The Republican tax plan will erode the foundation of Puerto Rico’s most important industry and politicians who support it will pay a price at the polls, local officials said over the weekend.
A new levy aimed at companies’ income from intellectual property that’s held in offshore tax havens will also hit the bankrupt, storm-ravaged commonwealth, making it more expensive for pharmaceutical companies to manufacture their drugs there. Drug and medical-device makers have poured billions into the U.S. territory, creating thousands of jobs and driving almost a third of its economic output.
“This will be disastrous for Puerto Rico,” commonwealth Senator Jose Nadal said after the latest version of the bill was released. The measure, which includes large permanent tax cuts for companies and temporary relief for the middle class, is set to go to a vote this week.
The U.S. territory has long relied on preferential tax treatment to lure lucrative manufacturing jobs in the pharmaceutical and electronics sectors. But the changes could dissuade others from coming and even prompt companies to leave. And the months-long blackout cause by Hurricane Maria exposed the risks of production on a vulnerable Caribbean island.
It’s hard to imagine how bankrupt Puerto Rico’s economy could get worse. It was already withering after a decade of economic contraction and this year declared a record $74 billion bankruptcy. A federal financial overnight board is auditing its bank accounts. Then, the devastating Sept. 20 natural disaster left hundreds of thousands without electricity and business -- and, in much of the commonwealth, modern life—ground to a halt.
“We live in a stagnant economy in which none of the mechanisms implemented have been able to stimulate growth," Omar Rodriguez, a lawyer, said as he visited La Placita square in San Juan’s Santurce district on Sunday. “Under the current circumstances, the little progress we had achieved will be reversed by the federal government. In the end, the commonwealth of Puerto Rico never receives the same benefits as the other 50 states.”
The new tax rate on intellectual property wasn’t immediately clear. An explanation appended to the text of the bill implied it would be 10.5 percent; Governor Ricardo Rossello and Puerto Rico economist Gustavo Velez said it would be 12.5 percent, as proposed in the Senate’s version of the final bill.
Rossello promised there would be consequences for lawmakers who support the bill. The Puerto Rican diaspora makes up a growing part of the electorate in in Florida, a crucial swing state, as well as New York and New Jersey. Since the storm, more than 247,000 have left the island of 3.4 million for Florida alone; the commonwealth’s population already had shrunk about 10 percent in the past decade.
Empty Promises
Rossello on Friday said politicians flocked to Puerto Rico after the hurricane with pledges of support that he said now appear insincere. (He didn’t name them, but Republican Senator Marco Rubio of Florida and House Speaker Paul Ryan of Wisconsin both took to the dais with similar promises after Hurricane Maria.) He said congressional leadership was being “hypocritical.”
“If they do this, you know what? Next year are the mid-term elections, and many of those representatives and senators have Hispanics, have Puerto Ricans in their districts and states," Rossello said. “We’re going to be involved.”
Not everyone saw apocalypse ahead. The island seemed to have dodged the worst-case scenario—a 20 percent excise tax that was proposed on imports and would have affected Puerto Rican products.
Jenniffer Gonzalez, Puerto Rico’s non-voting member of the U.S. House of Representatives and a supporter of Republicans, said in Washington that pro-business measures were forthcoming as part of a new supplemental disaster relief bill to protect jobs. She and House Speaker Paul Ryan had said last month in a joint release that the island’s concerns would be addressed in the tax bill.
Despite officials’ fears, no drugmaker has yet said it would leave the island due to the tax changes, and companies would pay the same offshore tax on operations in other countries. However, Puerto Rico has said it could be less competitive because island manufacturing sites there have to comply with federal environmental and labor regulations, even though considered foreign for tax purposes.
But uncertainty and confusion could be enough to turn people away.
“All planning related to Puerto Rico essentially has changed,” said Gabriel Hernandez, head of the tax division at BDO Puerto Rico, a San Juan financial adviser.
