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This article was originally published in The Gray Sheet

Executive Summary

SECTION 936 TAX CREDITS WOULD BE REPLACED BY A WAGE-BASED EMPLOYMENT CREDIT under legislation introduced by Sen. David Pryor (D-Ark.) on Feb. 16. The "Possessions Wage Credit Act" (S 356) proposes to phase out the current 936 tax credit over five years while it simultaneously phases in the 40% wage credit, beginning, the legislation states, with "taxable years ending on or after Feb. 16, 1993." Under the proposed transition schedule, companies with operations in Puerto Rico would be permitted in 1993 and 1994 to claim the lesser of a 100% tax credit under Section 936 or a credit for 100% of qualified wages. Companies would be allowed to claim a 75% credit under Sec. 936 or an 85% wage credit in 1995, a 50% 936 credit or a 70% wage credit in 1996, a 25% 936 credit or a 55% wage credit in 1997 and only a 40% wage credit in 1998 and beyond. The wage credit would apply to the first $20,000 of qualified possessions wages paid to Puerto Rican or Virgin Island employees, according to a one-page "description" of the legislation released by Pryor. "This is the same credit passed by the Senate Finance Committee for enterprise zones located within the U.S.," the document points out. Pryor expects the legislation to increase tax revenues by "about $3 bil. a year." His introductory material accompanying S 356 openly states his interest in taking the money back from Sec. 936 for general tax revenue purposes: to fund a 100% deduction for health care insurance premiums for self-employed individuals and to reduce the deficit. The Clinton Administration similarly is looking to Sec. 936 as one of the sources of its tax revenues to fund the economic stimulus package. The Pryor proposal allows the Clinton Administration to come in with a major cut in Sec. 936 benefits and portray their proposal as moderate by comparison with the Pryor version. The Sec. 936 proponents are being given a version of good cop, bad cop treatment, except the two specific options they face look more like a bad cop, worse cop routine. Treasury Secretary Lloyd Bentsen was sympathetic to Sec. 936 benefits during the debate over Pryor's pharmaceutical price control proposal last March. With Bentsen gone from the important Senate Finance Committee chairmanship, the political dynamics of the situation may further change this year. Proponents of Sec. 936 may be fortunate, however, that Sen. Patrick Moynihan (D-NY) has taken over the Finance chairmanship. The New York delegation has generally looked favorably on the Puerto Rican program in the past. The Clinton proposal is contained in the fiscal 1994 budget proposal, Vision of Change for America. It would cap "the tax incentives available to American corporations in Puerto Rico at 65% of compensation paid to workers there." The administration estimates that a 65% cap on the tax credit would increase government revenues each year during the four-year period 1994-1997 by amounts escalating from $200 mil. to $2.1 bil. for cumulative savings of $4.8 bil. The budget proposal notes that the cap would be incorporated "in a package in which enterprise zones [would be] established throughout the U.S. for economically distressed areas." Although the government "must reassess the extremely costly tax incentives provided in Puerto Rico," the document states, it seeks to "strike a balance" in recognition of "our unique relationship with Puerto Rico and its unusual circumstances." The summary of Pryor's bill maintains that the phase-out is needed because Sec. 936 "has become an abusive tax shelter," and "the chief abusers are the pharmaceutical companies." Drug manufacturers "receive over half the credit" available under the law "but provide only 18% of the jobs" created by all Sec. 936 companies, the document asserts. The Puerto Rico USA Foundation calls S 356 "unfortunate and ill-advised." PR/USA says substituting a wage credit for Sec. 936 would "result in the loss of tens of thousands of manufacturing jobs on the island." The foundation maintains that "even with the most generous wage credit, Puerto Rico simply cannot compete with Mexico or other low-wage countries of the Caribbean, Central America and the Far East for jobs." Puerto Rico/USA Foundation Executive Director Carl Nordberg in a Feb. 18 statement acknowledged that the Clinton proposal is "somewhat better than" S 356; however, he said, it would "reduce the Section 936 incentive by 50%." Nordberg contended that the 65% cap would "virtually eliminate Sec. 936 as an incentive for the creation of jobs and economic activity" on the island. Even without change to Sec. 936, he continued, "Puerto Rico's attractiveness as a manufacturing location has lost much of its lustre in recent years" compared to other low-wage locations, "and [the North American Free Trade Agreement] can only be expected to exacerbate the situation."

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