Wednesday, August 02, 2017

Puerto Rico Needs Pro-Growth Tax Reform, Not Just Austerity

The Puerto Rico Oversight and Management Board recently submitted their first annual report to the U.S. Congress, as required under the PROMESA law. While the report shows some initial steps the board and territorial government have taken toward fiscal stability and better debt management, it lacks any real recommendations to bring prosperity to Puerto Rico.

Puerto Rico is, to put it mildly, an economically distressed area of the United States (while not yet a state, it's a territory fully incorporated as a possession of our country and recently passed a plebiscite in favor of statehood). It has a poverty rate of 45 percent, according the U.S. Census Bureau--over three times the national average. The unemployment rate is nearly twice that of the U.S. on average in San Juan, and a staggering 11.5 percent on the island generally. It's not hyperbole to compare Puerto Rico to America's "Great Depression" economy of the 1930s.

Yet the oversight board report in its recommendations to Congress is remarkably tame in suggestions for getting Puerto Rico moving again. Most of the ideas are very small ball--the most ambitious is turning income support like food stamps and cash welfare into an EITC program to incentivize work and consolidate help to families.

The answer as to why might reside in the board's composition. The membership is still those appointed by President Obama on his way out of office, in strong coordination with House and Senate Republican Leadership. It's possible the men and women appointed were competent at fiscal stabilization, public finance best practices, and debt refinancing, but have found themselves at a growth stage of the process now beyond their skill sets. It's also possible the appointees were a kind of compromise between what the Obama Treasury wanted and what Congressional Republicans were looking for. In any event, now that the board has had a full year under its belt, it's a good time to see if the board's needs and membership now match what they did on the heels of PROMESA's passage. Board members have three year terms, so that should be respected. But the most important criterion is getting strong economic growth back to Puerto Rico, and there is scant evidence from the first annual report that the board is thinking very imaginatively or creatively in this respect.

President Trump needs to have appointees with his full confidence. The good news is that he can start to the process of board review, right away. Most of the board members are selected by the president from a list provided by the Congressional leadership. There is one slot, however ("Category F" in PROMESA-speak), in which the president has sole discretion to appoint. President Trump should put in his own man here sooner rather than later, to ensure that his administration's interests--and not those of President Obama--are represented on the board. It's the best way to ensure a fair outcome to future debt and fiscal board outcomes, and to make certain that the board has the jobs and capital growth requirements of the people of Puerto Rico in mind.

There are two recommendations I submit the board should have made to the Congress to help the people of Puerto Rico get back on their feet:

Deal with Puerto Rico "on purpose" in federal tax reform. Too often, Puerto Rico in particular and the U.S. possessions in general are treated as an afterthought in U.S. law, and even U.S. tax law. With all that has happened in Puerto Rico in recent years, this cannot be the case in any fundamental tax reform. 

There should be an "on purpose" section of tax reform for the territories, recognizing their unique place in our economy. In the case of Puerto Rico, the tax system there is a kind of hybrid no one is comfortable with--in some respects treated like a state, and in some respects treated like a foreign country. It's confusing to taxpayers and it impedes the "free flow of capital" the PROMESA law envisions. Certainty and simplicity in the tax treatment of Puerto Rico should be a deliberate goal of federal tax reform. There are many complex arrangements already set up, and it's important that Congress deal with the patchwork status quo carefully and without threatening jobs or capital investment. But Congress ought to work with all the stakeholders on the island to come up with a more common sense and transparent tax system for everybody that looks toward the future.

Create "enterprise zones" (or "empowerment zones," "investment zones," etc.) for Puerto Rico and other economically distressed regions of our country. The late Jack Kemp was always a fan of lowering tax rates in areas of the country left behind by a rising tide otherwise lifting all boats. Tax reform ought to incorporate his "enterprise zone" concept for Puerto Rico, but also for distressed areas like inner city Detroit, Appalachia, and poor rural counties. 

Business tax rates ought to be radically lower, capital gains tax rates should be at or near zero, and all business fixed investment should be eligible for first year expensing. The areas of our country with the worst prospects for job creation and capital formation ought to have the best tax policies available to them so they can catch up with the rest of their neighbors and we can all grow together. Expect to see more here in the fall as there's been a lot of talk in Congress about enterprise zones for places like Puerto Rico.

The oversight board has done a commendable job getting their arms around a very difficult fiscal, accounting, and debt situation. That job is not over. But it's essential that the board, Congress, and Puerto Rican officials look to the other side of the equation--not just the austerity and responsibility PROMESA so accurately called for, but also how we're going to get Puerto Rico quality jobs and a rising standard of living. In order to do that. President Trump's administration will have to take a more active role.


A view of the neighbourhood of La Perla where the video 'Despacito' was recorded in San Juan, on July 22
Ryan Ellis 
Puerto Rico Needs Pro-Growth Tax Reform, Not Just Austerity

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