We’re Off to See the Wizard
Although it borrows from film noir, the image illustrating this edition’s Cover Story is a fitting representation of the potential for capital generation and job creation underpinning Acts 20 and 22. The incentives provided by those two laws are beginning to draw huge investment to Puerto Rico. “You’re not in Kansas anymore,” is an assertion that Economic Development & Commerce Secretary Alberto Bacó can state with confidence.
After all, the 4% fl at income-tax rate on income generated from export services driven by Act 20 and the 100% tax exemption on earnings and profit distributions on income generated from export services for investors who make Puerto Rico their place of residence, enabled by Act 22, are enormously attractive incentives.
In an exclusive interview with Caribbean Business, Bacó shared the findings of a study conducted by Estudios Técnicos, which reports on jobs created and capital generated thus far. In 2014 alone, Act 20 created 3,713 direct, full-time jobs in Puerto Rico with an average salary of $45,000 a year and a total annual payroll of $78 million. The average salary in Puerto Rico is $27,500 a year, so Act 20 is having a positive impact in terms of increasing average salaries for local employees.
The total income of companies that have decrees under Act 20 is $1.2 billion, while the amount in individual taxes paid by the jobs created by the program is estimated at $13.7 million a year. And the study projects some 45,000 new jobs will be created in the service sector over the next 20 years.
To its credit, Gov. Alejandro García Padilla’s administration took laws that were established under the Luis Fortuño administration and promoted them to draw more investors to the island. This is the sort of continuity that Puerto Rico needs to attract capital that has taken flight and create jobs that have been lost. Puerto Rico needs to stay the course to help off set a precipitous slide dating back to 2006 that has seen more than 250,000 jobs lost and more than 12,000 businesses close.
Continuity was essential to the success of Operation Bootstrap, the industri alization program that propelled Puerto Rico from a dirt-poor backwater in the Caribbean to a model for industrialization that was touted the world over. Our leaders would do well to remember that Puerto Rico’s industrialization took several administrations under Puerto Rico’s first elected Gov. Luis Muñoz Marín and an army of promoters to hit warp speed.
What started with a mere 1,000 jobs in its first four years had climbed to 59,700 jobs over the next five (1949-1953).
Sadly, Section 936 of the Internal Revenue Code was targeted for a 10-year phase-out by the U.S. Congress in 1996 because the program had the stench of corporate welfare—benefiting big pharma, but not creating jobs to match the big tax breaks these corporations were receiving. So, we threw out the baby with the bathwater. With the tax code’s demise went some 40% of deposits tied to Section 936 funds in Puerto Rico banks.
It is now a certainty that García Padilla won’t be re-elected to office as he stepped down as the Popular Democratic Party (PDP) president to make room for former Secretary of State David Bernier. The procommonwealth PDP gubernatorial candidate will be running for La Fortaleza against the winner of the prostatehood New Progressive Party (NPP) primary between Resident Commissioner Pedro Pierluisi and Ricky Rosselló. Whoever wins the mandate of the people in November 2016 would do well to continue promoting Acts 20 and 22, but on a massive scale. Let us remember the lessons of history—never should we give and give, but receive nothing in return.
By Philipe Schoene Roura