Between 18.7% and 28% of the 936 companies -which reached a total of 2,328 in 1987- disappeared, as a result of the 1995 law that gradually derogated the incentives associated with that section of the Internal Revenue Code. (horizontal-x3)
Between 18.7% and 28% of the 936 companies -which reached a total of 2,328 in 1987- disappeared, as a result of the 1995 law that gradually derogated the incentives associated with that section of the Internal Revenue Code. (Archivo / GFR Media)

Washington - An analysis published by the National Bureau of Economic Research stated that the elimination of section 936 from the federal Internal Revenue Code reduced Puerto Rico's average manufacturing wage by 16.7 percent and the number of manufacturing companies by up to 28 percent.

The study, authored by Professors Zadia Feliciano and Andrew Green, uses recent data from the Internal Revenue Service, the federal Economic Census and a 1993 report from the Planning Board of Puerto Rico in an effort to understand the effects of eliminating section 936, which granted tax benefits to US companies on the Island for four decades.

In the case of the total number of companies, Feliciano and Green estimate that between 18.7% and 28% of the 936 companies -which reached a total of 2,328 in 1987- disappeared, as a result of the 1995 law that gradually derogated the incentives associated with that section of the Internal Revenue Code.

Feliciano and Green, professors of economics at Queens College of the City University of New York (CUNY), acknowledge that the origins of the fiscal crisis in Puerto Rico "have been attributed, in part, to the gradual elimination of section 936."

The report is being released at a time when the White House and Congress want to legislate, before the end of 2017, a tax reform that may impact Puerto Rico's capacity to attract new investment.

In order to conduct their analysis, the authors compared Puerto Rico to the United States, but also to the states of Indiana, North Carolina, Oregon and New Jersey.

In terms of employment, of about 160,000 jobs available in manufacturing companies in Puerto Rico in the mid-1990s, the total fell to just over 100,000 in 2005. However, by 2012, it had already fallen further, to about 80,000.

When Congress decided to derogate section 936, the companies that benefited from this statute –an overwhelming majority of those operated in Puerto Rico-, claimed federal tax credits of about $ 4.5 billion.

By 2005, when all of the 936 benefits had ceased to exist, the total federal tax credits had dropped to about $ 900 million annually and 98.8% were Island-based companies.

In the end, Congress, with the approval of the government of Pedro Rosselló, decided that the benefits received by the 936, which began to be significant in terms of patents and intangible assets, were too high compared to the jobs that the statute generated.

In a telephone interview, Professor Feliciano argued, however, that Puerto Rico's economic dependency on the 936 companies was remarkable. "In 1987, 82.8% of manufacturing production in Puerto Rico came from the 936 companies."

Although there are still sectors in Puerto Rico that aspire to a tax incentive that is similar to section 936, the Resident Commissioner in Washington, Jenniffer González, plans to submit a bill that will try to benefit of the possible federal reform to propose new incentives to invest on the Island through existing programs.

"Empowerment Zone, Enterprise Community and Renewal Community" are included among the programs that González wants to amend in order to benefit the Island as an afflicted economic zone, those known as

Incentives would include paying 20% of the salary for newly recruited employees living in one of the economically depressed areas, a definition which, especially under the current crisis, may cover a large part of the Island, but also other jurisdictions in the U.S.

Economist Gustavo Vélez thinks that Congress has aimed to do nothing that has a negative impact on the federal treasury or that grants benefits to the Island that are not available to the states.

"This is an issuet that has always been seen from the political point of view, but the empirical evidence has shown that the elimination of section 936 had a direct effect on the economic behavior of Puerto Rico about the attraction of new industrial capital and retaining manufacturing companies in the labor-intensive sector, such as textile firms," noted Vélez.


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