For more than three decades, the tax credit granted to U.S. companies operating in Puerto Rico has induced firms to locate on the island territory and has created jobs in a depressed region, proponents say. Both Puerto Rico and the companies have benefited, by their account.
Now they want to make sure that the Treasury Department -- which calls the credit expensive, inefficient and complicated -- doesn't take all that away.
One of the many provisions of the department's tax-simplification plan now up for White House review would repeal the possessions tax credit, the mechanism by which American firms legally can avoid paying almost all taxes on income from Puerto Rican operations.
The possibility of repeal has the governor of Puerto Rico pleading his case in Washington this week for at least the second time this year, saying his entire economy hangs on the provision. Numerous companies with operations in Puerto Rico, as well as such notable business people as David Rockefeller, are lobbying the administration and members of Congress.
"Section 936 is absolutely essential to the economic well-being of Puerto Rico," Gov. Rafael Hernandez Colon told reporters yesterday. "More than 200,000 jobs depend on it."
Hernandez Colon is to make his arguments before Vice President George Bush today, after meeting yesterday with Sen. Bill Bradley (D-N.J.), cosponsor of a simplification bill that also would trash the tax credit, and making a pitch to administration officials.
The third major tax-revision measure, sponsored by Rep. Jack Kemp (R-N.Y.) and Sen. Robert W. Kasten Jr. (R-Wis.), would preserve the credit on the grounds that private-sector stimulus is the best way to aid the economically ailing island. The unemployment rate in Puerto Rico is 22 percent, and supporters of Section 936 say it would rise to 30 percent if the credit were repealed.
In a paper submitted to Treasury Secretary James A. Baker III when he met with Hernandez Colon last month, the government predicts such dire consequences as withdrawal of the 41 percent of Puerto Rican commercial bank deposits that belong to U.S. corporations, migration of more residents to the United States and increased federal welfare payments in Puerto Rico.
Many U.S. companies would pack up and leave, relocating principally to cheap-labor regions such as the Pacific Basin, according to representatives of the firms themselves.
David J. Aho, Washington representative of American Hospital Supply Corp., said that, if the credit were repealed, his firm probably would phase out operations that now employ 3,100 Puerto Ricans. "The move would be elsewhere," he said.
The Treasury Department disagrees that the economic effect of repealing Section 936 would be widespread. The first plan proposes easing the transition with a tax credit equal to part of the wages paid. That might send high-technology and capital-intensive firms off the island, but it would attract labor-intensive industries that provide more jobs, officials believe.
Treasury officials ask how the tax break can be such a stimulus to employment if the unemployment rate is still so high. And they ask the point of forgoing corporate income taxes equal to $22,000 per worker for employes who are earning only $14,210.
"The current system is complex, expensive and ineffective," says the written explanation of the original Treasury plan. "The rules for determining possessions source income are among the most complex in the tax law. The average revenue cost per job was more than 150 percent of the average total compensation of employes of Section 936 corporations. Despite this, total employment has been flat."
At a lunch yesterday, Hernandez Colon and Rockefeller told representatives of the United States Information Agency, Commerce Department, Defense Department, State Department and White House that those conclusions were wrong. Doing away with Section 936 would hurt not only Puerto Rico but also run counter to the intent of President Reagan's Caribbean Basin Initiative, which relies on tax incentives and the private sector, Hernandez Colon said.
He added that repeal of the credit would end a project under which four U.S. companies are committed to producing nurses' hats in a joint operation in Puerto Rico and Grenada.