Puerto Rico Sees Risk of Losing Tax Break

PUERTO Rico's business and political leaders are scrambling to stop President Clinton and Congress from killing a tax-incentive program they say is responsible for 300,000 jobs and much of the island's economic prosperity.

Congressional hearings will resume in Washington Thursday to discuss the future of Section 936 of the United States Internal Revenue Code, which exempts US manufacturers from federal income tax on profits earned by Puerto Rican subsidiaries.

To help cut the federal budget deficit, Mr. Clinton has proposed abolishing the tax break and replacing it with a 65 percent partial wage credit.

"This is the worst attack we've ever had on 936," says Daniel Lebron, president of the 1,800-member Puerto Rico Manufacturers Association (PRMA).

Last week, Puerto Rico Gov. Pedro Rossello met with Clinton and other lawmakers to discuss alternatives to dismantling 936. Yet Mr. Rossello himself has been less than enthusiastic in defending the program. Like most members of the New Progressive Party, he sees it as a major obstacle to statehood. Both he and the island's current representative in Washington, former Gov. Carlos Romero Barcelo, were conspicuously absent from a recent pro-936 demonstration in San Juan that attracted 100,000 people.

The sudden uncertainty over 936 has helped push Puerto Rico's unemployment rate to 18.1 percent - the highest level in six years - and has united labor unions and corporations like never before. The program, designed to create jobs in the US commonwealth and keep the island firmly within Washington's sphere of influence, has been around in some form since 1921.

In the last 25 years, nearly every drug firm on the Fortune 500 list has built a plant on the island - helping turn Puerto Rico from a Caribbean backwater into the pharmaceutical-manufacturing capital of the world. Exports from drug companies to the US account for nearly a quarter of Puerto Rico's gross domestic product of $23.6 billion. Several of the biggest companies have put investment plans on hold pending a decision on 936.

"If 936 is eliminated, either the US pours billions of dollars into our economy, or Puerto Rico pours thousands and thousands of people into the mainland," warns Antonio Colorado Jr., the island's former nonvoting congressman in Washington.

The Clinton administration sees 936 as a $2.2 billion-a-year drain on the US Treasury, and figures that by dismantling the program, it will reap $7 billion in extra tax revenues over the next four years.

Statehood advocate Kenneth McClintock, chairman of the Puerto Rico Senate's Federal Affairs Committee, says the capital-intensive drug companies have created few local jobs relative to the tax breaks they're getting through 936. That, along with allegations that the companies are "gouging" the public through overpriced prescription drugs, leave Congress and the president "in no mood to keep 936."

But Mr. Colorado, a prominent member of the pro-commonwealth Popular Democratic Party (PDP), says 936 provides a vital incentive for businesses to locate here: "Transportation costs to and from Puerto Rico are high.... Electricity costs are higher here than in any of the 50 states. We have to comply with every [minimum-wage and environmental] regulation that the US does, but Mexico doesn't, the Dominican Republic doesn't, and Singapore doesn't."

Mexico, meanwhile, is on the verge of freer access to US markets under a North American Free Trade Agreement, he notes.

One proposal by the radical Puerto Rican Independence Party (PIP) is to replace 936 with the lesser-known Section 901 - known as the Foreign Tax Credit. PIP Sen. Fernando Martin says 901 is actually better for Puerto Rico, since it would treat the island as an independent country, allowing it to enter into tax treaties with Japan and other nations.

"There are alternatives to 936 that may not be good for the 936 companies but will be good for the Puerto Rican economy," says Mr. Martin, who ran for governor last year but got less than 4 percent of the vote. Many companies are reticent to talk about whether they will move out if the tax break is revoked.

About 650 companies manufacture in Puerto Rico thanks to 936. Together they provide direct employment for 115,000 people; another 200,000 work for companies that supply the Section-936 firms.