Can Tax Changes Make Puerto Rico an Economic Tiger?

An article by Ryan Ellis in Forbes has identified the debt crisis in Puerto Rico as “arguably the top issue facing Congress” at present. Ellis reminds readers that Puerto Rico has $70 billion or more in debt which it cannot repay, that the people of Puerto Rico are U.S. citizens, and that the territory may soon find itself unable to provide basic services to residents.

“Congress is not in the habit of letting millions of U.S. citizens fall into third world conditions,” the author asserts, so it’s either get Puerto Rico back on track or U.S. taxpayers (including Puerto Ricans) will find themselves paying for a bailout.

Congress is currently working to come up with a plan. Ellis predicts that this plan will begin with a fiscal control board, and that the board will have power to come up with a debt restructuring plan. There have been bills in Congress that would extend federal bankruptcy code chapter 9 protection to the territory, and some members of Congress have said that a fiscal board and a way to restructure debt must both be part of the plan, but Ellis’s suggestion is that the board itself should work out the details of debt reduction once Congress, under the authority of the Territory Clause, sets it to the task.

“Finally,” Ellis says, “the board will have to have some ability to bring creditors and the indebted Puerto Rican governmental and quasi-governmental agencies together to discuss some sort of debt restructuring. This should not be done in a discriminatory way that picks winners and losers. Nor, however, can the voluntary forum the board provides go on forever. There needs to be some final resolution on this that is as fair as possible to both the bond holders and other parties. Congress does not want to do this again.”

Ellis identifies this part of the solution as a set of austerity measures.  He goes on to say that such measures will not be sufficient without additional action to stimulate growth. “Everyone needs to know that a new day has arrived there so they have confidence investing in the island for the long run,” Ellis says. “That alone will be a huge boost to economic growth.”

Ellis acknowledges two controversial measures that have been proposed: exempting Puerto Rico from the laws requiring the use of U.S. built, owned, flagged, and crewed vessels for ocean freight and exempting Puerto Rico from national minimum wage requirements. Both of these, he ways, would be “nibbling around the edges” of the problem. Instead, he favors something like the H.R. 2182, the “National Enterprise Zone Act of 2005,” sponsored by now U.S. House of Representatives Paul Ryan (R-WI) and then Puerto Rico Resident Commissioner in the U.S. House Luis Fortuno. This bill proposed a tax adjustment for select underdeveloped or distressed communities, reducing capital gains taxes, instituting a flat income tax and corporate tax, and creating a tax deduction for savings.

Ellis says that under such rules, ” Puerto Rico would go from an economic backwater to an economic tiger, a veritable Hong Kong in the Caribbean.”