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REP. STARK's SEC. 936 BILL TO PREVENT PLANT "RUNAWAYS" TO PUERTO RICO will apply only to companies seeking to receive or expand Section 936 tax credits after June 12, 1991, the date of the bill's introduction. Stark (D-Calif.) introduced HR 2632 before the House Ways & Means Committee as a bill to amend the Internal Revenue Code of 1986. The bill would deny tax incentives for income attributable to a manufacturing plant relocated to Puerto Rico or the Caribbean Basin that has resulted in a "substantial adverse effect on employment at U.S. facilities," or a so-called "runaway" plant. The Stark bill would provide for a three-year window in which the Secretary of the Treasury could okay the Sec. 936 tax credits or revoke tax credits already allowed. If a manufacturer wanted to obtain credits for an expanded operation at an existing plant, the bill would require that a new determination of Sec. 936 eligibility be made "when employment at the facility increases by over 10% in one year or a new local tax incentive procedure is commenced." The bill also provides for public input into the allocation of Sec. 936 tax credits to corporations. The Treasury secretary would be required to publish a Federal Register notification of the request. The bill does not require an opportunity for a public hearing on the request for tax credits. Stark predicted that a version of the bill would be introduced in the Senate in the near future. At a June 12 press conference, Stark, a longtime opponent of Sec. 936 tax credits, called the measure a corrective action. "Section 936 is working too well," Stark said. "It's taking mainland jobs to Puerto Rico and taking away $ 2.6 bil." a year in lost taxation revenues. Stark based the $ 2.6 bil. figure on the average tax benefit of $ 18,523 per manufacturing sector employee hired in Puerto Rico -- data reported in a March 1989 Treasury Department report entitled "The Operation and Effect of the Possessions Corporation System on Taxation." The $ 2.6 bil. figure includes adjustments effected through the 1986 tax reform act. Stark based the job loss figures on a study by the Midwest Center for Labor Research, which estimated that over 7,000 mainland jobs have shifted to Puerto Rico. The California congressman, who also has been a critic of the pharmaceutical industry's use of Section 936 tax breaks, noted that the tax credits "vary substantially by industry," but that the drug industry "hit the jackpot with $ 57,761 in tax benefits per employee in 1983." A Congressional Research Service report publicized by Stark in December found that the pharmaceutical industry uses Sec. 936 credits "20 times the average amount" of other manufacturing industries ("The Pink Sheet" Dec. 17, p. 14). The Sec. 936 bill is one of several pieces of legislation that Stark has introduced or is interested in that could prove harmful for the pharmaceutical industry. Stark has proposed a permanent revocation of the R&D tax credit and elimination of the tax deductions for advertising and promotional spending beyond approved FDA standards. He recently introduced a bill to provide Medicare Part B outpatient prescription drug coverage ("The Pink Sheet" June 10, T&G-1). The California congressman is also working on a bill that would require electronic tracing of prescriptions for controlled substances. During Q&A, however, Stark denied that the bill to amend Sec. 936 was a punative measure against the pharmaceutical industry designed to push for lower prescription drug pricing. "We'll just wait to take care of the pharmaceutical industry when the time is right," Stark remarked. The congressman also maintained that his bill would have no adverse impact on the economy of Puerto Rico and predicted a future when the 936 tax credits would be eliminated entirely; for example, if Puerto Rico were to be granted statehood. Stark also told the press conference that he introduced the measure "in response to concern in Indiana that we would lose a lot of jobs to a company that would become a 936. I suspect more of this will happen," Stark said, "and that's not what 936 was intended to do." The congressman was alluding to the planned November shutdown of American Home Products' Whitehall Labs facility in Elkhart, Indiana. He introduced HR 2362 for himself and freshman Rep. Roemer (D-Ind.), who represents the district encompassing Elkhart. The Oil, Chemical and Atomic Workers' Union, which represents the employees at the Elkhart plant, commissioned the Midwest Center's study on plant relocations to Puerto Rico and the effect on mainland jobs. The study, presented at the June 12 press conference, looked at 25 factories owned by 21 companies that have shifted 7,306 jobs to Puerto Rico. Bristol-Myers Squibb, DuPont and Warner-Lambert were involved in more than one case cited in the study, which found that 16 of the 25 plant closings or major layoffs involved pharmaceutical or medical products companies. The study, which is ongoing, offers "vignettes" of the impact of the plant closings and concludes that there is a "pattern" of runaways to Puerto Rico. Other drug or medical device industry firms included in the case studies are: Allergan, Anaquest/BOC, Baxter, Carter-Wallace, Chese-Pond's, Kodak's Sterling Drug, Johnson & Johnson, Merck, SmithKline Beecham and Teledyne Turner. OCAW efforts to keep the Whitehall plant in Elkhart open took another step forward May 31 with a ruling that the union's $ 100 mil. lawsuit against American Home Products in San Juan, Puerto Rico federal court will proceed to trial. Federal Court Judge jaime Pieras, Jr. denied AHP's motion to dismiss the case and gave the go-ahead order for discovery and trial. The OCAW suit, which seeks $ 100 mil. in actual and punative damages, alleges that since 1987 AHP has violated federal and Puerto Rico laws through its use of Section 936 and Puerto Rico tax credits. The suit also alleges that the AHP activities fall under the jurisdiction of the Racketeer Influenced Corrupt Organization (RICO) Act ("The Pink Sheet" Jan. 28, T&G-10).