Tax Bill Could Be A Big Hit To Puerto Rico's Economy

Host Michel Martin talks with Armando Valdes Prieto, former director of Puerto Rico's Office of Management and Budget, about how the new tax bill might negatively affect the island's economy.

MICHEL MARTIN, HOST:

We want to go back now to that massive tax bill that the Republican Congress passed yesterday. Now, every major piece of legislation has some unexpected consequences. Our next guest says that the tax bill that Congress passed, quote, "could be as damaging to Puerto Rico's economy as Hurricane Maria was." That's the view of our guest writing in The Washington Post this week.

Armando Valdes Prieto is a former director of Puerto Rico's Office of Management and Budget. The part of the bill that he's worried about is a new tax that's intended to bring manufacturing back to the U.S. But he says it will affect many manufacturers operating in Puerto Rico. And Armando Valdes Prieto is with us now. Welcome. Thanks so much for speaking with us.

ARMANDO VALDES PRIETO: Thank you, Michel.

MARTIN: Could you just walk us through this tax? What is it, and why is it affecting Puerto Rico in this particular way?

VALDES PRIETO: Basically this provision of the tax bill would make it more expensive for manufacturing operations to operate in Puerto Rico. The intention behind that particular provision is to make it more expensive for companies to be able to operate outside of the United States, in foreign jurisdictions. It just so happens to be to a quirk in the law that Puerto Rico is considered domestic for all purposes except for tax purposes.

And so if this provision of the tax bill works as it is intended to do - in other words, to bring back jobs into the U.S. from offshore - it would mean that some of these jobs that are here now in Puerto Rico, jobs that are held by U.S. citizens, would also be relocating elsewhere.

MARTIN: What kinds of businesses are we talking about?

VALDES PRIETO: So what we're talking about here is - and I should speak to what the provision is. It's basically a 12.5 percent tax on profits derived from intellectual property. So what we're talking about here is high-end manufacturing, the type of manufacturing that makes up 47 percent of Puerto Rico's GDP. Pharmaceuticals and medical devices is mainly what that industry's composed of. They're the best paying jobs in Puerto Rico, and they come to about 75,000 folks that work directly in the industry here on the island.

MARTIN: So it's my understanding that Puerto Rico lobbied hard to get an exemption from this tax, particularly given the circumstances that the island is in a terrible way, rebuilding from this devastating hurricane earlier this year. And the exemption wasn't agreed to. Do you have a sense of, you know, why that is? Was it simply an oversight?

VALDES PRIETO: I think that one of the problems that is facing Puerto Rico is that the present administration and a lot of the majority members of Congress don't know exactly where Puerto Rico fits in to kind of the narrative of the United States. I'm not quite sure that they understand the history. I'm not quite sure that they understand that we're not foreigners, that we are, again, U.S. citizens, that Puerto Rico was made a part of the U.S. after the Spanish-American War. And there was an invasion by U.S. troops in Puerto Rico.

And so root of the problem here is that there is not a deep understanding of our position within the American story. And so there was no response really on the request for an exemption, which I think makes a lot of sense, again, considering the fact that what the president and the GOP intend to do is to safeguard and bring back American jobs. Well, these are already jobs in the hands of American citizens, and the fact that there's not an exemption to recognize that I think is very worrisome.

MARTIN: Now, I'm asking you to speculate here, so I understand that that could be unfair. But do you have any sense of what these companies are likely to do?

VALDES PRIETO: That is in fact highly speculative. And I've spoken to a number of tax attorneys here on the island. And they're telling me, look; each company's going to have to sit down, look at their numbers and look at what makes sense. But I think that the problem here is that in fact it will be more expensive to operate for some of these companies. I can't say that they will all leave. But even if some of them leave and we lose some of that wealth-generating capacity that they have, anything that puts additional pressure on folks to leave the island or to lose their jobs is really coming at the worst, worst possible time.

MARTIN: Armando Valdes Prieto is a former director of Puerto Rico's Office of Management and Budget. We reached him in San Juan. Mr. Valdes Prieto, thanks so much for speaking with us, and happy holidays to you.

VALDES PRIETO: Thank you, Michel.

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