Think Strategically: Second-class citizens
Senate passes federal tax reform bill in 51-49 vote and markets rally
The Senate’s version of tax reform passed Friday night by a slim 51-49 margin along party lines. With the holidays closely approaching, the next two weeks will be highly critical and we should expect many changes to come before the bill is signed into law by Christmas.
Now both the House and Senate should announce their conference committees to harmonize the differences between the two bills. Under the conference committee process, House-Senate negotiators examine both measures and specifically try to reach agreements on areas where the measures differ. Identical provisions in both bills will be accepted. The committees will be striving for consensus on highly complex issues that have significant consequences before voting on a final bill.
Let’s review the most important aspects of each chamber’s bill:
We do not see a lot of room to maneuver to stave off a meltdown of Puerto Rico’s manufacturing sector and with it the most significant source of government revenues. Although Resident Commissioner Jenniffer González and U.S. House Speaker Paul Ryan have stated that Puerto Rico’s situation will be addressed in conference committee, we cannot see even a glimmer of hope to protect our manufacturing sector and thus the economic well-being of Puerto Rico.
It has often been said that special treatment treads a fine line with regard to discrimination, particularly without adequate representation and diverse points of view. The manufacturing base of Puerto Rico will suffer the most. If section 936’s repeal was a game-changer, no one can honestly imagine the devastation, job loss and factory closures that the enactment of this reform will produce.
We must wonder why is our political leadership betting 47.3 percent of our economy on a promise from Speaker Ryan that he will take care of Puerto Rico during the conference committee.
A tax reform law by Christmas is now on the horizon, and the Republican leadership is calling it a once in a generation legislation. The Dow Jones Industrial Average at one point Monday hovered over 24,500, an increase of nearly 275 points as Wall Street cheered the passing of the Senate’s bill.
Puerto Rico’s manufacturing mirage: 936 all over again
We have seen the private sector and most political leaders align with the governor in seeking special provisions that would create the basis for new economic development under the tax reform.
The reason behind the support is that in both the House and Senate versions, Puerto Rico is considered a foreign jurisdiction, where a new 10 percent minimum tax on U.S. companies’ overseas profits as well as a 20 percent import tax and a 12.5 percent tax on intangible assets would apply. Puerto Rico’s manufacturing sector is mainly composed of controlled foreign corporations, or CFCs.
Upon implementation of the new tax law, Puerto Rico will quickly lose some 200,000 direct and indirect jobs. A similar outcome occurred after the repeal of 936. At its peak, there were 2,358 section 936 companies providing 163,605 direct jobs on the island. By August 2017, less than 1,500 corporations were employing 69,600 people.
The benefit of section 936 was it granted a tax credit equal to the tax liability of specific business that operated in Puerto Rico; in turn, the income generated here was tax-free. In 1992, a report from the Congressional Budget Office established that the federal government would lose $15 billion between 1993 and 1997 if the exemptions continued.
While the Clinton administration did away with section 936, none of the expected income from the former 936 companies materialized, killing our economy and benefiting mostly Ireland and Singapore, among other places.
Most Puerto Rican leaders from both the public and private sector lobbied aggressively in Washington, D.C. to avoid the elimination of section 936. In the end, our government did not push enough to save it.
At the time, the Puerto Rico Manufacturers Association warned the administration and members of Congressional that the repeal would only result in economic harm to Puerto Rico and not produce revenue and that, in turn, it would create jobs in Singapore, Ireland, the European Union and Asia at the expense of hundreds of thousands of American Jobs.
As we all know, the PRMA’s prediction back then was spot on. Once the phase-out period ended, it started our economic contraction in May of 2006, from which we have never recovered.
According to the Bureau of Labor Statistics, in the 10 years following the 936 repeal, the labor force saw a 281,500 decline, with more than 236,000 jobs lost. Adjusted unemployment fell (-1.1) mostly due to people having stopped looking for work.
Puerto Rico’s job base continues to shrink, putting our economy in a downward spiral. The absence of jobs in Puerto Rico has sent many Puerto Ricans stateside, where the job market is robust.
The outmigration trend that began well before 2006 has caused Puerto Rico’s population to drop from 3.8 million in 2004 to 3.4 million by late 2016, and now Florida reported that more than 200,000 people have arrived in that state since Hurricane María hit the island on Sept. 20.
The combination of job loss and outmigration have caused the labor-force participation rate to fall well below 40 percent.
Final Word: Second-class citizens
As things continue to develop in Washington D.C. and with all the focus only on the 50 States of the Union, some of us feel forgotten. So, we wondered how does the dictionary define a second-class citizen. Well, the Oxford English Dictionary defines second class citizens as those “belonging to a social or political group whose rights and opportunities are inferior to those of the dominant group in society.”
Here are some facts:
- Puerto Ricans pay federal taxes such as Social Security, Medicaid and Medicare. However, in terms of Medicaid in Puerto Rico, the federal government spends $1,571 per person, while it spends $5,790 stateside, that is 72 percent less. For Medicare in Puerto Rico, the federal government spends $5,208, versus $8,700 for the states. That is 40 percent less.
- Puerto Rico receives lower funding levels in education, support for individuals with disabilities and other programs.
- Unlike the states, we only have one representative in Congress, a resident commissioner who cannot vote.
- Puerto Rico gets to vote in presidential primaries and sends delegates to the conventions. However, we do not vote in the presidential election.
Puerto Ricans have been U.S. citizens for more than 100 years. Is it time that, at the very least, we are treated with equality. There is no reason not to do it other than selective discrimination by the U.S. Congress.
We have been living in the 21st century for the past 17 years, and as a Puerto Rican who also cherishes my U.S. citizenship, we wonder why our rights are not equal to those for people in the 50 states of the Union.
This inequality made us review the second paragraph of the U.S. Declaration of Independence, which states:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”
Equality is defined as the state or fact of being the same in number, amount, status or quality. So it appears that for the United States, equality only applies to the 50 states of the Union.
As we witness the inequality in the recent actions toward Puerto Rico by Congress or the federal government, these latest efforts are not based on equality, they are based on discrimination. Thus every U.S. territory is being treated with the same bias, and as such we are, in their view, second-class citizens.
Polish-British writer Joseph Conrad said, “The belief in a supernatural source of evil is not necessary. Men alone are quite capable of every wickedness.”
–Francisco Rodríguez-Castro is president & CEO of Birling Capital Advisors LLC.