After nearly three months of recovering from a pair of natural disasters, Puerto Rico now faces a man-made one: the GOP tax bill.
Not enough attention has been paid to the unique harm the tax reform proposal would inflict on Puerto Rico. The severe consequences the bill would have on the hard-hit US territory reflect just how badly thought-out the GOP’s slapdash tax legislation was in the first place.
Both the Senate and the House bills — which congressional leaders are working to reconcile — would impose new and unfair taxes on US companies with operations in Puerto Rico. While the supposed goal behind the tax reform was protecting and creating American jobs, this proposal would actually kill them.
“Puerto Rico is part of the United States, and if states are going to benefit from this corporate tax reform, Puerto Rico should benefit as well,” said the island’s governor, Ricardo Rosselló, in a Globe interview. Instead, he added, the tax reform effort penalizes Puerto Rico and provides an incentive for manufacturers to flee the island.
Federal law treats Puerto Rico arbitrarily, sometimes as a foreign entity and sometimes as a domestic one. For example, current rules allow manufacturing subsidiaries to be incorporated in Puerto Rico as foreign factories but their output to be sold as made in the United States. The parent company in the mainland imports the products from Puerto Rico and writes off the profits to its subsidiary, avoiding US income taxes and keeping the proceeds offshore.
Manufacturing companies that use this arrangement represent nearly half of the island’s economy. The pharmaceutical and medical-device industry alone account for a third of Puerto Rico’s gross domestic product. That’s why the GOP’s proposed 20 percent excise rate on offshore transactions, while treating Puerto Rico as a foreign jurisdiction, represents a potential economic calamity for the island. The underlying principle behind the new tax was to discourage American businesses from avoiding taxation by shifting profits to other countries, and not to slow the flow of capital to and from a US territory, according to Puerto Rican officials. Those manufacturing companies would likely flee the island, putting a quarter-million jobs in jeopardy — American jobs, that is.
Before hurricanes Irma and Maria hit, Puerto Rico’s economy was already on the verge of collapsing. Its government was bankrupt. Unemployment and poverty were rampant. Puerto Ricans were already fleeing the island, further eroding its tax base. Today, nearly three months after Maria tore through Puerto Rico, power and drinking water haven’t been fully restored. The Puerto Rican government estimates the cost of rebuilding the island after Maria will be at least $94 billion.
The GOP tax bill undermines one of the island’s few competitive advantages, piling on economic damage just when Puerto Rico can least afford it.