[Editorial] The Disaster This Time
Editor’s note: The following editorial originally appeared in the Feb. 15-21 print edition of Caribbean Business.
Category-five storms come in all shapes and sizes. It seems like only yesterday that Puerto Rico’s economic development brigades had come back from U.S. Congress with the best thing since sliced bread tucked under their arms in a tax incentive titled Section 936 of the Internal Revenue Code. The now-defunct tax break—targeted for phase-out when then-House Speaker Newt Gingrich strode into power during the 1994 midterm elections vowing to stamp out corporate welfare—afforded U.S. manufacturing companies doing business in Puerto Rico literally zero taxes on income made in Puerto Rico. A tollgate tax on funds sent back to headquarters in the States prematurely was incentive enough for manufacturing companies established in Puerto Rico to keep money in island banks—at the tax break’s high point in 1996, some 40 percent of the money deposited in Puerto Rico banks were Section 936 funds.
So sweet was the deal that the tax break came under fire as an incentive that had Puerto Rico giving and giving while creating too few jobs in return. Its detractors, namely supporters of statehood for Puerto Rico who knew the tax break was incompatible with statehood because it was only available for U.S. possessions, had no qualms gutting the loophole as long they obtained something in return.
Thus, although he initially supported Section 936 during his first term in office in 1993, then-Gov. Pedro Rosselló, who is the father of the incumbent Gov. Ricardo Rosselló, yielded to U.S. Congress to phase-out the tax break, without securing anything in return. The elder Rosselló had hoped to obtain some sort of quid pro quo in the form of Section 33A wage credits that would have helped spur job creation. Instead, he was introduced to the double-edge sword of congressional negotiations—another casualty of a broken deal that ultimately saddled Puerto Rico’s people with Hell to pay.
In the time since Section 936’s ultimate demise in 2006, Puerto Rico has been hard pressed to create jobs. Over the past decade, more than 250,000 jobs were lost and some 12,000 businesses were shuttered—more than 400,000 people outmigrated. Manufacturing continued to hemorrhage jobs. For too long, we have descended upon U.S. Congress as a people divided in our vision for sustainable economic growth.
Those winds were blowing hard prior to the devastation wrought by the wind beast named Maria. Yes, now things are truly dire—estimates hover at $100 billion in losses. And even as we beg for equal treatment, Puerto Rico’s governments have lost sight of the underlying principles of job creation—that you are only true partners in progress with those who have capital when they can trust you will not hoodwink them at every turn.
You need to convince them that you will not spend months figuring out a way to squeeze your partners in progress with excise taxes, as happened under Gov. Luis Fortuño, whose administration spent $25 million in legal fees to draft a source rule behind Law 154 to make those taxes creditable against federal income taxes. By the way, los federales are real happy about that. And, that the law was passed on a weekend as some midnight rider in the middle of the night probably did little to boost Puerto Rico’s standing as a trustworthy place to do business.
Instead, word spread like California wildfire that you need both eyes peeled at all times, armed with your lawyers—at affordable rates—if you are going to do business with Puerto Rico.
None of us are free of fault: Not we the people, not our governors, who pay handsomely to beg for crumbs on the Hill. As we struggle mightily to get back on our feet, we must keep dignity, honesty and our skills as guiding principles to attract partners in progress in job creation that was gutted so long ago.