Republican Tax Bill Will Devastate Puerto Rico's Economy And Eliminate Thousands Of Jobs

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Residents of Adjuntas walk up to their houses on October 10, 2017, after working to clear the street of debris nearly three weeks after Hurricane Maria hit Puerto Rico. Getty

There is no question: The Tax Cuts and Jobs Act, as currently written, will bring enormous devastation to Puerto Rico's economy.

Following a decade of economic crisis and the devastating effects of Hurricanes Irma and Maria, Republicans' tax reform bill will delay any recovery and further plunge the island into social and economic misery.

Puerto Rico Gov. Pedro Rosselló has said that the tax bill will cripple the Puerto Rican economy. Puerto Rico Manufacturers Association President Rodrigo Masses, said the bill would be "catastrophic."

Two new proposed taxes in particular are at issue: an excise tax of 20 percent on products manufactured by subsidiaries of U.S. companies located outside the U.S., and a 12 percent tax on income derived from intangible assets (such as patents and intellectual property) by American companies outside the U.S.

But why do these taxes involve Puerto Rico, a U.S. territory and not a foreign nation? Because the tax bill considers Puerto Rico to be outside the U.S., a foreign country like Mexico or Venezuela.

Sounds crazy? It should.

It is wrong to lump together Puerto Ricans with foreigners, when they are U.S. citizens who have fought in World War II, Vietnam and other conflicts.

It is wrong to deny that Puerto Rico is part and parcel of the United States, when its constitution—approved by the U.S. Congress and president in 1952—explicitly states that there shall be free mobility of people as well as goods and services (a customs union) between Puerto Rico and all states of the Union.

And it is wrong to suggest that Puerto Rico is separate and apart from the U.S. when U.S.-based corporations located on the island are both subject to the same federal regulations—including labor and environmental regulations—as Michigan or Illinois, and required to ship their products in the same American-made and operated ships that other states in the U.S. must use to transport goods and people within the United States, according to the 1920 Jones Act.

The rationale used by the tax reform bill to exclude Puerto Rico from the rest of the U.S. has its origins in the fact that the Internal Revenue Service considers American territories—including Puerto Rico—foreign jurisdictions for tax purposes.

This has historical roots. In the U.S. war for independence, the American revolutionary position was that the British colonial power should in no way impose taxes on the American colonies without political representation of the colonies in the decisions regarding those taxes in Britain.

Back to the present: Since U.S. territories like Puerto Rico do not have any political representation in Congress (just observers), special provisions were made so that these American territories (colonies) would not pay some federal taxes, such as the federal income tax. For these specific tax purposes, then, Puerto Rico is considered a foreign country.

A Puerto Rico Power Authority worker walks between downed power lines in the aftermath of Hurricane Maria in Luquillo, Puerto Rico, on Sept. 21, 2017. Getty

But although Puerto Rico is regarded as a foreign jurisdiction by the IRS, it is also considered part of the U.S. in terms of the flow of goods and services. And the new excise tax is really about the flow of goods and services. It is a tax on the imports of goods and services produced by American companies located in foreign jurisdictions. The tax is a tool to encourage American companies to produce those goods and services within the U.S., not in foreign countries. It was part of President Donald Trump's campaign agenda, but it should not apply to Puerto Rico.

The tax bill will encourage companies to move away from Puerto Rico and to the rest of the U.S., shifting jobs from the island to the mainland. The tax bill provisions would affect a manufacturing sector that accounts for more than 60 percent of the island's gross national product and over 90 percent of its exports. Tens of thousands of workers would be displaced, leading to severe repercussions all over the economy and stimulating further emigration.

Who in their right mind thinks it is good policy at this point to shift jobs away from Puerto Rico? The island's economy has been collapsing for the last decade and is suffering from a severe fiscal crisis, with a ballooning public debt leading the governor to declare a form of bankruptcy last May. And, to top it off, the effects of Hurricanes Irma and Maria have had a cataclysmic effect. It is estimated that over half of the population is currently living in poverty, many with their homes destroyed and without electricity.

There is still time to avoid this devastation. Rosselló has proposed that the tax bill consider Puerto Rico part of the U.S. for purposes of the new taxes. Additionally, the IRS currently returns to the government of Puerto Rico a portion of the rum excise tax revenues it collects; a similar policy could be introduced for the proceeds of the new taxes.

The Republican tax bill blatantly ignores the plight Puerto Ricans are currently suffering. These U.S. citizens deserve better. Much better.

Francisco Rivera-Batiz is a professor of international and public affairs at Columbia University.