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Section 936 repealed; minimum wage raised
The San Juan Star / August 21, 1996

By Larry Luxner

WASHINGTON -- President Clinton, surrounded by adoring children and smiling lawmakers of both parties, Tuesday signed legislation that raises the federal minimum wage over the next year while killing off Section 936 tax benefits over the next 10.

"There," said the President, as he signed the Small Business Job Protection Act of 1996 under bright blue Washington skies. "It's the law."

But he didn't attach his signature to H.R. 3448 without reservations.

In an official press statement released by the White House, Clinton asked Congress to "act to ensure that the incentive for economic activity remains in effect" to prevent companies from fleeing Puerto Rico once the tax credit is history.

"This legislation ignores the real needs of our citizens in Puerto Rico, ending the incentive for new investment now and phasing out the incentives for existing investments," said the statement, reflecting what Clinton called a serious concern with the legislation.

"I urged the Congress to reform the credit and use the resulting revenue for Puerto Rico's social and job-training needs," he said. "My proposal would have, over time, prevented companies from obtaining tax benefits by merely attributing income to the islands, but it would have continued to give companies a tax credit for wages and local taxes paid and capital investments made there, as well as for earnings reinvested in Puerto Rico and qualified Caribbean Basin Initiative countries."

Under the new law, tax breaks for all existing factories operating under 936 will disappear within a decade, with no federal incentives for new investments. Section 936 is effectively eliminated retroactively to Dec. 31, 1995, for any business that didn't already claim it. For other companies, the bill would continue a phase-out process begun in 1993, providing a new cap on the credit beginning in 2002, and abolish it altogether for active business income by Jan. 1, 2006. For passive income, the bill eliminates the credit retroactive to Jul. 1, 1996.

The president signed the bill on the South Lawn of the White House, at a table used by Frances Perkins, who served under President Franklin D. Roosevelt as the nation's first woman labor secretary and Cabinet member. Both Democrats and Republicans were in attendance, as were labor leaders, adoption-rights advocates and an array of representatives from other special-interest groups.

From a Washington perspective, the final, fatal blow to Section 936 -- the successor to Operation Bootstrap and other programs that have attracted hundreds of thousands of manufacturing jobs to Puerto Rico since World War II -- was merely a footnote to the much larger and politically more significant issue of raising the federal minimum wage from $4.25 to $5.15 an hour by Sept. 1, 1997.

In fact, Resident Commissioner Carlos Romero Barcelo, who also attended the ceremony before flying back to San Juan, didn't even mention 936 in a one-page statement praising Clinton.

"With the signing of this law, we do justice to thousands of Puerto Rican workers, above all women, who will see their salaries, benefits and working conditions improve substantially," said the New Progressive Party commissioner. The statement goes on to say that Romero Barcelo "was one of the most active proponents in Congress in favor of passage of this measure."

And that's exactly the point, says PDP politician Antonio J. Colorado, who challenged Romero Barcelo for the resident commissioner's job in 1992 and lost by a hair.

"This is going to be a slow death for Puerto Rico," Colorado told The STAR. "This wouldn't have happened if the governor and the resident commissioner would have done what was required. If we cannot bring investments from abroad, we'll have to make sure we grant incentives to local industry to set up maquila plants with other countries."

As Fomento administrator and later secretary of state during the Hernandez Colon years, Colorado spent much of his time rescuing Section 936 from lawmakers who wanted to axe it. The politician, who was so closely linked with the 936 program that even his license plate once read "AJC-936," warns that unemployment will continue to climb as manufacturers look to more lucrative sites elsewhere in Latin America and the Far East.

"It's the end, and Puerto Rico will suffer," said Colorado, who last month took over as executive director of Caribbean/Latin American Action, a Washington lobby. "Once you get something out of the books, it's very hard to put it back."

The economic activity credit is moved to Section 30a of the Internal Revenue Code, now a matter of intense political debate in Puerto Rico. The law applies to other insular areas such as the U.S. Virgin Islands and Guam, though one Washington source said that "the economic activity credit isn't capped between years seven and 10 in American Samoa."

"There has been no new promotion of any importance in the last three years," said Colorado. "When you talk about 40% -- and most of these companies were on the profit-split basis -- you're really talking about an exemption of less than 20%, because half of the profit would pay full taxes in the states, and the other half would be exempt 40%. I don't see how anybody in his right mind can say how 20% exemption would induce a company to go to Puerto Rico, where electricity and water costs twice as much as on the mainland."

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