Two economists are recommending the creation of federal “Investment Zones” to promote investment and economic growth in underdeveloped communities throughout the United States, including Puerto Rico.
Arthur MacEwan, professor emeritus at University of Massachusetts, and J. Tomas Hexner, an economist with a specialty in developing countries, are advancing a proposal that would help economically depressed areas in 38 states, the District of Columbia and all of Puerto Rico.
An Investment Zone would be a county, city/town or zip code with at least 25,000 residents and unemployment and poverty rates at least twice the national average. Firms that establish operations in these areas would be subject to a 12% tax rate on earnings, as opposed to the current rate of 35%.
MacEwan and Hexner propose Investment Zones as a significant improvement over the Controlled Foreign Corporation (CFC) status for firms operating in Puerto Rico. CFC firms are constrained from repatriating earnings to parent firms in the states due to high tax rates on non-U.S. sources income, which includes Puerto Rico, a populous U.S. territory that is considered a foreign country under the Internal Revenue Code, even though its residents are U.S. citizens by birth. Congress is contemplating addressing the repatriation issue next year, and much uncertainty remains over possible policy changes. The entire territory of Puerto Rico would meet the criteria of Investment Zones. Under the proposal, areas having smaller populations than 25,000 can be combined with contiguous areas to meet the criterion.
“Although a program of Investment Zones would not focus on Puerto Rico,” the authors say, reflecting the recommendation to establish these zones in 38 states as well as in Puerto Rico, “it would be an especially effective means to meet a major goal established in PROMESA—that is, the goal of promoting economic growth in Puerto Rico.”
Investment Zones are designed to encourage companies to establish their businesses in areas that need new businesses. Whereas previous tax legislation has encouraged U.S. companies to shelter profits in Puerto Rico, however,the Investment Zone concept is incentivizes corporations to establish businesses in the Zones, conducting research & development as well as manufacturing and other types of work. Earnings from intangible assets would be eligible for the tax advantage, encouraging research and development (R&D) to stay in the U.S.
Losses in revenue for the federal government would be offset by reduced costs in social services and unemployment compensation, as well as by the increasing income and expenditures in the Investment Zones. Puerto Rico would have growth in the local economy. Additionally, the alleviation of poverty and unemployment would have such positive effects on the residents of the Zones that the authors consider the federal government’s investment worthwhile.
The authors point out that local companies already established in the Investment Zones would gain the same benefits as those that move in and estimate that the loss of tax revenues in an Investment Zone will be balanced by the increase in jobs and revenues.
In 2005, now-Speaker Paul D. Ryan (R-Wisc.) and Puerto Rican delegate (and future governor) Luis Fortuno (R-P.R.) introduced H.R. 2182, the “National Enterprise Zone Act of 2005,” a proposal that is similar to the Investment Zone plan. The Ryan/Fortuno proposal would include all of Puerto Rico in an enterprise zone in which there would be:
- a 17% flat tax on personal income, down from 39.6% nationally,
- a 17% flat tax on business income derived from bona fide enterprise zone businesses, down from 35% nationally for corporations and 39.6% for partnerships, S-corporations, and other flow through firms,
- a 0% capital gains tax on assets held and sold in the enterprise zone, down from 20% nationally (presumably, a newer iteration of the bill would also have no enterprise zone version of the 3.8 percent Obamacare surtax on earned and unearned income),
- a deduction for all new savings, creating an inflow-outflow neutral savings tax system, and
- a 17% death tax in the enterprise zone, down from 40% nationally.