Hatch Brewing Economic Potion
The Perfect Recipe for Economic Development?
While hundreds of proposals to spur economic growth are before the congressional Task Force on Economic Growth, sources warned that the panel will only evaluate those that deal with changes to federal laws that promote economic growth, jobs and investments in Puerto Rico, as well as reduce child poverty.
The Task Force has until Sept. 15 to provide a status update to the U.S. House and Senate on the information it has collected and on matters that the chairman of the Task Force, Republican Sen. Orrin Hatch deems urgent for consideration by Congress.
Because it is a lame duck Congress and not much can be done before the end of the year, sources said Hatch is inclined to allow a temporary cut in payroll contributions to Social Security to put more money into the local economy. Another source said he may be pushing for parity in federal funding formulas for Medicare, Medicare Advantage and Medicaid as Puerto Rico gets dramatically less than the 50 states, but contributes as much as the states at a time when the commonwealth provides coverage to over 1.6 million residents. Healthcare costs are a major driver of deficits for many jurisdictions, including the island.
Caribbean Business requested an interview with Hatch but was told he is not commenting.
“It is important to note that the Task Force will focus on the steps the federal government, either government or executive branch, must take to promote the economic development of Puerto Rico. We know there are many things the local government can do and must do in that regard, but that isn’t going to be the focus of the Task Force…. So, all proposals must promote federal actions and not local actions,” Resident Commissioner Pedro Pierluisi said recently.
After submitting its initial update, the Task Force must issue a report of its findings no later than Dec. 31 to the House and Senate regarding impediments and changes to federal laws and programs to promote economic growth in Puerto Rico, including equitable access to federal healthcare programs; the economic effect of Administrative Order No. 346 of the U.S. Health Department relating to natural products, natural supplements and dietary supplements, and any additional information deemed appropriate.
Besides Hatch (R-Utah) and Pierluisi, the Task Force is comprised of U.S. Sens. Marco Rubio (R-Fla.); Bill Nelson (D-Fla.); and Robert Menéndez (D-N.J.) as well as U.S. Reps. Sean Duffy (R-Wis.); Tom MacArthur (R-N.J.); and Nydia Velázquez (D-N.Y.).
Pierluisi said he is refraining from speaking about the things the Task Force can or must not do because he wants to promote a consensus. However, he believes the island’s political status should be part of the solution. “The Task Force has eight members, each with its own views. The important thing is what we can agree upon,” he said. “I think the island’s status as a territory is at the root of Puerto Rico’s fiscal ills…. And I think statehood has the support of the majority of the residents and statehood will improve the quality of life in Puerto Rico,” he said, adding that Puerto Rico must use some $2.5 million assigned for a status vote.
Need for long-term economic growth
Despite what sources close to Hatch’s office said about limiting the proposals, Velázquez said through her spokesman, Alex Haurek, that “there are a wide range of proposals that will need to be considered to put Puerto Rico on a sustainable economic path for the long term. The Task Force’s role will be to consider them and determine which ideas will be the most feasible and effective.”
Hundreds of business organizations, civic groups and think tanks have submitted a host of proposals, most of which agree on the need for tax incentives to U.S. manufacturing firms; a reduction in energy costs; the extension to Puerto Rico of the earned-income tax credit (EITC); parity in healthcare funds; and the island’s exemption from the Jones Act, which requires all products shipped between U.S. ports and Puerto Rico to be in U.S.-flagged ships and has raised the prices of products.
In a letter dated Aug. 26, the U.S. Treasury Department said that in addition to fixing Puerto Rico’s inadequate healthcare treatment, Congress must enact proven, bipartisan tools for stimulating economic growth and rewarding work that includes the EITC. “At 40%, Puerto Rico has the lowest labor market participation in the United States; indeed, participation rates in Puerto Rico are about two-thirds of the U.S. average, which stunts economic growth and undermines Puerto Rico’s economic and fiscal reform efforts. A federally financed, locally administered EITC would create incentives for work and increase participation in the formal economy,” Treasury Secretary Jacob Lew said.
“Adopting a locally administered EITC consistent with the president’s budget proposal would pull 54,000 Puerto Ricans out of poverty and increase Puerto Rico’s gross national product by $1.05 billion, or 1.5%. The EITC also can be expected to increase tax compliance and tax revenues, improving Puerto Rico’s fiscal position. An expanded Child Tax Credit could supplement this effort,” he added.
Lew said the federal government is already pushing people to go into the workforce by repealing the cash portion of the Nutritional Assistance Program, known as PAN by its Spanish acronym. “Work is also underway to strengthen Puerto Rico’s nutrition assistance program to further encourage and support participants entering the workforce,” he said.
Treasury also called for an update to Puerto Rico’s statistical methodologies. In that regard, Lew said Congress should encourage the Census Bureau to explore including Puerto Rico in the Census of Governments, which is the primary source for benchmark data on the scope and nature of local government organizations, powers and activities, as well as the authoritative benchmark for government employment and government finance. “Given the importance of the agricultural industry to Puerto Rico’s economic vitality, the National Agricultural Statistics Service also should determine whether it is feasible to include Puerto Rico in its surveys, which are the authoritative source for agricultural statistics,” Lew said.
Need to drive key industries
Lew also asked the Task Force to build on existing federal initiatives to accelerate progress in key local industries such as aerospace, export services, information and biotechnology, pharmaceuticals, medical devices, agriculture, infrastructure and manufacturing.
For instance, the U.S. Department of Agriculture (USDA) recently selected Roosevelt Roads as a federal “Promise Zone,” so it can have greater access to federal resources and support from government partners, including assistance with critical infrastructure needs.
Aside from supporting parity in healthcare funds and support for a Puerto Rico EITC to create incentives for work and increase participation in the formal economy, the Center for a New Economy (CNE) proposed increases in Small Business Administration lending, noting that access to affordable credit is extremely important to support the creation and expansion of business enterprises, especially small and midsize businesses that form the backbone of any economy.
Because Puerto Rico needs to repair and upgrade its electricity grid, undertake several large water treatment projects and increase broadband access, the CNE also said the USDA’s Rural Utilities Service should be required to provide loans and guarantees for these kinds of investments. The San Juan-based think tank also called for the promotion of technological change and innovation through the establishment of the Caribbean Biomedical & Health Sciences Center as well as a Center for Manufacturing Innovation in Puerto Rico.
Furthermore, the CNE called for a Permanent Federal Task Force to assist Puerto Rico in dealing with structural constraints to growth, restructure obsolete institutions and eliminate corruption.
For its part, the Natural Products Association (NPA) wants Congress to eliminate Administrative Order No. 346, which would require all dietary supplements to be registered and pay fees.
The NPA convinced U.S. Rep. Ryan Zinke (R-Mont.) to put the administrative order on the task force’s list of considerations.
“The NPA will work directly with the Task Force to inform its members of the damaging impact this order will have on consumers and economic growth in Puerto Rico,” said Daniel Fabricant, CEO & executive director of the organization. “We are optimistic that the report will encourage the federal government to remove economic impediments that keep Puerto Ricans from enjoying the extensive health benefits of dietary supplements and other natural products.”
Need for a new economic model, tax incentives
The Puerto Rico Minority Supplier Development Council (PRMDC) is seeking a new economic model and is supporting proposals from the Private Sector Coalition. PRMDC President José Ríos Nieves said the objectives of a new economic model would include the creation of duty-free zones to attract multinational companies that will have access to a sustainable chain of goods provided by local companies.
“If this plan is implemented, multinational companies will be able to develop operations in a cost-effective manner as long as they make purchases from minority suppliers,” he said. The organization has more than 500 certified minority suppliers.
The Private Sector Coalition, which comprises more than 20 business groups in Puerto Rico including the Manufacturers Association, Chamber of Commerce, Products Association, Restaurants Association and Hospitals Association, submitted a short list of proposals, noting that the Task Force has only until December to make recommendations.
At the core of its proposals are tax incentives for manufacturing firms by changing the current federal tax code. The proposal entails exempting 85% of dividend income from federal income taxes and the remaining 15% to be taxed at 50% of the federal corporate income-tax rate. The exempt income must be Puerto Rico source income.
“By approving the measure, the federal government would achieve the dual objective of stimulating the return of funds held abroad because of the attractive tax environment and, at the same time, stimulating investment in Puerto Rico in order to generate Puerto Rico source income. In order to implement the measure a number of sections of the Internal Revenue Code need to be amended, including Section 864, but also Sections 245, 901, 904 and 933A and 959,” the coalition wrote to the Task Force.
The key principles of the proposal are aimed at ensuring that it is not tainted with the corporate welfare stigma of Section 936 and providing for mandatory repatriation of trapped Puerto Rico source income and including strong base erosion rules.
Need to reduce energy costs
Another big concern for the coalition is reducing Puerto Rico’s high energy costs. Therefore, the coalition wants the federal government to take over jurisdiction of the energy sector.
“We believe the best option for addressing Puerto Rico’s electric-sector woes while stimulating private investment and competition is to formalize jurisdiction of the Federal Energy Regulatory Commission (FERC) over the Puerto Rico electric sector. In order to facilitate the implementation of widely known competitive policies and avoid the legal challenges and associated government bureaucracy inherent to the Puerto Rico Electric Power Authority (Prepa), Congress must enact legislation to accomplish this task,” the coalition wrote to Congress.
Rodrigo Masses, president of the PRMA, said the island needs to produce at least $6 billion to $7 billion OF WHAT. All of the economic efforts are aimed at achieving that, including lowering energy costs. Asked by Caribbean Business, Masses said their proposals do not dismiss the possibility of FERC taking over control of the energy sector, which is currently a monopoly headed by Prepa.
The group is also proposing a payroll tax holiday, which consists of a six-year, 50% reduction in the Social Security tax for workers, employers and the self-employed in Puerto Rico to raise the take-home pay of workers and reduce operating costs for businesses, thus helping to stabilize the island’s economy during the implementation of the fiscal adjustment program that the fiscal control board must move forward under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).
The payroll tax holiday could contribute as much as $1 billion into the local economy.
The coalition is also asking the Task Force to promote the adoption of public policy at the federal level aimed at stimulating the development of the aerospace industry in Puerto Rico. The rationale for this is that locating new operations on the island will not only advance local development objectives, but also benefit the defense establishment in the U.S. since Puerto Rico operations are highly cost-effective.
Puerto Rico has an ample supply of highly competent engineers. Among the aerospace firms already established in Puerto Rico are Honeywell, Pratt & Whitney, Lockheed Martin, Hamilton Sundstrand, Axon Group, Lufthansa Technique and Florida Turbine. “We also note the many graduates of Puerto Rico’s engineering schools are now NASA engineers,” the coalition contends.
While Promesa allows for the island’s procurement to be carried out through the federal General Services Administration, the coalition wants Congress to set aside for Puerto Rico a portion of the procurements by the federal government.
On the other hand, the coalition is exploring reform or modification of the Jones Act to promote free market policies and a more competitive environment for Puerto Rico.
The Puerto Rico Hospital Association, which is a member of the coalition, is focusing on the issue of seeking parity in federal funds for healthcare.
In tandem, “we urge Congress to work with the Centers for Medicaid & Medicare Services (CMS) to reform the Wage Index and provide a proxy for the SSI [Supplemental Security Income] that direct disparate treatment of Medicare reimbursements for our hospitals, doctors and clinics. We question why SSI days have been used in the formula by CMS when residents of Puerto Rico are not eligible for SSI,” the coalition said.
Hospital Association President Jaime Plá said the change in the wage index is needed so they can raise the salaries of healthcare workers.
Need for positive investment climate
The Builders Association of Puerto Rico has an economic development plan that relies on human resources development and competitiveness, but many of the proposals appear to be initiatives that can be done locally through the fiscal control board that was recently appointed, according to an analysis done by Caribbean Business. For instance, the association called on strengthening Act 20, the Export Services Law.
Their proposals include positioning Puerto Rico as a center for manufacturing, construction, services and tourism.
Ricardo Álvarez-Díaz, the group’s leader, said attracting investors and increasing economic activity depends upon a good and favorable investment environment and for that reason, there is a need to have government transparency.
The Builders’ proposals include using strategic government properties for public-private partnerships and transferring government tasks to the private sector; strengthening the pharmaceutical, biotechnology, information and aerospace sectors; developing sustainable farming to reduce the reliance on imports for food; exporting services; and developing an infrastructure ecosystem for transportation at airports and across the island.
The group is also proposing a refocus on the so-called entertainment industry and tourism, or the “visitors’ economy,” as areas of opportunity.
In the area of housing, which has been in a slump for years, the Builders said there needs to be a focus on developing housing that feeds the needs of the current market and modifying certain laws such as those involving foreclosures. The group also called for a temporary reduction in property taxes.
In addition to the proposals that have been mentioned by other groups, the Popular Democratic Party, through its president David Bernier and candidate for resident commissioner, Héctor Ferrer, is asking the Task Force to extend to Puerto Rico parity in Temporary Nutritional Assistance Program funds and the tax credit for dependent children.
The Bankers Association, through its President Zoimé Álvarez Rubio, told Caribbean Business it will seek amendments to Community Reinvestment Act regulations, which are designed to encourage commercial banks and savings associations to meet the needs of borrowers in all sectors including the poor.
Because the banking sector is highly regulated, she said the organization is looking at specific issues that affect Puerto Rico when compared to the 50 states. Currently, the banking sector faces numerous problems as it has a large portfolio of foreclosed and abandoned homes that are forcing it to restrict borrowing.
The Chamber of Commerce met last week with Pierluisi to discuss its proposals.
On the other hand, the Associated General Contractors of Puerto Rico (AGC-P.R.) presented to the Task Force some 200 infrastructure projects under Title V of Promesa.
The costs of the projects are estimated at $3.7 billion and include water, highway, energy and housing projects, the organization said.
“This proposal was developed by the AGC-P.R. in consultation with the leading government agencies related to infrastructure. They are submitted under Title V of Promesa, that deals with infrastructure revitalization and establishes an expeditious permitting process,” the organization said.
The $3.7 billion investment is expected to impact thousands of families and create 75,000 direct and indirect jobs.
The organization’s proposal also includes a Preferred Bidding Process to give priority to general contractors, subcontractors and suppliers as well as local services. It is based on an ordinance that currently regulates contractors in the state of Florida.