Max Massaro, Emily Bornstein, Lucy Brainard

November 10, 2017

Secretary Wilbur Ross
The United States Department of Commerce
1401 Constitution Avenue NW
Washington, DC 20230

A New San Juan

Revitalizing Puerto Rico Through New Tax Incentives

Introduction

The United States today has the fastest increasing trend of inequality in the world, despite

priding itself on economic development and growth. While parts of the country, such as Silicon

Valley and the Greater San Francisco area, explode with booms in technology, traditional

industrial cities like Baltimore and Detroit fall by the wayside. The same is true for the territory

of Puerto Rico, and specifically its capital city San Juan, where the economy is imploding.

Despite the current state of the Puerto Rican economy, it was at one time highly productive and

supported a large and stable middle-class. This stability was the result of tax incentives from the

US federal government that have since been phased out, consequently forcing the economy into

deep recession and debt. To remediate the current economic situation, these tax incentives of the

past should be reintroduced as a way to lure businesses to the island, with the eventual goal of

revitalizing the economy and providing opportunities for large-scale redevelopment, similar to

Baltimores Port Covington. Through these efforts, Puerto Rico and its economy would once

again become an asset to the United States, as opposed to a burden with the current threat of

bankruptcy.

As the Trump Administration pushes to bring business and jobs back to America, Puerto

Rico provides a perfect environment for a legislative push towards lessening corporate taxes.
This proposal supports the reintroduction of past tax incentives directed towards the islands

economy, as well as the potential positive outcomes of the proposed revitalization project. The

proposal will use Port Covington, the urban redevelopment project being proposed in South

Baltimore, as a blueprint to outline the parameters and goals of the project in the hopes of

persuading professionals and political officials to carry out the identified solution through

collaborative work.

Background Information
Figure 1
I. Puerto Ricos Economy

In order to grasp the extensive

benefits the US government could have

through the revitalization of Puerto Rico,

it is imperative to understand the history

of the islands economy. Currently,

Puerto Rico, and San Juan specifically,

are in dire need of economic
stimulus. The population is hindered by a
Unemployment Rate [Chart]. (2017, September 30). In
Quartz Media. Retrieved November 1, 2017, from
https://qz.com/1091341/puerto-ricos-eye-popping-eco nomic-
situation-in-charts/

10.4% unemployment rate as of July 2017, over double that of the US mainlands current rate, as

shown in Figure 1, and around $70 billion in debt - more than any other American state or

territory (San Juan Area Economic Summary, 2017). These are stark figures, even before two

major hurricanes decimated the island in the Fall of 2017. However, the economy hasnt always

been structured in this way.

 While the current economy is now centered around the service and manufacturing

industries, the island was primarily supported by agriculture before World War II. After the war,

the US tried to incentivize business opportunities in Puerto Rico using existing low-wages, the

introduction of tax benefits such as those that exempted mainland companies from federal taxes

on income earned in Puerto Rico, and governmental support of the costs of start-ups

(Wagenheim & Mathews, n.d.). All of these initiatives brought an influx of US mainland

manufacturing businesses to the island, mostly focused around textiles, processed food, shoes,

clothing, ceramics, tobacco, wood products, and

Figure 2
petrochemicals. Through the benefits of these

industries and jobs growing on the island, a

large portion of the Puerto Rican population

was living a modest, middle-class lifestyle,

despite generally having a lower median

household income level than the mainland US Cost of Living: Median Household Income, 2015 [Chart].
(2017, September 30). In Quartz Media. Retrieved
November 1, 2017, from https://qz.com/1091341/puerto-
states, as displayed in Figure 2. ricos-eye-popping-economic-situation-in-charts/

Although these manufacturing companies eliminated much of the islands poverty by the

1990s, the US government began to retreat on some of these initiatives, specifically the tax

benefits given to businesses operating in Puerto Rico. This caused a mass exodus of large

businesses from the island and loss of tax revenue to Puerto Rico from those companies. In turn,

the Puerto Rican government started borrowing large sums of money via bonds from Wall Street

firms to maintain the lifestyle to which many of its people were accustomed and in order to keep

the countrys programs running. This excessive borrowing lead to a recession beginning in 2006

that continues to exist today and an accumulated debt amount of around $70 billion, displayed in
Figure 3 to illustrate Puerto Ricos debt levels from 2008 to 2016 (Wagenheim & Mathews,

n.d.).

Puerto Rico is primed for a combined effort between the service, government, and

tourism industries and employers to revitalize the islands economy, specifically centered in the

capital of San Juan. With the capital of San Figure 3

Juan having a slightly lower unemployment

rate compared to the whole island at 8.7%,

the city is the central economic driver for the

island and has the opportunity to be pivotal in

the revitalization of Puerto Ricos economy

(San Juan Area Economic Summary, 2017).
Currently, the service industry and the
Debt: Commonwealth of Puerto Rico Public Sector Debt
2008-2016[Chart]. (2017, September 30). In Quartz
Media. Retrieved November 1, 2017, from
https://qz.com/1091341/puerto-ricos-eye-popping-
economic-situation-in-charts/

government are the main employers for the island of 2.75 million people, employing 328,200

and 222,2000 people respectively as of June 2017 (Puerto Rico Economic Indicators, 2017). The

service industry, including those working in trade, finance, and tourism, produces half of Puerto

Ricos GDP, with government services providing one-tenth of the GDP and employing a fifth of

the total workforce (Wagenheim & Mathews, n.d.). In addition, tourism is a major contributor to

the overall GDP, luring almost 2 million visitors from around the world to the islands hotels

each year, with additional cruise passengers (Wagenheim & Mathews, n.d.). A combined effort

between these three industries could be essential in the revitalization of the island.

II. Puerto Ricos Government and Infrastructure

As a freely associated state inhabited by US citizens, Puerto Rico does not enjoy many of

the same benefits as official states. Most importantly, Puerto Ricans do not pay federal taxes
since they do not have representation in Washington, resulting in less federal government

funding from the US government directly while being deeply affected by policies that werent

intended for them (Wagenheim & Mathews, n.d.). In the past, the Puerto Rican government has

promoted private enterprises and emphasized the importance of an upgraded transportation

infrastructure system to promote economic welfare. The government also has a history of

funding small-scale factories and local entrepreneurs in an effort to privatize state-run

businesses.

Since the island is not permitted to file for bankruptcy, the economy needs to be

addressed immediately. It has become abundantly clear in the past decade that Puerto Rico

cannot repay its debts and the situation has only been made worse after two major hurricanes

nearly destroyed the island this fall. Even prior to the hurricanes, the territorys debt was not

being adequately addressed. Looking at the history of the island and the times when the economy

was performing well, there is hope for the economic difficulties to be overcome. Businesses can

be lured to the island once its infrastructure is rebuilt from the hurricane damage, revitalizing the

tourism industry as well as the manufacturing and service industries.

III. Overview of Baltimore and Port Covington

The redevelopment of Port Covington is a project that attempts to turn under-utilized,

industrial land in South Baltimore into a hub of business and commerce, which in turn aims to

create jobs and initiate economic growth in the city as a whole. The proposal can be used as a

blueprint for the type of revitalization that is needed in Puerto Rico, and specifically the city of
San Juan. As a central and coastal city home to large commercial ports, stimulation and stability

in San Juan is essential to the overall resurgence of the Puerto Rican economy.

The Port Covington project in Baltimore is being deployed by Kevin Plank, the CEO of

Under Armour and owner of private real estate firm, Sagamore Development (Marton, et.

al). Using nearly $6 billion of private equity and government funding, the initiative hopes to

create thousands of jobs in Baltimore and revitalize an underused part of the city, ultimately

helping to stimulate the citys economy as a whole. To fund this effort, Plank requested support

from local, state and federal governments to create the necessary infrastructure for the multi-

billion dollar project. While the City of Baltimore looks to generate nearly $2 billion in

revenues, some critics argue that this type of redevelopment project could take resources away

from other critical areas of need (Marton, et. al). Despite these concerns, there is still very much

to be learned from this effort, it's probable success, and the implications it could have in other

areas of the country, specifically in San Juan, Puerto Rico.

Proposed Course of Action for the United States

I. Implementation of a New Tax Code in Puerto Rico

Prior to any other action being taken, it is crucial that the United States Government and

the Department of Commerce reinstate legislation similar to Section 936 of the US tax code.

Removed by President Clinton in 1996, this provided corporations within the US tax exemption

from any income originating in US Territories. Experts argue that Section 936 created a bubble

and left the island vulnerable to a crash if the provisions were to ever be replaced (Tax

Foundation). At the time, the removal was done as an effort to bring tax dollars back to the

United States. It was a common belief that many companies were using the legislation as a
loophole to avoid taxes, often providing little benefit to the people of Puerto Rico. An up-to-date

tax code can be written to ensure that both Puerto Rico and the United States reap the benefits of

an increase in investment and the rebuilding of Puerto Ricos economy. This can also serve as an

additional tool for the Trump Administration, as they push a tax repatriation plan that will

provide corporations a tax-free opportunity to bring their business back to the United States.

II. Initiating a Port Covington Model Based on Amazon

As laws are changed and capital pours into Puerto Rico, it will be necessary to ensure that

the capital is properly managed and facilitated to ensure the best results. In doing this, Port

Covington provides both proof of concept and a loose framework for the revitalization of San

Juan. Under Armour plays a crucial role in the Port Covington project, not only providing a

financial backbone but also a face of stability to the project.

As businesses flock to Puerto Rico, the opportunity will arise for a company to spearhead

the citys revitalization. No company is better suited for doing this than Amazon, who is

coincidentally in the midst of a search to build a new headquarters. Amazon plans to invest over

$5 billion in construction, creating a new headquarters that will provide a base for over 50,000

employees (Amazon, 2017). This is an incredible opportunity for the island of Puerto Rico, as

well an incentive for the US Government and Department of Commerce to move quickly with

the implementation of a new tax code. Amazon has the scope, as well as the intangible goodwill

and charisma to be the driving force in Puerto Ricos economy. Proof of their impact is evident

in Seattle, as over $38 billion poured into the citys economy between 2010 and 2016 (Amazon,

2017). These are only the direct benefits provided by Amazon. Indirectly, the companys

presence creates thousands of other jobs and economic opportunities, demonstrated in Figure 4.
 Figure 4

Amazon announces 238 proposals for HQ2 from across North America. (n.d.). Retrieved November 07, 2017, from
https://www.amazon.com/b?ie=UTF8&nod e=17044620011

Ramifications and Closing

I. Benefits Experienced by the United States

With the proper regulations in place, the United States can help realign the Puerto Rican

economy, molding the island into a strong economic asset. This growth will prevent an American

territory from continuing to default on its debts and will save approximately 3 million United

States citizens from impending poverty. From a financial perspective, U.S intervention in Puerto

Rico protects their own interests, as it will help the territory from defaulting on their immense

debt. The island yearns for economic growth and is currently one of the best developing market

investments in the world. The United States is in a position to do much more than simply

neutralize a liability. They will be creating an asset out of Puerto Rico.

II. Conclusion

Puerto Rico once boasted a proven economy, stable government and skilled workforce,

but has since become unrecognizable in comparison to its former glory. It is crucial for the
United States government to intervene quickly and effectively, in order to remediate the current

Puerto Rican economy. By re-encouraging investment, the U.S Commerce Department can

ensure the revitalization of Puerto Rico and mold it into a strong asset yet again.

Through this revitalization effort, local Puerto Rican businesses will be more inclined to

stay on the island, in addition to large US corporations moving operations to the US territory. A

company like Amazon could play a role in San Juan, Puerto Rico similar to the one Under

Armour played in Port Covington, Baltimore. Amazon is looking to relocate its headquarters,

but also struggles with image issues of its own. Business development in Puerto Rico could thus

be mutually beneficial to a company like Amazon looking to improve its reputation as well as to

the population and economy of Puerto Rico, the direct beneficiaries of the business development

efforts. With the help of the US Government and the Department of Commerce, large and local

companies on the island could work together to change the situation in Puerto Rico, resulting in a

substantially improved quality of life for its inhabitants and a transformed economy that boasts

the same success and sustainability that it once enjoyed.

 Works Cited

Amazon announces 238 proposals for HQ2 from across North America. (n.d.). Retrieved
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economic-situation-in-charts/

Debt: Commonwealth of Puerto Rico Public Sector Debt 2008-2016[Chart]. (2017, September
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eye-popping-economic-situation-in-charts/

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