Few places have been as hard hit by the recession as Puerto Rico. Over the past two years, the commonwealth has seen its unemployment climb from an already high 13 percent to a gut-wrenching 16 percent.
So why did Puerto Rico Gov. Luis Fortuno just sign a law that will almost certainly make this picture even worse by dismantling longstanding Puerto Rican tax law and alienating its most prosperous foreign corporations.
Approved by Puerto Rico's House and Senate on Oct. 23, and signed into law by the governor the following Monday, Law 154 levies an excise tax on all offshore corporations whose annual revenue exceeds $75 million.
Beginning Jan. 1, the 40 to 50 multinational firms affected by the new law will see all sales of their finished goods taxed an additional 4 percent. The tax will then gradually diminish each year, until it's completely eliminated on Dec. 31, 2016.
These figures may sound small, but to the corporations facing this new tax in less than two months -- most of which are biotech, pharmaceutical and medical device developers and manufacturers -- that small percentage translates into huge losses. And not just for their bottom lines.
The Biotechnology Industry Organization released a statement in response to Fortuno's legislation, pointing out that the tax hike "will profoundly affect the decision-making of foreign corporations as they consider whether to do business in Puerto Rico."
Considering that the biopharmaceutical industry employs more than 100,000 Puerto Ricans and its revenue makes up 26 percent of the commonwealth's GDP, Fortuno's unusually accelerated implementation of Law 154 has people confused.
Equally if not more unsettling than the law itself is that Fortuno moved forward without any formal review, committee hearings or dialogue with industry representatives.
Understandably, people want to know why.
Like the rest of the world, Puerto Rico has experienced severe economic hardship the past several years. When Fortuno was inaugurated in January 2009, he inherited an almost $3.5 billion deficit. By slashing 17,000 public-sector jobs, freezing salaries for two fiscal years and implementing other aggressive budget cuts -- including a cut to his own salary -- Fortuno managed to not only balance the commonwealth's budget for the first time in recent memory but also cut its deficit by 20 percent.
Supporters of Law 154 promise that the revenue it generates -- an estimated $6 billion -- will be used to underwrite the governor's other tax reforms. A separate bill will cut taxes for local businesses by about 11 percent.
But Fortuno's strategy just doesn't make sense. If he admits that lowering taxes on some businesses will create jobs, doesn't it follow that raising taxes on other businesses will eliminate jobs? This is especially true because multinational corporations can very easily move.
It's not just foreign biopharmaceutical executives who oppose Fortuno's Law 154. Thomas Donohue, president of the U.S. Chamber of Commerce, as well as local Puerto Rican business groups such as the Puerto Rico Manufacturers Association and the Puerto Rico Chamber of Commerce have all expressed dissent for the new tax.
For a governor who had the good sense to cut his own salary during an economic downturn, it's troubling that he would turn around and bite one of the few reliable hands that has fed Puerto Rico so well for so many years.
No mas.
