The Republican tax bill will cut thousands of Puerto Rico jobs

The advocates of the Tax Cuts and Jobs Act are promising savings of $1,182 a year for median households and the creation of 975,000 full time jobs in the states. But if Section 4303 of the bill is not amended to exclude Puerto Rico, 75,000 jobs to U.S. citizens could be lost. Congress has the responsibility to legislate on behalf of all U.S. citizens no matter whether they reside in the states, commonwealths or territories.

The U.S. tax code treats Puerto Rico as foreign for tax purposes. Since 1921 and until 2006, this has been used by Congress for Puerto Rico’s advantage through special tax provisions that fostered economic development. In 1996, Congress decided to end that special tax policy by legislating a 10-year phaseout of Section 936. By no coincidence, the recession in the island started in 2006 when the phaseout ended. Since then, we have been in a downward spiral and economic decline that led Congress to pass the Puerto Rico Oversight Management and Economic Act last year. Adding insult to injury, we were hit with a category five hurricane in September.

{mosads}The U.S. Food and Drug Administration recently published an analysis that highlights the important role that medical product manufacturing plays in the Puerto Rican economy. It found that approximately 30 percent of Puerto Rico’s gross domestic product in 2016 was “driven by pharmaceuticals and medical devices, and these product segments were two of Puerto Rico’s largest exports.” It found that the island produces more pharmaceuticals, worth $40 billion in value, for America than any of the 50 states or any single foreign country.

The Republican tax bill has a provision in Section 4303 that imposes a new excise tax of 20 percent on goods manufactured by subsidiaries of U.S. corporations on foreign soil. Because Puerto Rico is treated as foreign under the U.S. tax code, this means that when a parent company buys from its subsidiary in Puerto Rico, it would have to pay the 20 percent excise tax on every purchase. Subsidiaries in the states are not subject to this, but the ones located in commonwealths or territories will be.

This new excise tax is aimed at getting U.S. corporations to bring back jobs under the flag. The only thing that lawmakers have not yet realized while discussing this legislation is that U.S. corporations in Puerto Rico are providing 75,000 jobs to U.S. citizens. Furthermore the controlled foreign corporations in Puerto Rico contribute $2 billion to the Puerto Rico treasury under Act 154. This is why Section 4303 of the Republican tax bill must be amended to exclude Puerto Rico.

Last year, I wrote a column in The Hill in which I stated that the commonwealth had developed a “proposal that would reverse the existing strained economic relationship between Puerto Rico and the United States. This proposal would stimulate job creation, incentivize the return of profits to the mainland, increase tax collections and enable us to pay off creditors. Specifically, the proposal would ensure among other things that there would be no net revenue loss to the U.S. Treasury by imposing new limitations on the ability of taxpayers to claim foreign tax credits against the repatriated income, and by mandating a repatriation of earnings currently trapped in Puerto Rico as a result of its treatment as a foreign tax jurisdiction.”

Congress should consider including the proposal presented by the commonwealth to the Congressional Task Force on Economic Growth in Puerto Rico. Congress should honor the bipartisan task force report, which said, “Puerto Rico is too often relegated to an afterthought in congressional deliberations over federal business tax reform legislation. The task force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform legislation. The task force recommends that Congress continue to be mindful of the fact that Puerto Rico and the other territories are U.S. jurisdictions, home to U.S. citizens or nationals, and that jobs in Puerto Rico and the other territories are American jobs.”

Let’s make good on that promise made by Rep. Sean Duffy (R-Wis.), Rep. Tom MacArthur (R-N.J.), Rep. Nydia Velázquez (D-N.Y.), Sen. Robert Menendez (D-N.J.), Sen. Bill Nelson (D-Fla.), Sen. Marco Rubio (R-Fla.), and Sen. Orrin Hatch (R-Utah) when they issued the report to the House and Senate on Dec. 20, 2016.

Juan E. Hernández is a former senator of Puerto Rico and former director of the Puerto Rico Federal Affairs Administration.