as chief economist and vice president. Hunter received his Ph.D. from the University of Minnesota in 1981.

IPI—A leader in free-market studies

The Institute for Policy Innovation (IPI) is a nonprofit, nonpartisan educational organization founded in 1987. IPI conducts research, aids development and widely promotes innovative and nonpartisan solutions to today’s public policy problems. IPI is a public foundation and is supported wholly by contributions from individuals, businesses and other nonprofit foundations. IPI neither solicits nor accepts contributions from any government agency.IPI’s focus is on developing new approaches to governing that harness the strengths of individual choice, limited government, and free markets. IPI emphasizes getting its studies into the hands of policy makers so the ideas they contain can be applied to the challenges faced today.

Hunter has special interest in Puerto Rico

Because of his interest in tax reform, the scholar views the Enterprise Zone concept on the island worthy of consideration

WASHINGTON--"I have a long-time interest in Puerto Rico because of my service as a Congressional staff member and association with friends like Jack Kemp of Empower America and former Sen. Robert Dole (R-KS) who have had a special interest in Puerto Rico," said Dr. Lawrence A. Hunter of the Institute for Policy Innovation (IPI) in an exclusive interview with CARIBBEAN BUSINESS.His study on Puerto Rico’s economic situation, which has taken close to a year to complete, takes no position on status. After meeting with business people and other friends from Puerto Rico a year ago, Hunter said he "became very supportive of tax reform for the island" and convinced that "such a proposal was the way to encourage greater attention for Puerto Rico in Washington."Hunter acknowledged the influence of Kemp, the pioneer advocate of the Enterprise Zone concept. "There was always the feeling that it was the best tax policy for Puerto Rico," Hunter said. "We know that people in the administration of President Bill Clinton stole the idea and even the name."Kemp came up with the idea of utilizing the Enterprise Zone concept as a laboratory and Puerto Rico has always been a good case study so it fit right in," he added.While conceding that Puerto Rico enjoys considerable good will in the Congress, Hunter admitted that it’s not always on the Congressional radar. "Island issues are just not on the front burner in Washington as many in Puerto Rico think. In Puerto Rico, they’re always on the front burner and about to boil over. Puerto Rico policy does come to a boil periodically but I doubt if many people really understand the complexities."Hunter said he is convinced that the application of the Enterprise Zone concept to Puerto Rico is an idea whose time has come. "It will be embraced by members of Congress of both parties, who will see the relevance of it, not only to Puerto Rico but other jurisdictions on the mainland U.S. as they increasingly come to grips with adjusting to the consequences of globalization and free trade, " Hunter said."Embracing this concept would be a very good way to help Puerto Rico and other parts of the U.S. that are worried about rising unemployment and loss of manufacturing because of globalization and free trade," said Hunter. "This would be an added tool to help counteract them."Next year (2004), is a general election year throughout the U.S. but Hunter "is convinced it is a good time to introduce the Enterprise Zone concept and afford people an opportunity to examine it. When it moves, Puerto Rico would be like the caboose hooked to the national train."

This Caribbean Business article appears courtesy of Casiano Communications.
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