Puerto Rico stands to lose big in Republican tax plan

by Nov 21, 2017Economy, Headlines0 comments

With President Trump’s return to Washington following his trip to meet with other world leaders in Asia, attention will now turn to the current iteration of the Republican proposal for tax reform, titled the “Tax Cuts and Jobs Act.” While the House and Senate versions of the legislation call for stimulative tax cuts projected to induce growth domestically, new questions are emerging about how the tax cut is to be paid for and its ramifications outside of the US. In particular the matter of how Puerto Rico stands in the tax reform is under new scrutiny. The legislation has a section that could endanger Puerto Rico’s domestic industry.

The Republican tax bill has a provision in Section 4303 that imposes a tariff of 20 percent on goods manufactured by subsidiaries of US corporations on foreign soil. Although Puerto Rico is a territory of the United States, it is treated as foreign under the US tax code. Under this new tax law, when a parent company in the US buys from its subsidiary in Puerto Rico, it would have to pay the 20 percent excise tax on every purchase. This would discourage these companies from purchases from Puerto Rico, depriving the islands of much needed cash.   

The governor of Puerto Rico, Ricardo Rosselló, warned Congress that this tariff could further damage the economy if it uses these new taxes on Puerto Rico to help cover the cost of the broader US cuts now under debate. “If Congress does not consider Puerto Rico in tax reform it would lead to the exodus of companies that currently generate 42 percent of Puerto Rico’s gross domestic product, the loss of jobs on the island and exacerbate the outward migration of island residents moving to the mainland,” a statement from the governor’s office accompanying the letter said.  Rosselló has asked Congress to exclude Puerto Rico from a proposed excise tax of 20 percent for merchandise manufactured abroad because products manufactured in Puerto Rico and imported into the US should be treated as domestic products.

With Republicans hoping to finalize a tax overhaul by Christmas to help bolster their chances for reelection in the 2018 midterms, prominent Puerto Rican officials like Resident Commissioner Jenniffer Gonzalez-Colon have negotiated with congressional leadership to change the bill. “What we have discussed, and they [the congressional leadership] understand, is that being in American territory they have to give us a differential,” she said.  

With the passage of H.R. 1, the Tax Cuts and Jobs Act on November 16, House Speaker Paul Ryan (R-WI) and Resident Commissioner Jenniffer González-Colón released the following statement after the bill’s passage:

“Puerto Rico is still working to rebuild following the damage done by Hurricanes Irma and Maria. Congress has been sending aid, many of our Members have visited Puerto Rico following the storm, and we are always looking for more ways to help the island. One of those ways is through additional tax incentives so that our fellow U.S. citizens in Puerto Rico can have all the possible resources to rebuild their lives and their economy. It is our intention to make improvements to our tax reform legislation as it relates to Puerto Rico when we go to conference.”

The need to add additional tax breaks for Puerto Rico and protect the domestic job situation there  has been echoed by the Puerto Rican governor “If the goal of the tax reform is to create American jobs, then Puerto Rico must be taken into consideration,” the governor said. “If not, it would end up being worse than how it is today.”

The coming weeks should show if the republican majority in the Senate will include measures to spare Puerto Rico from the potentially damaging consequences of tax reform.