If the U.S. government takes the right steps, Puerto Rico can become a thriving international center of commerce and innovation, to the benefit of both the Island and the Mainland, according to Dr. Lawrence A. Hunter, author of "Leave No Territory Behind: Formulating a Pro-Growth Economic Strategy for Puerto Rico." But to do so, both the Island and the Mainland must be willing to pursue three fundamental reforms of the U.S.-Puerto Rico relationship.

1. Replace the tax-credit economic development strategy. Instead of the current tax-credit economic strategy, Puerto Rico should cut taxes, and the U.S. government should treat Puerto Rico as an island-wide enterprise zone, giving companies the choice of being taxed under the current system, or under a reformed federal tax code.
2. Enact fiscal reforms. Puerto Rico needs to commit to meeting the national education standards established in the "No Child Left Behind" legislation of 2001. Additionally, Puerto Rico should act to restrain the growth of Puerto Rican government spending and employment, and should phase out "cover-overs" of federal excise taxes. The federal government should consider extending coverage of the EITC and SSI benefit to Puerto Rican residents who qualify.
3. Enact regulatory reforms. Puerto Rico must reduce counterproductive regulations, especially the system of business permitting, which retards business start-ups and expansions.

Today, Puerto Rico faces a daunting economic challenge. Nearly half of the population is below the federal poverty line, and a 13 percent unemployment rate. It's manufacturing base has eroded, and other developing nations are eliminating Puerto Rico's past wage advantage.

"The U.S. can do better by Puerto Rico, and Puerto Rico can become a dynamo of economic growth and a great asset to the United States," says economist Lawrence Hunter. If Puerto Rico and the federal government enact the reforms outlined in this report, Puerto Rico can function as demonstration project for tax reform and enterprise zones, and could also present a possible solution to the corporate inversion controversy. And a successful tax reform demonstration in Puerto Rico could help put additional pressure on the federal government to do tax reform and enterprise zones on the Mainland, to the benefit of all Americans.