Our expert analysis of the Puerto Rico municipal bond crisis continues with an examination of tax and trade policies that have negatively affected the island economy. In particular, the timing of the expiration of Section 936 coincided with the start of the 2006 recession.
The Puerto Rico economy has been adversely affected by a number of changes in tax and trade policy. Repealed by President Clinton in 1996 with a ten year phase out, Section 936 of the Federal Tax Code expired in 2006, helping to thrust the island economy into its long-run recession. Section 936 was a tax incentive for U.S. companies to manufacture in Puerto Rico, allowing the repatriation of profits to the mainland U.S. without paying federal tax. The pharmaceutical industry was a large beneficiary of this tax break and was a major driver of employment on the island. According to a 2002 article published by the Pharmaceutical Industry Association of Puerto Rico, the pharmaceutical sector was responsible for 56% of total manufacturing jobs and 20% of total industrial jobs on the island. The article states that although the pharmaceutical industry was able to largely maintain its tax advantages as an existing industry on the island, the expiry of the exemption was a significant disincentive for new industries to move to Puerto Rico. 27,373 industrial jobs were lost from October 1996 to September 2002. Additionally, included below is a reference table of historical Puerto Rican tax rates.
 Maldonado, A. W., “The Loss of 936: Good or Bad for Puerto Rico?” The Pharmaceutical Industry Association of Puerto Rico, November 17, 2002