Puerto Rico is in a financial mess as predicted in 1993, when the Clinton Administration removed the “936” IRS tax breaks for American companies operating on the island. This break, which included operating income-tax free, was approved in 1966 and had lured about 300 companies to build or buy manufacturing facilities. Many of these companies were pharmaceutical and light electronics because the expense of shipping heavier goods was costly.
My company built two new pharmaceutical plants in Puerto Rico, which eventually caused me to move to another company. During 1988, I became involved in building a plant on the island for my new company and saw firsthand the effects of the tax breaks. There were over one hundred pharmaceutical plants in Puerto Rico with very professional staffs, and the University of Puerto Rico was turning out new pharmacists, chemists and business majors at a high rate. In fact, so many Puerto Rican youths were graduating they had to seek employment on the continent.
With all of this manufacturing activity, the unemployment rate was still at 18%, but the economy was improving. Our new plant was staffed and put on line with great success, and we started to add products to it for manufacture. Shipping was costly, but with the tax breaks there was still an incentive to continue to operate and grow until President Clinton saw an income opportunity. He pushed through the repeal of the tax breaks, expecting to reap a huge tax inflow. Instead, many of the companies moved off of the island because, with the high cost of shipping, they could not compete with stateside companies. Our company stayed there because of loyalty to the wonderful employees and capacity problems at home. We are still on the island but in a greatly reduced capacity, and most of our competing companies have left.
Without the incentive to manufacture in Puerto Rico, there is no reason for any company to move there—thus, no employment opportunities. Most of the professional people have moved to the states for employment, leaving everyone else to wait and wonder what happened. The US Congress caused this problem by trying to solve an unemployment problem and then allowing a president to talk them out of their solution. Not only did the unemployment rate skyrocket but Clinton never realized his expected tax influx. Both the Americans living stateside and those living in Puerto Rico were losers over his action.
Perhaps a new look at the old “936” tax breaks should be made instead of just bailing Puerto Rico out. Helping the island with employment and tax generation might be the better answer.