Also known as the Possessions Tax Credit, Section 936 exempts U.S. corporations from paying federal income tax on profits generated by a qualified Puerto Rican subsidiary at the cost of $3 billion a year to the U.S. Treasury and at the expense of high-wage jobs in the mainland United States. Yet the extent to which Section 936 benefits the Puerto Rican economy is questionable. Companies accounting for 12.6 percent of Section 936- related employment received 63.5 percent of the loophole's benefits, according to the April 1993 testimony of Samuel Sessions, Deputy Assistant Secretary of the U.S. Treasury. The pharmaceutical industry alone - including Pfizer, Merck and American Home Products - reaped a tax benefit of $66,281 per Puerto Rican employee in 1989, according to the U.S. Treasury Department. With such a tax break, says Richard Leonard, director of special projects for the Oil, Chemical and Atomic Workers Union (OCAW), "mainland U.S. workers could work 80 hours a week for nothing and would not come close" to competing on wages with jobs in Puerto Rico.
Congress, in its 1993 budget, placed caps on how much profit corporations can exempt under Section 936. Corporations must now choose between an income-based limit (60 percent now, to be phased down to 40 percent by 1998) on their tax exemption or a limit based on a fixed percentage of the credit allowed currently under 936 rules.
The Puerto Rico/USA Foundation, a Washington, D.C.-based membership organization of 70 manufacturing corporations, financial institutions and other businesses with operations in Puerto Rico related to Section 936, says the congressional action "is an improvement to the approach originally taken by the Clinton Administration and the House of Representatives," but "represents a substantial reduction in the economic incentive" for U.S. companies to locate in Puerto Rico.
But Leonard of the OCAW, whose members have lost thousands of jobs due to Section 936, says that the new rules will affect only a few dozen of the more than 500 U.S. corporations benefiting from the tax break. "Most corporations, including Acme Boot Company, won't be affected - the caps will end only the worst abuses of the largest corporations, particularly pharmaceuticals, which have enormous intangible assets" currently sheltered under 936.
The OCAW favored a runaway plant bill introduced by Representative George Miller, D-California, that would restrict Puerto Rico from granting to any company any incentive that would have an adverse effect on a related mainland enterprise. This is the "ideal way" to go about protecting mainland jobs, says Leonard, because it gives workers and communities cause of action to sue runaway corporations in federal court. The provision would let the Puerto Rican government off the hook as long as it secures an annual statement of compliance from corporations to which it grants local tax breaks. Congress did not enact any of several proposed runaway plant provisions.
MCLR's The Impact of Internal Revenue Code Section 936 on Manufacturing Jobs in the United States identifies 50 cases - involving 23,664 jobs at a total of 59 plants - of layoffs and major plant closings in which work was transferred to U.S. possessions. California was the state hardest hit with 4,295 job losses at 10 locations, followed by Pennsylvania (3,660 jobs), New Jersey (3,450 jobs) and Maine (2,515 jobs). Most of the jobs were directly shifted to Puerto Rico.
The majority of those job losses have occurred since 1985, although some of the cases occurred in the 1970s (36 of the 50 cases occurred within the 1985-1993 time period). Although Congress enacted Section 936 in 1921, the loophole became more popular as a result of the Tax Reform Act of 1986 and new Puerto Rican laws granting local tax exemptions. The 1986 Act created a "twin plant" initiative, allowing U.S. subsidiaries in Puerto Rico to shelter investments in "twin" plants in certain Caribbean countries. By 1992, U.S. corporations had established 50 twin plants in the Dominican Republic largely due to geographical proximity and low-wage labor (available at approximately 40 cents per hour).
The MCLR report, commissioned by the OCAW, estimates that as a result of the 23,664 jobs lost directly because of Section 936, an additional 56,342 mainland workers lost their jobs due to a ripple effect. A total of 80,006 job lossess - direct and indirect - have cost local, state and federal governments between $71 and $94.7 million in the form of fewer taxes collected, reduced business taxes and increased social benefits for workers, including unemployment compensation, welfare and food stamps. The report offers a profile of the circumstances of each of the cases cited.
Workers at Acme Boot Company became the latest to suffer the impacts of a runaway corporation when Acme closed its Clarksville, Tennessee bootmaking plant in May 1993. Acme began hiring workers for its new Puerto Rican facility in January 1993. The United Rubber Workers (URW), which represented workers at the Tennessee Acme plant, petitioned the Puerto Rico Office of Industrial Tax Incentives for a hearing on the granting of local tax breaks necessary to obtain the larger breaks from Section 936. A few weeks before the hearing and just one day after a network television producer expressed interest in the story, Acme withdrew its tax exemption petition. The company is, however, free to reapply for the tax breaks at any time in the future. The URW has called for a boycott of Acme products including Acme, Dingo and Dan Post boots.
Workers at the American Home Products (AHP) facility in Elkhart, Indiana managed to win some compensation from the corporation after it closed the Elkhart facility in November 1991, transferring approximately 500 jobs directly to Puerto Rico. AHP, manufacturer of over-the-counter medications and other health care products, including Advil, Anacin and Dristan, opened a plant in Guayama, Puerto Rico in 1988 and began moving packaging lines and other equipment there from the Elkhart facility [see "American" Home Products Moves Abroad, Multinational Monitor, April 1991]. The OCAW filed a class action suit on behalf of the laid-off workers. AHP settled in July 1992 when, five days before the trial, it agreed to pay its former employees $24 million - the first settlement made in a 936 runaway plant case. Yet, according to AHP's 1991 Annual Report, the company saved $105.6 million in taxes - or $75,000 per Puerto Rican employee.
The trend of U.S. corporations transferring manufacturing jobs from the United States to Puerto Rico to take advantage of 936 looks likely to continue unabated. "The fear of getting dragged into court [as prompted under the Miller bill] is probably the most effective way of policing [runaway corporations] - but it is also the least likely to get passed in Washington," says Leonard.