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Executive Summary

PUERTO RICO GOVERNOR PROPOSES 123% WAGE CREDIT and a 10% investment credit in place of the Clinton Administration's proposed changes to Section 936. Gov. Pedro Rossello laid out his proposal in a March 24 memorandum to President Clinton. The administration has proposed to replace Section 936's income-based tax benefit with a 65% wage credit as part of its economic stimulus program announced in February ("The Pink Sheet" Feb. 22, p. 6). Sen. Pryor (D-Ark.) has introduced a similar bill to replace Sec. 936 with a lower wage credit, dropping to 40% over a five-year transition period. By suggesting a change to wage-based credits that would provide more generous benefits to industry, Rosello and Puerto Rico's Resident Commissioner Carlos Romero-Barcelo seem to be seeking the greatest protection of the island economy in the face of apparently inevitable legislative change. On March 2, Romero- Barcelo proposed legislation that would provide a 10-year transition to a 100% wage credit ("The Pink Sheet" March 15, T&G- 2). In testimony submitted to the House Ways & Means Committee at an April 1 hearing, the Puerto Rico/USA Foundation and former resident commissioner Antonio Colorado opposed any changes to the tax code. The Puerto Rico/USA Foundation maintained that the Clinton Administration's proposal "will reduce Section 936 benefits 72%." PRUSA surveyed 50 member companies and found that three-fourths of them "will reduce their operations in Puerto Rico" if the administration proposal is enacted. The foundation said "employment losses will begin to occur almost immediately" if the Clinton proposal is enacted. "By the end of the third year...nearly 70% of the employment losses will have occurred." In his oral testimony, the foundation's Washington counsel Carl Nordberg, Jr. (Groom & Nordberg) said "75% of [PRUSA] companies had planned expansions" in Puerto Rico; however, since the Administration has proposed to modify the tax credit, "only 6% intend to follow through with those plans." Colorado testified on his own behalf in opposition to proposals to change the income-based credit to a wage credit. Colorado said he opposed such wage credit proposals "because they would spell economic disaster for Puerto Rico." Noting the concern in the U.S. regarding high pharmaceutical prices, he said "the way to deal with this perceived problem cannot be to penalize the corporations only if they do business in Puerto Rico." He suggested the White House health care task force is the appropriate venue for correcting the problem. The former resident commissioner also suggested that estimates be made as to "how much revenue Puerto Rico should be expected to contribute to U.S. deficit reduction." After the size of the island's contribution is established, "an adjustment to the allocation of intangibles [should] be studied that could produce U.S. tax revenue without abandoning the concept of an income-based tax credit." The Pharmaceutical Manufacturers Association did not testify at the Ways & Means Committee hearing. The association is said to be analyzing the Rossello proposal. The Oil Chemical & Atomic Workers International Union argued that there is a benefit in proposals that slow expansions in Puerto Rico. Ciba Geigy is "the very first company to say that it had scrapped plans to build in Puerto Rico, due to the 'uncertainty' of Clinton's proposal," the union's Special Projects Director Richard Leonard testified. However, rather than opening "its new $100 mil. plant [in] Mexico or Singapore," the firm "chose instead to build right at home at an existing site in Suffern, New York." Leonard contended that Syntex now "is undertaking the closure of its only mainland pharmaceutical plant in Palo Alto, Calif." He said that the company "intends to transfer all pharmaceutical operations to facilities in Puerto Rico, thereby displacing 281 Bay Area workers." OCAW endorses HR 1210 and HR 1207, respectively introduced by Reps. Stark (D-Calif.) and Roemer (D-Ind.) to block companies from receiving Section 936 benefits if they cause employment dislocation ("The Pink Sheet" March 8, p. 5). PRUSA disputed the notion that Section 936 causes plant relocation. "In many instances, particularly in the case of pharmaceutical companies, products manufactured in Puerto Rico are new products," Nordberg testified. "However, if for economic reasons" a company chooses to move from the mainland, he continued, "runaway plant restrictions should not penalize [it] for choosing to stay on U.S. territory and manufacture in Puerto Rico instead of going to Mexico or some tax haven, such as Singapore." OCAW called it ironic that "the very companies that said they have never dislocated a single mainland worker to take advantage of what amounts to a 246% wage credit presently offered in Puerto Rico, are now saying that they would dump 300,000 Puerto Ricans in a heartbeat to find something better than the 65% wage credit."

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