Puerto Rico’s economy was in distress before the island was slammed by hurricanes Irma and Marie, and it is struggling mightily now to recover. But new tax policies also are needed for this U.S. territory to have a fighting chance at long-term economic recovery.
Damage to the island from the hurricanes was overwhelming, destroying homes and crippling businesses already suffering in the island’s fragile economy.
“By every measure, this was an epic event of historic destruction that will require our sustained commitment to our fellow citizens on the island,” Food and Drug Commissioner Scott Gottlieb told Congress in testimony last week. “Puerto Rico was a singular tragedy that challenges the FDA in unique ways.” And it affects all of us.
Puerto Rico is a manufacturing hub with half of its economy devoted to manufacturing. One third of the island’s GDP comes from making medical products, primarily biopharmaceuticals, and the island has a growing biotech sector. About 8% of all medicines that Americans consume are produced in Puerto Rico. In addition, 50 medical device plants there make everything from pacemakers to blood collection devices.
Altogether, manufacturing directly employs about 74,000 people, with more than 160,000 working in indirect supplier and support jobs. They are good, high-paying jobs that are crucial to supporting Puerto Rico’s middle class. Unless these manufacturing facilities recover and stay in Puerto Rico, the beating heart of the economy would be irreparably damaged.
As part of its tax reform measure, Congress could help to rebuild the island’s economy with new policies that would underpin its vital manufacturing sector.
While most of the island is still without power, most of the pharmaceutical plants are operating but at a substantially limited capacity. Most are operating on diesel-fueled generators that were never created to keep a large manufacturing plant operating indefinitely.
Gottlieb warned that critical drug shortages could hit U.S. consumers in just a few months if the island’s electrical grid isn’t restored soon. He said the FDA is focused on 30 “medically important” drugs manufactured in Puerto Rico, including 14 that are made exclusively in plants on the island.
Because plants are producing at only 20% to 70% of their normal capacity, the FDA has had to find other facilities off the island to fill the supply until the power grid is restored.
“If we don’t do our job and help these facilities [get] back up in a timely fashion, we could start to see some of the production move out of the island,” Gottlieb said, putting a series strain on the economy.
The FDA is facilitating emergency help for Puerto Rico, including emergency diesel fuel, and Gottlieb praised the pharmaceutical companies for their response in providing food, water, shelter, and generators for their employees and other citizens in outlying areas.
But the plants need more than emergency supplies. Puerto Rico needs a change in tax policy to keep this active manufacturing sector alive. “We owe the island’s residents our steadfast and long-term commitment to a full recovery.”
Puerto Rico is a U.S. territory and its residents are U.S. citizens. Yet current tax policy treats the island as a foreign country: Companies located there must first pay taxes in Puerto Rico, and then they face another tax hit if the earnings are repatriated to the mainland. Complex international rules may result in a 25% surtax for revenue from Puerto Rican facilities. This produces a disincentive for U.S. companies to expand.
Tax reform legislation that the House plans to unveil this week is expected to include a “territorial tax” that would reform our nation’s anti-competitive tax policy. Even though Puerto Rico is part of the United States, the IRS treats the commonwealth as a foreign country for tax purposes. That means U.S. companies operating in Puerto Rico face double taxation in Puerto Rico—taxed once in Puerto Rico and again if they bring the earnings back to the mainland. Yet foreign competitors operating in Puerto Rico pay tax only once.
“Allowing a free- flow of capital between Puerto Rico and the rest of the U.S. would spur investment, create more jobs, and increase wages for the territory,” according to Grover Norquist, president of Americans for Tax Reform.
Puerto Rico must do its part as well by reducing regulatory red tape and right-sizing its bloated government bureaucracy.
“Federal officials must, in a bipartisan manner, make the island a forethought rather than an afterthought by designing tax policy that allows for dividend exclusions, repatriation incentives, and other refinements to showcase Puerto Rico as the primary Caribbean destination for the flow of investments,” according to Pete Sepp, president of the National Taxpayers Union (NTU), and Andresen Blom, Washington Director of Fundacion Libertad in San Juan.
Congress can make sure U.S. jobs stay in Puerto Rico by rationalizing and simplifying U.S. tax treatment of Puerto Rico. That means lower tax rates, territoriality, eliminating tax penalties for U.S. firms that operate in Puerto Rico, and allowing U.S. firms to repatriate earnings trapped on the island without penalty, according to NTU.