Puerto Rican Gov. Luis Fortuño has proposed tax cuts that could be a huge boon to the island’s stalled economy, but there is a dark side to his proposal involving a huge tax increase on major employers that could cost the island hundreds of thousands of jobs.
Gov. Fortuño plans to cut personal income and corporate taxes for Puerto Rico-based companies, but he is paying for it with $5.8 billion in new taxes that target several dozen major U.S. companies operating on the island.
There were no public hearings on the tax hike, no discussion with the companies affected, and no opportunity to analyze the impact of the legislation. The law was drafted on Friday, Oct. 22, approved on party-line votes by the House of Representatives and the Senate on Saturday, Oct. 23, and signed on Monday, Oct. 24. The new tax goes into effect on January 1, 2011.
This is a dangerous gamble with the livelihood of Puerto Ricans. At least four U.S. corporations — Edwards Lifesciences, Medtronic, Pfizer, and Eli Lilly — have officially warned the government that the tax will deter future investments on the island.
In addition, many local companies are suppliers to the major manufacturing firms. The governor’s deal could mean that their taxes will be lower but that they will have less business and fewer workers will have jobs. This is a losing game for the Commonwealth.
There has been a decades-long partnership between the mainland and Puerto Rico that has facilitated the creation of hundreds of thousands of good, high-paying jobs, largely in the health care industry. Federal tax advantages for offshore companies to operate there have been phased out over the last decade, so why would the Commonwealth deal another self-destructive blow to job creation?
Most of the several dozen companies impacted are pharmaceutical and biotech companies that already have had their research budgets drained by ObamaCare’s taxes. The biotech industry alone accounts for at least one-quarter of the island’s GDP and is responsible for 100,000 jobs.
This new tax will deter future investments. While the governor says the tax is “temporary,” few believe that. Companies who were planning to expand operations on the island now are looking to Singapore and other sites instead.
This is a jobs-killing tax hike on business, and it comes while the island is stuck in a four-year recession. It’s bad policy that was passed in a reckless way.
Politicians apparently think that companies can absorb absolutely anything they dish out and still chug along creating jobs, profits, and paying taxes. At some point, the engine stalls and working Americans are the ones left holding the pink slip.
Puerto Rico needs to get to work to lift regulatory burdens, reduce taxes across the board, and provide new opportunities and incentives for people to work, save, and invest. A middle-of-the-night, surprise attack on the major employers on the island is a prescription for disaster.
Grace-Marie Turner is president of the Galen Institute, a think tank specializing in health and tax policy.