JESSICA DESVARIEUX: From a bird's-eye view, you would think that you were looking at the
cityscape of Miami. But in reality, this is Puerto Rico. It has all the dressings of being
in the United States. A powerball lottery system. The highest concentration of Wal-Mart
stores per square mile. And its residents are all American citizens.
But Puerto Rico is not a state. It's known as an unincorporated United States territory,
meaning it is not on a guaranteed path to statehood. And although Puerto Ricans serve
in the U.S. military, they do not have the right to vote for their commander in chief
in presidential elections. Now with a population of 3.6 million people, it has more than $73
billion in debt and its governor has declared it unpayable. Currently, the island is paying
close to $3.7 billion a year just to service the debt.
But before we can ask what to do about this crisis we wanted to understand, how did Puerto
Rico rack up so much debt in the first place?
The Real News spoke with Puerto Rico's sole member of Congress, Pedro Pierluisi. As resident
commissioner, Pierluisi does not get to vote, but he's still fighting what he calls Puerto
Rico's second-class status when it comes to receiving federal funds.
PEDRO PIERLUISI: We have a health insurance card system for the medically indigent. But
Puerto Rico's pretty much covering more than half of its cost under the Medicaid program.
If Puerto Rico were a state or were treated like a state in that program, the federal
government would be assuming about 80 percent of the cost. You're talking about, easy, $1.5
[billion] dollars that Puerto Rico is now spending to deal with people who fall below
poverty level, in helping them address their health needs, that Puerto Rico wouldn't have
to spend.
DESVARIEUX: But beyond what the government is spending, what about the taxes that it's
collecting? The major shift in Puerto Rico's tax code began in the 1940s when American
corporations operating in Puerto Rico were given special status, allowing them to be
exempt of both Puerto Rican taxes and federal taxes. Most recently, beginning in 1976, Section
936 Tax Code granted U.S. corporations a tax exemption on both Puerto Rican and federal
taxes. It allowed them to pay nothing on profits that reached in the billions.
The idea was that it would attract business to the island, and it worked. Big pharmaceutical
manufacturers like Pfizer and Merck came in droves.
PIERLUISI: If there's not a large number of the population paying taxes, or at least getting
the kinds of wages that would allow them to pay taxes, then the deficits in the 1980s
began to grow in Puerto Rico. And in fact, after 1970s the convergence--in other words,
the growing together of salaries in Puerto Rico and the United States began to separate.
In other words, they began to go down. Even lower than [inaud.] than the poorest state
in the United States, which is Mississippi.
DESVARIEUX: California State University Latino Studies professor Victor Rodriguez explains
that since the 1970s Puerto Rico began to rely on debt to pay for basic public services
and to pay for previous debt. Due to these extensive tax credits and exemptions, Puerto
Rico lost $250-500 million a year in revenue according to a recent report by former chief
economists of the World Bank.
The IRS also conducted its own investigation of the program. Back in the '90s the Government
Accountability Office found that this tax exemption did not provide the level of employment
that was expected, and the tax code was phased out in 2006. Just based on that tax code,
the island lost up to $15 billion in tax revenue.
Back in the '90s many Republicans in Congress predicted the end of tax incentives would
mean a shrinking of business in Puerto Rico. And it did happen, but mainly because companies
were consolidating due to mergers, and many of the companies that stayed still do not
pay local and federal taxes. For example, the world's biggest maker of heart rhythmic
devices, Medtronic, manufactures its products in Puerto Rico. But through a tax loophole
it's able to credit the $16 billion of income to a mailbox in the Cayman Islands, leaving
billions of profits in these tax havens.
Puerto Rico is also trying to encourage the wealthy to become residents. Currently Act
20 and Act 22 exempt residents from paying taxes on capital gains and real estate acquisitions.
According to Pierluisi, 500 individuals have taken advantage of the tax break.
PIERLUISI: Why do we do this? Because we're trying to grow. The underlying problem in
Puerto Rico is lack of growth. And as a territory the only tool you have is the fact that we
have our own tax system in Puerto Rico. But it's not good enough, I tell you. It hasn't
worked. It hasn't worked now for too long. We need to change the model, we need to change
the platform.
DESVARIEUX: Rodriguez agrees that a change is needed since these individuals do not stimulate
the economy.
VICTOR RODRIGUEZ: What really moves an economy is when the middle class and the working class
have money to buy stuff. How many cars can a millionaire buy? Maybe one, two, three,
thirty. But how many cars can a million people buy? So obviously it's more important to have
a middle class and a working class that gets good wages than having 300--I think they've
been able to attract 300 millionaires who basically [set up] their residence in Puerto
Rico. So I don't think that's going to solve anything.
DESVARIEUX: But what is going to solve Puerto Rico's financial woes? Tax reform is being
heavily discussed as Puerto Rico meets with its creditors this week. Back in March, Puerto
Rico's governor signed into a law increasing the U.S. territory's sales tax from 7 percent
to 11.5 percent.
But will this get to the root issue of changing the economy to work for the majority of Puerto
Ricans? In part two of our series we'll explore that question, and short-term and long-term
solutions. Much is on the line, for Puerto Rico could legally be forced to pay creditors
before paying state employees or benefits, like Medicare for residents. And with at least
40 percent of the population living below the poverty line it's a reality the country
can't afford.
For the Real News Network, Jessica Desvarieux, Washington.