Section 936 and how it messed up Puerto Rico

by Jul 17, 2020Opinion1 comment

Now more than ever, voices of the media are hotly contesting American dependence on imports from foreign countries. This is not a new revelation. However, this phenomenon is not simply due to lower labor costs and higher efficiency. Some of this dependence is correlated with the Clinton administration’s slow repeal of Section 936, an Internal Revenue Service tax code which provided heavy tax breaks to corporations who established businesses in Puerto Rico. Simply put, parent companies were able to either partially or completely avoid paying federal income taxes for their subsidiaries, as long as they sent out their earnings as dividends. 

Section 936 is a complicated point of discussion. At face value, this bill could have been motivated by a desire to increase the domestic economy of Puerto Rico. However, that wouldn’t historically align with American interests. American forces sought to obtain imperial control over Puerto Rico because of its geological advantages in regards to military operations, as well as the possible industries that could be of use to the US economy. If we were really concerned with the liberation of Puerto Rico from Spanish rule, why did we not simply step away and allow them to live on as a sovereign nation?

I believe that Section 936 was originally created to encourage the profitability of Puerto Rico as an asset of the United States– not to bring prosperity to the Puerto Rican people themselves. However, it did nonetheless. While corporations benefited vastly more than the local residents, this influx of industry into Puerto Rico drove their economy into a steady upward climb. It would be unethical of me to leave out some important notes: the Puerto Rican unemployment rate remained significantly higher than that on the mainland, while the average income was much lower. Furthermore, many saw this as yet another barrier to statehood, which would provide far better resources and protections for Puerto Rican residents. The difference is, a tax credit was initially seen as making Puerto Rico more profitable for mainland industries, while providing them with statehood was not. Was Section 936 the perfect solution for Puerto Rico’s economic instability? No. Unfortunately, if change happens in America, the best way to fast track it is by backing it with monetary value. It is undeniable that Section 936 set the stage for Puerto Rico’s place in hosting multiple large industries, especially those related to pharmaceuticals. Section 936 was a blessing, but mostly a curse. It encouraged a somewhat better economy for Puerto Rico, but if that tax code were to ever expire, the consequences would have been catastrophic.

And that they were. In 1996, The Clinton administration quietly slipped the expiration of Section 936 into a bill that raised the minimum wage for millions of Americans. This transition was set to happen over the course of ten years. In that time, Puerto Rico lost close to 40% of their manufacturing related positions. The loss of Section 936 was the beginning of a downward spiral for Puerto Rico. Lacking tax incentives, many corporations flocked to China in an effort to replace their lost advantages. Although there were other factors, this led to Puerto Rico’s notorious debt mountain, as they were forced to borrow funds, filling the gaping hole that manufacturing left in its wake. This particular tax credit backed a significant part of their job market. There was nothing else to fall back on after it was gone. Puerto Rico was left with a crumbling economy, a fleeing job force, and held little place in the minds of politicians. While reestablishing 936 is certainly not the answer, the American government should recognize it’s hand in setting them up for substantial gains– and massive failure.