Summary Background

SUMMARY BACKGROUND

Chart 2: Puerto Rico GDP – constant 2010 US$.

Source: World Bank Unemployment Rate: U.S. Bureau of Labor Statistics

Puerto Rico’s current economic situation can also be attributed to a history of incentives that have come and gone at various intervals over the last 70 years when Puerto Rico, as well as the SPREDD region, began to transform from an agrarian society to an industrialized economy. See Chart 2.

The Revenue Act of 1921 provided a tax exemption to all U.S. corporations receiving income from U.S. possessions or territories; however, at the time, Puerto Rico’s local income taxes essentially nullified the federal tax incentives. Puerto Rico started to make inroads as an industrialized territory during World War II. After seeing the benefits of moving to an industrialized society, Puerto Rico’s legislature passed the Industrial Incentives Act of 1948, also known as “Operation Bootstrap,” which exempted U.S. corporations from most Puerto Rican taxes, thus enabling U.S. corporations to take advantage of the Revenue Act of 1921. The U.S. supported this effort, viewing Puerto Rico as a vital capitalist outpost in the Caribbean.⁷

Operation Bootstrap successfully industrialized Puerto Rico and shifted the economy’s base from agriculture to industry in less than 20 years. However, the industrialization of Puerto Rico did little to expand the workforce, as many manufacturers were locked into global supply chains; therefore, there were limited multiplier impacts on other jobs and local business creation.⁸ The Possession Tax Credit created in 1921 evolved into section 936 in 1976. In 1992, the Congressional Budget Office estimated section 936 would cost taxpayers $15 billion for the five years covering the 1993-1997 fiscal years. Legislation phasing out Section 936 over the next decade was signed into law in 1996.

As demonstrated in Chart 2, the economy of Puerto Rico, as well as the SPREDD region, has expanded and contracted to a significant extent based on similar expansions and erosions of incentives. Key components of plans for economic growth and resiliency, as well as this CEDS focus on growing industries able to flourish in the region absent of incentives. For example, during the 30 years when Section 936 was in place in some capacity, the unemployment rate was never lower than 10%. Decreases in the unemployment rate during 2018 and 2019 are attributed to decreases in the labor force, as opposed to new job creation.

⁷Reuters

⁸Reuters, December 20, 2016: How dependence on corporate tax breaks corroded Puerto Rico’s economy