Leave No State or Territory Behind: Formulating a Pro-Growth Economic Strategy for Puerto Rico
by Lawrence A. Hunter on 07/28/2003
45 Pages
Puerto Rico faces a daunting economic challenge at the beginning of the 21st century. It starts with a significant portion of its population below the federal poverty line (48 percent) and persistently high unemployment (13 percent). The manufacturing base created in the 1950s is eroding under the pressure of North American Free Trade Agreement (NAFTA) and other trade agreements as the Island’s wage advantage in unskilled labor disappears. Puerto Rico’s engines of growth must be overhauled, and those engines must be allowed to operate at peak performance, unencumbered by ill conceived and failed federal and Commonwealth government policies.
Expanding the Island’s economy and putting more of its people to work is a multidimensional undertaking. First, the tax and regulatory shackles imposed by the federal and Commonwealth governments must be removed from Puerto Rico’s investors and business owners. A new broad-based economic development strategy is required to spur local investment and entrepreneurial risk-taking. Second, impediments that currently disrupt the operation of an efficient labor market and create disincentives to work must be removed to unleash Puerto Rico’s labor force and allow workers to achieve their highest potential. Third, Puerto Rico must create a highly educated and trained labor pool, especially in the area of Information Technology, who will make the Island competitive in today’s global economy.
Three fundamental reforms are needed to put Puerto Rico on a high-growth path to prosperity:
1. Replace tax-credit economic development strategy. Scrap the failed government-centered economic development strategy to which Puerto Rico has become addicted. Puerto Rico should reduce tax rates across the board on all corporations and individuals, both foreign, Mainland and domestic, and devise a new pro-growth, pro-family tax system that rewards work, saving, investing and risk-taking, which will be conducive to all types of economic activity and generate adequate revenues for the legitimate activities of government.
Rather than treating Puerto Rico as a special political dependent reliant on handouts, Congress should create nation-wide super enterprise zones in which Puerto Rico and other poor regions of the Mainland, particularly those adversely affected by free-trade initiatives, could participate.
Specifically, this report recommends that Puerto Rico petition Congress to treat Puerto Rico as an Island-wide enterprise zone in which all companies would be allowed to elect whether they are taxed under the current Internal Revenue Code or under a reformed federal tax code.
2. Enact fiscal reforms. Reform and rein in the Puerto Rican welfare state, which breeds dependency and retards private sector growth. In particular, the report recommends restraining the growth of Puerto Rican government spending and employment in order to reduce the size and scope of government on the Island to something more comparable to that on the Mainland. The report recommends that:
3. Enact regulatory reforms. Reduce counterproductive regulations, especially the system of business permitting, which retard business start-ups and expansions and generally clog up the economy. The report also recommends that Puerto Rico participate actively in regulatory reform efforts by state and local government associations to achieve relief from harmful federal regulations, the spirit of which can more appropriately and efficiently be implemented by state, local and territorial governments.
The federal government’s direct cost of implementing the policies suggested in this report will be less than the cost of providing Mainland businesses doing business in Puerto Rico new tax subsidies through section 956 of the Internal Revenue Code as was proposed in the last Congress. If the policies recommended in this report are adopted in lieu of more tax-subsidy schemes, Puerto Rico can become a thriving international center of commerce and innovation. Puerto Rico can meet the challenge of the 21st Century with great hope and promise, but to do so, both the Mainland and Puerto Rico must enter into a new contract that rejects the failed policies of the past.
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