Puerto Rico’s bad year could be about to get a lot worse if Republicans pass their tax overhaul.
With over $70 billion in debt, $40 billion in pension liabilities, a series of bankruptcy proceedings underway, and an economy at a standstill thanks to a two-month power outage caused by Hurricane Maria, Puerto Rico can ill afford to lose any revenue or jobs.
Yet that’s precisely what would happen under the Trump administration’s tax plan. Part of the plan is intended to encourage companies to move overseas operations back to the United States and prevent further offshoring. One proposal would stop corporations from deducting foreign taxes they pay from their federal returns. Another proposal would put a 20 percent tariff on products manufactured by a mainland company’s foreign subsidiaries.
ADVERTISEMENT
And Puerto Rico is treated like a foreign country when it comes to taxes. For most of its history, this unique status has been a benefit. Indeed, with Congress’ help, it has served as the backbone of Puerto Rico’s economic development since the 1950s.
The best known of these incentives was “936,” named for the portion of the federal tax code in which it is codified. Beginning in the 1970s, it offered favorable tax advantages to companies operating in Puerto Rico. When the incentive ended in 2006, Puerto Rico entered a serious recession from which it has never recovered.
In response to the loss of 936, Puerto Rico enacted its own legislation to generate revenue.
Puerto Rico’s "Act 154" of 2010 was created by the island government as a temporary excise tax on Puerto Rican products and services purchased by their mainland parent corporations. The companies didn’t fight the new tax because for them, it’s a zero-sum game: They pay Puerto Rico’s treasury, then deduct that amount on their federal returns.
This new income for Puerto Rico, however, comes at the direct expense of the federal Treasury: Money that would normally be paid to the U.S. government is paid to Puerto Rico instead.
In 2016, the tax amounted to $2 billion in revenue, 20 percent of the island’s general fund income.
Puerto Rico’s Act 154 tax is not subject to federal review; therefore mainland companies operating in Puerto Rico will owe the 4 percent excise tax to the Puerto Rico treasury even if Congress eliminates their ability to deduct it from their federal returns.
What’s more, Trump’s tax plan would mean they also owe the U.S. Treasury 20 percent in new tariffs for purchases they make from their Puerto Rican subsidiaries.
One estimate says that tax double whammy could force some of the affected companies to shutter operations in Puerto Rico with a loss of up to 200,000 jobs. That would be on top of the 32,000 jobs already lost since Hurricane Maria.
While few realize it, there is a relevant historical parallel.
One year after the American military took control of the island in 1898, Puerto Rico was devastated by Category 4 Hurricane San Ciriaco. The island’s economy was already at a standstill. Trade with Spain had stopped at the end of the Spanish-American War and Puerto Rico had, effectively, no trading partners.
In the aftermath of the storm, Congress did not pass legislation to directly aid the devastated island. It was too busy rewriting the tax laws, one result of which was an additional 15 percent tariff import and export duty for Puerto Rican items.
The tariffs were challenged in federal court on the constitutional grounds that it was illegal for Congress to impose tariffs between two parts of the United States. The Supreme Court ultimately disagreed, declaring Puerto Rico to be “foreign to the United States in a domestic sense.” Congress, the Court said, has the authority to treat the island differently in trade matters.
Congress had found a way of funding Puerto Rico without having to dip into its own kitty: It made businesses and consumers pay the cost.
(Unlike 1900, there is no suggestion that the current Congress would send the income from the new taxes to Puerto Rico.)
The Trump tax bill isn’t all that bodes ill for Puerto Rico in what remains of the year. Funding for hurricane recovery is also at stake in Congress.
Whereas Texas and Florida are set to receive $44 billion in disaster recovery funds, Puerto Rico is not even included in the bill.
Earlier this month, Puerto Rico Gov. Ricardo Roselló asked Congress for $94 billion in reconstruction funds. Apparently the request fell on deaf ears.
House Speaker Paul Ryan and Puerto Rico’s non-voting congressional Rep. Jenniffer González released a joint statement saying they would “make improvements to our tax reform legislation as it relates to Puerto Rico when we go to conference.”
Puerto Ricans aren’t holding their breath. In just the two months since Maria, a flood of people have made the choice to move to the mainland. More than 168,000 people have arrived in Florida since the hurricane and an additional 100,000 have flights booked in December, The New York Times reports. Whether it is temporary or permanent migration remains to be seen.
As American citizens, Puerto Ricans can participate in every aspect of life the moment they arrive on the mainland: The parents can work, the kids can go to school, and those over 18 can vote in state and national elections. The new residents are also eligible immediately for safety net services, including Medicaid. Since half the population of Puerto Rico lives in poverty, it is likely there will be enormous demand for assistance.
The affected states will use their congressmen and senators to demand—and probably get—more funding. Thus Congress will likely have to come up with the funds, be it in Puerto Rico or on the mainland.
If the humanitarian arguments don’t convince Congress to provide a level of federal assistance that will make Puerto Rico livable for families, a political one might: Hundreds of thousands of new Democratic-leaning voters in Florida could change the political power structure in short order.
And given Florida’s outsize role in American electoral politics, the migration could decide if Trump gets a second term as president after short-shrifting Puerto Rico.
