Still devastated by Maria, Puerto Rico fears an economic ‘hurricane’ in GOP tax bill

This Nov. 15, 2017, photo shows roofs in San Juan, Puerto Rico, that remain damaged by Hurricane Maria.
This Nov. 15, 2017, photo shows roofs in San Juan, Puerto Rico, that remain damaged by Hurricane Maria. AP

There’s another hurricane aimed at Puerto Rico lurking in the GOP tax bill, officials are warning.

The tax legislation, which was working its way through the Senate on Thursday, effectively includes a 20 percent excise tax on goods that U.S. companies acquire from their subsidiaries established abroad — including territories like Puerto Rico.

Barring a last-minute rewrite, that provision could hammer the island’s manufacturers, which represent about 40 percent of Puerto Rico’s GDP and provide more than 250,000 direct and indirect jobs, said Carlos Mercader, the executive director of the Puerto Rico Federal Affairs Administration in Washington, D.C.

“We call [the tax bill] the hurricane after the hurricane, the storm after the storm,” he said “This will basically kill Puerto Rico and kill Puerto Rico’s economy.”

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Mercader’s office has been lobbying senators for weeks in hopes of persuading them to rewrite that portion of the bill. And while many have been sympathetic to the island’s plight, Mercader said there were “no guarantees” that the changes would be made.

The news couldn’t come at a worse time for the island, which was bankrupt and limping through a decade-long recession even before Hurricane Maria made landfall on Sept. 20. The storm caused an estimated $94 billion in damage and has forced more than 156,000 Puerto Ricans to flee to Florida alone.

On Thursday, more than two months after the storm, only 66 percent of the island’s electrical generation capacity had been restored.

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After the House moved its version of the bill earlier this month, Gov. Ricardo Rosselló warned that unless it was amended it would “lacerate” Puerto Rico’s economy.

“This action discriminates against the 3.4 million U.S. citizens who live in Puerto Rico,” he said.

And the Puerto Rico Manufacturers Association said the bill could rip out “the backbone of the economy.”

But the sweeping nature of the bill — overhauling the tax code for corporations and individuals and with deep implications for the health insurance market — has overshadowed Puerto Rico’s particular concerns.

The excise tax is a key part of the Trump administration’s plans to force manufacturing jobs back to the mainland, closing a provision that allowed U.S. companies to operate subsidiaries offshore penalty-free as long as they didn’t repatriate the cash.

Under the tax code, Puerto Rico, a U.S. territory since 1898, is considered both a foreign and domestic entity. That allows U.S. subsidiaries to operate on the island with the tax breaks granted to a foreign subsidiary but the right to label their products “Made in the USA.”

While it makes sense for U.S. companies to move factories home from places like Shanghai and Mumbai, it doesn’t make sense to further depress Puerto Rico’s already weak economy, Mercader said.

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For years, many major pharmaceutical companies have been manufacturing drugs on the island that are sold on the mainland. Johnson & Johnson, Pfizer and the Pharmaceutical Industry Association of Puerto Rico declined interview requests, but it’s clear the sector has much to lose.

Making the change to the tax bill would be easy enough. But Mercader said in the politically charged atmosphere on Capitol Hill, where the bill is expected to pass by the narrowest of margins, there’s fear that tinkering could derail it.

While some senators have negotiated carve-outs for their constituents, Puerto Rico has no vote in congress.

“There is a political deficit on our side that we are facing,” Mercader said. “Nobody is thinking about the massive effect this will have on the island.”

Puerto Rico hasn’t been completely voiceless. On Wednesday, Democratic Sen. Bill Nelson of Florida urged his colleagues to vote against the bill, citing its impact.

“We’re going to send another hurricane to Puerto Rico if we pass this bill because of the provisions that are so punitive to Puerto Rico in this tax bill,” he said. “That’s not something we want to do to Puerto Rico. We want to help Puerto Rico.”

On Thursday, expectations were running high that there were enough Senate votes to pass the bill. Even so, Mercader said he’s still hopeful there might be some last minute rewrites.

“This bill puts us in peril,” he said. “Unless there are changes, we are talking about a massive, massive disaster.”

Follow Jim Wyss on Twitter @jimwyss