One of the strongest, but least-noticed, lobbying efforts on President Reagan's tax proposal appears to be making some headway for Puerto Rico.
Early indications are that Congress will produce less drastic changes than those proposed in the Reagan plan in the business tax credit enjoyed by U.S. corporations operating on the island. The Reagan administration remains committed to the spirit of its proposal, but will discuss other methods of achieving the same goals, officials say.
"If it works, don't fix it," said Rep. Philip M. Crane (R-Ill.) at a hearing on the credit held yesterday by the House Ways and Means Committee. His statement appeared to reflect the views of most committee members.
Rep. Charles B. Rangel (D-N.Y.) said the credit, which effectively wipes out taxes on profits from U.S. companies' operations in Puerto Rico, makes the island a "showcase" that demonstrates to the Caribbean region that capitalism works and helps deter communist movements.
Several members did criticize the way the credit has functioned. Rep. Fortney H. (Pete) Stark (D-Calif.), noting the more than $1 billion annual revenue cost of the tax credit, said it would be cheaper to provide a grant of $10,000 to each of the 90,000 Puerto Ricans who work for U.S. companies on the island. And Rep. J. J. (Jake) Pickle (D-Tex.) said the tax credit warranted some scrutiny even if the administration's alternative -- a partial credit for wages paid -- is rejected.
Puerto Rico's governor, Rafael Hernandez Colon, told the hearing that even a 100 percent wage credit would lead to a corporate exodus from the island. Manuel Garrido, president of Puerto Rico's Chamber of Commerce, said that repeal of the provision, called section 936 after its number in the tax code, could cause a "brain drain" of educated residents to the United States.
The administration contends that the credit merely reduces taxes without providing incentives to hire more workers. Companies operating in Puerto Rico tend to be high-tech firms, such as pharmaceutical companies, rather than those that employ large numbers of workers. The administration's wage credit would be worth 60 percent of an employe's salary at the minimum wage, plus 20 percent of the amount paid up to four times the minimum wage. That equals a maximum of $5,062 per worker.
Administration officials say they have not yet heard any evidence that would lead them to think any other approach is better than the wage credit, but they noted that the document detailing the tax proposal says that "there may be other ways to encourage employment in the possessions in a cost-effective way."
In an interview, Hernandez Colon said there had been "a climate of understanding" during a meeting he had Wednesday with Treasury Secretary James A. Baker III, Deputy Secretary Richard G. Darman and Deputy Assistant Secretary Roger Mentz. Although he received no specific assurance that the administration would tolerate change in its proposal for Puerto Rico, Hernandez Colon said, "I believe they are coming around to recognizing the fact that the wage credit is an inadequate substitute" for the existing credit.
The provision, however, has been considerably beefed up from the original tax proposal made by the Treasury Department. That version would have used the wage credit only as a transition measure leading to total repeal of the tax break, and only applied it to the minimum wage. Besides covering more than the minimum wage, the president's version would phase the credit in more slowly and make it permanent.
"It's a much sweeter provision," said Carlos Bonilla, an economist with the Institute for Research on the Economics of Taxation. However, he added, "It isn't clear whether it will result in a net gain of employment."