Call to Congress

The members of a Joint Congressional Task Force are currently evaluating a wide range of initiatives to jump start the economy of Puerto Rico, a United States Territory since 1898, and one that has been on a prolonged recession since the third quarter of 2004. The Task Force was formed as part of the implementation of Puerto Rico Oversight Management and Economic Stability Act, better known as ‘PROMESA.’ 

The Task Force will oversee the development, by the local government, of a viable, tactical and strategic economic plan aimed at restoring economic progress and providing stability to the almost 3.5 million American citizens that reside on this Caribbean Island. It will also look to alternatives, such as tax incentives and stimulus packages, in order to reverse this historic recession, the longest in U.S. history.

Among the many suggestions being floated is a massive, 85 percent to be exact, federal tax credit to multinational companies that establish subsidiaries in Puerto Rico. The so-called Section 245A, a proposed amendment to the U.S. Internal Revenue Code pushed by the same political party that 40 years ago brought Section 936, lacks the provisions needed to generate sustainable growth and create new jobs.

Back in the mid-1970s, then-Gov. Rafael Hernandez Colon insisted on a similar initiative, Section 936, which gave these same companies targeted by Section 245A, a 100 percent tax exemption in all profits generated in Puerto Rico. After 30 years, Congress voted to phase out Section 936, arguing that the excessive cost, the small number of companies that applied for it and the even smaller return, in terms of job creation, did not justify it. Section 936 failed to achieve its stated goals mainly because the few companies that used this tax shelter did not ‘invest’ in Puerto Rico as proportionally as they should have done. This is probably the same fate that awaits Section 245A.

In essence, Section 936 was a profit-shifting operation that allowed some big companies based in Puerto Rico to purchase supplies and materials from their corporate headquarters at a much lower than usual rate, while selling the finished product back at the highest price, thus inflating profits.

Job creation should be the main cornerstone of any mechanism devised by the Joint Task Force to provide help to our ailing economy. One of the many problems that doomed Section 936 was the discrepancy, compared to other U.S. jurisdictions, of the few jobs it actually managed to create.

In 1993, a GAO report concluded that companies that applied for tax credits under Section 936 were making an average of $69,800 per employee, while the worker wages averaged less than $22,800. This is a huge discrepancy. In fact, actual job creation in 936 companies during its 30 year span was 45 percent less than that of other territories with similar tax breaks. Simply put it, Section 936 do not create jobs or improve the quality of wages because it lacked a trigger mechanism aimed at job creation.

There’s simply no provision in the proposed Section 245A, as was in the case of its close ‘cousin’, Section 936, that will guarantee tie-ins of tax revenue with the creation of new and well compensated jobs.

Time it’s of the essence. We know that the current government in Puerto Rico must present a viable economic plan to the Task Force, as required by PROMESA. This, Section 245A is not that. Congress needs to act now in order stimulate our economy.

Jose Aponte-Hernandez is a state representative in Puerto Rico and is the former Speaker of the House for the territory.The views expressed by authors are their own and not the views of The Hill.

By Jose Aponte-Hernandez
Call to Congress