August 4, 2006

Commentary:

Don’t forget the four million American citizens living in Puerto Rico

Lawrence A. Hunter, Ph.D.

Congress is struggling over what to do about illegal aliens coming to the United States from Mexico and Central America yet a huge problem within the Hispanic branch of our own American family is overlooked.  Four million American citizens of Hispanic origin struggle in Puerto Rico under circumstances that can only be described as totally un-American.

People born in Puerto Rico are American citizens with U.S. passports who have all the rights of citizenship, including dying for their country in the American military — all the rights that is except the right of electing voting Members of Congress or voting for the President. Few “mainlanders” recognize that the U.S. has a colony, which they can visit without a passport and whose residents may freely come to the mainland to visit, work or live permanently without presenting a passport, obtaining a visa or a green card or going through customs when they arrive.

Between 1950 and the mid 1970s, Puerto Rico was considered by many to be a showpiece of economic growth and educational advancement. Since then, however, Puerto Rico’s economy has been stagnant, its standard of living has lagged, and the educational system has virtually deteriorated.

Unemployment persists at 11 percent, and labor force participation (60%) is less than two-thirds the rate in the States, much lower than any OECD country, including Mexico (82%).  Nearly half of Puerto Rico’s residents still live below the U.S. poverty line, and the gap in income relative to the mainland continues to widen.

The Institute for Policy Innovation described this situation in a report three years ago  (“Leave No State of Territory Behind”). The Brookings Institution is publishing a book with virtually the same findings.

The Brookings book and the IPI report constitute a consensus among economists.

Puerto Rico’s lack of prosperity derives from flawed tax policy and a bloated welfare state stimulated and perpetuated not only by the government of Puerto Rico itself but also by very smart tax lawyers who designed fatally flawed tax policy for the United States government, which benefited large multinational firms with territorial tax credits but barely benefited the people of Puerto Rico.

While the strategy did attract multinationals to Puerto Rico and demonstrated for the relatively few people hired how productive the Puerto Rican people can be, the strategy ultimately backfired.

It was immensely costly to the Federal Treasury — on the order of $2.67 in tax benefits received for every dollar of labor compensation paid — and not only distorted Puerto Rico’s local politics, by making the tax incentive dependent upon Puerto Rico’s continued territorial status, but it also distorted the structure of production and employment in Puerto Rico.

Large multinational companies got large tax credits, often in reward for income attributed to Puerto Rico, but actually produced by activities in the States.  Very few Puerto Rico residents got resulting jobs or small-business opportunities.

As a result, four million people born in Puerto Rico now live in the States where they can find a job and vote.

Special tax breaks also exacerbated a willful blindness in Washington of the urgent need to resolve the status debate. Is Puerto Rico to become a state, remain a territory or gain independence as a sovereign nation?

The Bush Administration is to be commended for its recognition of the festering political-status issue in its recent recommendations for Congress to establish a formal process of Puerto Rico self determination to resolve permanent status in a timely fashion.

In 1996, with a generous 10-year phase out period, Congress repealed those tax credits, and the multinational firms have remained on the island.

But the history of corporate welfare had created an economic strategy with one pillar-perpetual dependency. In this regard, Puerto Rico’s economic problems are not unique, and they are only compounded by the uncertain status situation. 

This is why a new economic strategy is required for Puerto Rico, one that incorporates wise federal policies rather than handouts. At a minimum, Congress should implement national enterprise zones including Puerto Rico. That would make it possible for these American citizens to claim the ladder of prosperity and achieve the American Dream.

Companion national enterprise zone bills including Puerto Rico were introduced by Wisconsin Congressman Paul Ryan and Senator Sam Brownback in the last Congress. Puerto Rico’s newly elected non-voting Member of the House, Luis Fortuno, introduced similar legislation (H.R. 2182) in this Congress.

National enterprise zones provide a practical means of getting tax policy right, easing regulations and establishing incentives for private capital and enterprise to invest and flourish in these lagging sectors of America, whether it be on the mainland or on that little corner island of America 1,000 miles off the coast of Florida.

Dr. Hunter is a Senior Fellow at the Institute for Policy Innovation and former staff director of the congressional Joint Economic Committee.

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