[Congressional Record (Bound Edition), Volume 152 (2006), Part 12]
[Extensions of Remarks]
[Pages 16260-16261]
[From the U.S. Government Publishing Office, www.gpo.gov]




               DISTURBING ECONOMIC TRENDS IN PUERTO RICO

                                 ______
                                 

                          HON. EDOLPHUS TOWNS

                              of new york

                    in the house of representatives

                        Thursday, July 27, 2006

  Mr. TOWNS. Mr. Speaker, I rise today to call attention to the 
disturbing economic trends in Puerto Rico detailed in recently released 
reports by the General Accountability Office (GAO), and the Joint 
Committee on Taxation (JCT). Taken together, these finely written and 
well-documented studies paint a bleak picture of an island that--
instead of being a model of economic development--has fallen further 
behind the 50 states.
  Nothing could be clearer from these reports than that we have failed 
the U.S. citizens of Puerto Rico miserably for over 50 years. Not 
because of bad intentions, or because of some sort of benign neglect, 
but because of failed policies that have provided few, if any, of their 
promised benefits. These studies vividly demonstrate the need for a 
different approach that will more directly benefit the residents of 
Puerto Rico, including making them eligible for the refundable portion 
of the child tax credit, which I proposed in legislation introduced 
earlier this Congress (H.R. 4451).
  These studies paint a fairly stark picture of the ways in which 
Federal policies have markedly neglected working Americans in Puerto 
Rico, by denying them basic support accorded to families in the rest of 
the United States who are struggling to make ends meet.
  The focus of the GAO report is the economy of Puerto Rico during the 
phase-out of the Possessions Tax Credit (``Sec. 936''), the cornerstone 
of the U.S. tax policy in Puerto Rico until Congress repealed it in 
1996. GAO (and an independent study by the Brookings Institution), 
determined that the repeal of Sec. 936 to a significant degree did not 
cause the companies that had previously taken advantage of the program 
to flee the island; instead concluding that ``a substantial amount of 
possession corporation activity has been continued by other types of 
businesses,'' primarily by the companies conversion to controlled 
foreign corporations, which do not have to pay taxes on their PR source 
income. As such, the GAO provides the most comprehensive and objective 
assessment that while corporate structures have changed, underlying 
economic activity has not markedly changed during the Sec. 936 phase-
out.

[[Page 16261]]

  The bottom line conclusion is that the tax policies that have been in 
place have failed to put Puerto Rico on a path toward equality with the 
mainland. Growth has been insufficient to reduce the gap in per capita 
income (one third that of the mainland), living standards (four times 
the number of people live below the poverty level) and unemployment 
(twice as high as the mainland)--nor improve the abysmally low labor 
force participation rate. Clearly the data supports the conclusion that 
the past approach has had little--if any--direct and positive effect on 
the welfare of individuals living and working on the island.
  The JCT study points out that tax incentives such as Sec. 936 cannot 
be permanent additions to the Internal Revenue Code, and that there are 
market distortions associated with these incentives. While not opining 
on a preferred approach, JCT states that other options might gain a 
higher rate of return. JCT surveys some of these options, putting them 
in the context of the various political status alternatives. 
Unfortunately, JCT articulates the costs, but dodges the really big 
question of measuring the possible economic benefits of the different 
status options (independence, statehood, or continued commonwealth 
status).
  Most importantly, the JCT study points out how much misguided federal 
tax policies have neglected the people of Puerto Rico--and point to a 
direction that would clearly have a measurable, positive, impact on the 
very people who need it most: the working poor of Puerto Rico. This is 
through application of work incentives available to working families in 
the 50 states: the per-child tax credit (CTC) and Earned Income Credit 
(EIC), both of which are available to working families on the mainland 
to offset payroll taxes (which are also paid by residents of Puerto 
Rico).
  By paying payroll taxes for Social Security and Medicare without 
receiving the earned income tax credit, working families in Puerto Rico 
face a heavily regressive tax burden. To illustrate, a Puerto Rican on 
the island who files as a head of household with two children and 
$20,000 of income has a total Federal tax liability of $792. Yet that 
filer's brother in New York with the same income and family 
circumstances would receive a tax refund of $3,708. According to the 
JCT study, simply making Puerto Ricans eligible for the EITC would 
provide an annual fiscal stimulus of $540 million directly to the local 
economy, which some estimates show would reduce tax burdens on over 90 
percent of taxpayers (about 950,000 taxpayer returns).
  My legislation, making families eligible for the child tax credit 
(now applicable only to families of 3 or more), would further reduce 
taxes for another 32 percent of all tax filers or about 560,000 
taxpayers (and add another $180 million, annually, to the local 
economy). Independent analysis shows that these targeted tax credits 
would be up to 40 percent more effective in stimulating the economy 
than failed subsidies we have tried, which amount to billions of 
dollars every year (and continue to this day).
  In closing, let me say, I applaud GAO and JCT for drawing our 
attention to the problem of Puerto Rico's economy. The ball is now in 
our court. It is the responsibility of this Congress to implement new 
policies. I am not sure what all these policies should be, but do know 
that what we have tried did not work, and that we should consider a 
range of options--including my own legislation--with an eye toward what 
would best serve the nearly four million U.S. citizens in Puerto Rico, 
who need and deserve our help. I urge my colleagues to move forward 
expeditiously in this effort.

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