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Executive Summary

The Puerto Rico/USA Foundation is criticizing legislation (S 356) introduced by Sen. Pryor (D-Ark.) on the grounds that it effectively would reduce to $800 per employee the annual tax benefits for establishing manufacturing facilities in Puerto Rico after the 40% wage credit is fully phased in. Introduced by Pryor on Feb. 16 ("The Pink Sheet" Feb. 22, p. 6), the bill would establish a 40% credit for wages up to $20,000 paid to each Puerto Rican employee of island subsidiaries of U.S. companies. In a March 1 analysis of the Pryor bill, the private foundation said that because of the cap, the maximum credit under the Pryor bill "is $8,000 per employee when fully phased in after the five-year transition period" (40% of $20,000). However, the bill also provides a "denial of double benefit," which disallows crediting or deducting "any wages taken into account in computing" the credit under S 356. Therefore, because 36% of the credited wages would have been deducted from company income as an expense, the analysis maintains that the credit provided under the Pryor bill is reduced to the remaining 4% of the 20,000 ($800). Any legislative change to a wage-based credit would encourage companies to move from Puerto Rico, the foundation suggested. Using 1990 wage estimates, the foundation said a wage credit would reduce a company's average cost of hourly compensation per Puerto Rican employee from $7.21 to $6.97. In contrast, the 1990 average hourly cost of compensation per employee is $4.11 in Barbados, $3.71 in Singapore, $2.51 in Mexico and $1.13 in Jamaica. The federal minimum wage law applies to Puerto Rico, the foundation explained; therefore, even with the "most generous wage credit," the "real cost of wages remains substantially higher than in countries that compete with Puerto Rico for investment on the basis of [low] wage rates." At a March 2 press conference, Puerto Rico/USA Foundation counsel Peter Holmes (Washington, D.C. firm Groom & Nordberg) contended that the Pryor bill constitutes a repeal of Sec. 936 and that the Clinton Administration's proposed modification of the law could constitute a repeal "for some companies." Repeal, Holmes maintained, would lead to a 64% decline in companies' investments on the island and a loss of 164,000 jobs there. The Congressional Budget Office issued a February report on spending and revenue options for reducing the deficit. One option discussed in the report involves repealing Sec. 936 or replacing it with a wage credit. Citing figures from the Joint Committee on Taxation, the report states that tax revenues would be raised by $2.1 bil. in 1994 if 936 were repealed and by $300 mil. if it were replaced by a wage credit. Repeal would raise additional revenues of $18.7 bil. over the period 1994-1998, whereas changing to a wage credit would raise an additional $2.8 bil., the report states. Repeal would raise an additional $3.9 bil., $4.1 bil., $4.3 bil. and $4.5 bil., respectively, in each year from 1995-1998; a wage credit would increase revenues over the same period by $500 mil., $600 mil., $700 mil. and $800 mil. The Puerto Rico/USA Foundation called the press conference to release a report on a survey of Sec. 936 companies' purchases from the U.S. mainland in 1991. The foundation said that the 50 Sec. 936 companies that responded to the survey purchased $2.3 bil. in supplies and services from mainland sources. Using a Commerce Department and U.S. Trade Representative formula that calculates 20,000 jobs are created by each $1 bil. in U.S. exports, the foundation concluded that the 936 companies' $2.3 bil. in purchases indirectly created 46,000 jobs on the mainland. On March 3, Reps. Stark (D-Calif.) and Roemer (D-Ind.) introduced "plant runaway" bills intended to prevent companies from shutting down mainland facilities and relocating in Puerto Rico. Stark's bill, which was introduced in the last Congress, was referred to the House Ways & Means Committee, Roemer's to the House Education & Labor Committee.

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