The U.S.’s neglect of Puerto Rico has never been benign


Edwin Meléndez—professor of Urban Affairs and Planning at Hunter College and director of the Center for Puerto Rican Studies—recently published an article outlining a history of “second class” treatment of Puerto Rico by the United States, echoing a previous piece from the Wall Street Journal. Here is roughly half of the article (it was difficult to choose just a few paragraphs). I highly recommend reading the full article at Global Americans.

[. . .] A history of “second class” treatment

The Jones-Shafroth Act of 1917 extended statutory citizenship to residents of the U.S. territory of Puerto Rico. It also created a local government. But it maintained U.S. control over fiscal and economic matters and granted triple tax exempt bonds. That is, it made Puerto Rico bonds earnings exempt from federal and local taxes to make them attractive to investors in municipal capital markets. Under this act, the U.S retained authority over currency, defense, immigration, and other conventional domains of federal jurisdiction—including disaster relief!

The (maritime) Jones Act is far from the only policy that has contributed to the second-class treatment of Puerto Rico. The Revenue Act of 1921 exempted from U.S. taxation all corporations that received at least 80% of their income from U.S. possessions if at least 50% came from active business. Income was taxable on repatriation but liquidated distributions were tax-free. These federal tax incentives were intended to foster industrial development in Puerto Rico through the expansion of operations of American corporations. And federal tax exemption did affect economic development, fostering the post-World War II expansion of labor-intensive manufacturing.

[. . .] In 1970s, the island economy relied on processing oil imports from Arab countries and then shipping them to the United States.  When President Nixon declared an embargo of oil from Arab countries in 1973, the oil refinery industry collapsed, and with it, Puerto Rico’s economy. In 1976, Section 936 of the Internal Revenue Code was created to support the island’s economic recovery by exempting American companies from federal taxes on income earned in Puerto Rico.

Section 936 worked. By the early 1990s, pharmaceutical and high-tech manufacturing had become the indisputable economic anchors of the island’s economy. But the companies favored by Section 936 were reaping billions of dollars in profits exempted from federal taxes. A pro-statehood administration in Puerto Rico saw the law as an impediment to a change in status. President Bill Clinton, who had tried for years to close a perceived tax loophole, finally found a willing local ally to eliminate Section 936.

As part of the Small Business Job Protection Act of 1996, Congress approved a 10-year phase-out of Sec. 936 tax credit. Presumably, closing the loophole would have provided funding for business development in the United States. But in reality, multinational corporations repatriate only a small fraction of their profits, meaning that while Puerto Rico lost, the U.S. didn’t gain investment capital either.

As a result, Puerto Rico lost new investments in the pharma and high-tech industries as companies withdrew deposits from local banks, and Puerto Rico’s economy entered into a steady decline. The program ended completely in December 2005. Puerto Rico’s most recent economic crisis began shortly after. [. . .]

Puerto Rico was in the midst of a prolonged recession and a public debt crisis prior to Hurricane Maria. Borrowing through triple-tax-exempted municipal bonds in capital markets became a pillar of the post-war economic development. Public borrowing made feasible the development of public corporations that provided the country with electricity, water, roads, communications, public buildings, and all types of economic infrastructure. But when the recession hit and many of these public corporations could not service debt payments and maintain operations, Puerto Rico was not able—according to U.S. law—to declare bankruptcy to protect public corporations from creditors.

The U.S. neglect of its territory connects to the debt crisis. In 1984, Congress adopted Section 903(1) of the Bankruptcy Code and introduced a new definition of “State” that excluded Puerto Rico’s municipalities from legal recourse to municipal bankruptcy. To this day, no one has provided a consistent and credible explanation as to why Puerto Rico’s exclusion was enacted as part of the law. Yet, exclusion of Puerto Rico from declaring bankruptcy led directly to the enactment of PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act of 2016.

The Affordable Care Act (ACA) of 2010 also had clear adverse implications for Puerto Rico. As part of Congressional negotiations, instead of extending ACA to Puerto Rico, Puerto Rico receives a block grant for the first six years and thereafter depends on ongoing appropriations to sustain Medicaid. Puerto Ricans pay Medicare taxes and those federal benefits are not in question, but the Medicaid formula for Puerto Rico caps reimbursement at 50 percent. The ACA funds expired this year, and Congress approved a stopgap measure of $300 million supplement instead of the estimated $900 million needed for the year. Until recently, the Commonwealth government borrowed to cover the cost for Medicaid and other programmatic services. With mounting debt, borrowing is no longer an option.

With Puerto Rico crippled by public debt exceeding seventy billion and pension obligations estimated close to fifty billion, Congress had to act to provide a legal mechanism to restructure the island’s debt. PROMESA established the Financial Oversight and Management Board (FOMB) to oversee Puerto Rico’s finances and budgets, and provides for a court-supervised debt restructuring. PROMESA also provided for a stay in debt service of almost a year to allow the oversight board to examine options and possibly negotiate with creditors. For many, PROMESA offered a way out of the debt crisis and the promise of economic prosperity. But PROMESA generated a strong populist opposition from the very beginning. Over time, massive demonstrations against the policies of the oversight board and the populist approach of Governor Rosselló led to less favorable public opinion about PROMESA. The FOMB is generally perceived in Puerto Rico as a colonial “junta.”

Puerto Rico’s future

It is too early to know the long-term impact of Hurricane Maria’s devastation of the country, the extent of the ongoing loss of life and property, and the depth of frustration with FEMA and local authorities’ responses to the storm. Yet it is clear that when troops are not sent right away to help American citizens in need, or when corporate interests are put ahead of emergency relief efforts such as the waiver of the Jones Act, Puerto Ricans on the island and the diaspora feel a sense of neglect and insensitivity—a sense of grievance backed by the actions of the federal government for the last century. The Wall Street Journal editorial “Second-Class Puerto Rico” resonates with citizens who have lived a history of mixed policies—Jones Act, Section 936, Medicaid, PROMESA—that at times are beneficial and at times hurt the island and its dependent economy.  Over time these policies have changed with the concerns of the U.S. government, which often ignore the direct or unintended consequences of these policies on Puerto Rico and its U.S. citizens.

[. . .] After a century of Puerto Rican U.S. citizenship, it is clear that the main goal of the Jones-Shafroth Act of augmenting a “bond” with Puerto Rico (and Puerto Ricans) by granting citizenship has been achieved. But the question is, “Is American citizenship worth the same for Puerto Ricans as it is for other Americans?” For too long, Congress has looked the other way while its inconsistent policies continue to harm Puerto Rico. It is high time for members of Congress to pay attention and act before the humanitarian crisis facing 3.4 million American citizens reaches a point of no return.

For full article, see

[Photo above from Business Insider,]


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