One way that the U.S. government has tried to stimulate corporate investment in its territory of Puerto Rico is by allowing certain companies to operate there on essentially a tax-free basis. The tax bill now being considered in a Senate-House conference would reduce this tax incentive for some companies, and the Puerto Rican government is understandably concerned.
There are substantial reasons for revising the current tax incentive rules. They have allowed U.S. corporations to transfer intangible assets, such as patents, copyrights and trade secrets, to subsidiaries in Puerto Rico that may then derive the benefits from these intangibles without paying taxes on the profit. This pattern is particularly prevalent among drug companies that develop new drugs on the mainland (and deduct the costs from their U.S. taxes) and then transfer the patents to Puerto Rico, where profits from the manufacture of the drugs are tax-free.
The biggest beneficiary of this tax break has not been Puerto Rico but the companies that take advantage of it. The incentive has, no doubt, attracted jobs to Puerto Rico, but at a very high cost to the Treasury. A recent Treasury study estimated that the revenue loss for each job created is so high that the federal government would save money if it simply paid the workers' wages directly instead. In the case of drug companies, the Treasury is losing more than $3 in taxes for each $1 in wages paid to a worker. In several companies, the revenue loss per job exceeds $100,000.
The new rules will not eliminate federal tax incentives for investment in Puerto Rico, and the island's own tax incentive policies will still be a significant attraction. Nonetheless, job losses are likely to result, as well as a substantial outflow of funds currently deposited by corporations in Puerto Rican banks to avoid U.S. taxes. With unemployment already over 23 percent, these losses will hit Puerto Rico very hard.
Thus far, the Reagan economic program has meant nothing but trouble for Puerto Rico. Because Puerto Ricans, who are American citizens, pay no U.S. taxes, they received no benefit from last year's tax cuts. On the other hand, the island absorbed more than its share of cuts in federal welfare and economic development programs. Termination of the CETA program alone cost Puerto Rico 26,000 jobs--far more than are anticipated from the proposed tax changes.
It is important to remember that when senators and congressmen sit down to divide up the economic pie, there is no one at the table with a vote representing Puerto Rico. This puts a special responsibility on Congress to see that the island's fate is not dealt with lightly. The current tax incentives are certainly not an efficient way to help Puerto Rico, but a substitute source of help should quickly be put into law. Why not, for example, restore the lost CETA money and let Puerto Rico decide how best to use it to develop permanent jobs?