Hazy Forecast for Puerto Rico : Taxes: Clinton's budget will phase out most tax breaks for U.S. firms. The commonwealth may try new incentives.

By DAVID R. OLMOS

Aug. 16, 1993 12 AM PT

TIMES STAFF WRITER

Pharmaceutical, electronics and other companies that for years have enjoyed multibillion-dollar tax breaks for bringing business to Puerto Rico will lose many of those incentives under the budget bill signed into law by President Clinton last week.

Already, a few companies in California and elsewhere are saying that the tax change could force them to shrink Puerto Rican operations and curb expansion on the island. But other firms say they anticipate no immediate changes at their Puerto Rican operations.

During congressional debate on the tax credit, Puerto Rico officials warned that the change would break the back of an island economy already suffering 18% unemployment and heavily dependent on federal aid. The tax provision, they warned, could cost tens of thousands of jobs and lead more of Puerto Rico’s 3.5 million residents to emigrate to the mainland.

Now that the new budget bill is law, however, industry and government officials have changed their tune, saying they doubt the reduction in the tax credit will bring dramatic job losses to the island’s economy. They do say they fear that it will cripple job growth, particularly for the highly educated and skilled.

Clifford Myatt, administrator of economic development for the Commonwealth of Puerto Rico, expects most companies to stay put for at least several years as the tax credit reductions are phased in. That could buy the government some time to draw up other incentives to keep business in Puerto Rico, he said.

“I don’t see a lot of companies already there going off the cliff as a result of this legislation,” said Larry Langdon, director of taxes and logistics for electronics manufacturer Hewlett-Packard Co., which has about 650 workers in Puerto Rico.

The Palo Alto-based company is one of 200 to 300 U.S. firms operating in Puerto Rico under Section 936 of the Internal Revenue Code, which exempts U.S. firms from federal taxes on income earned in Puerto Rico as long as it remains a commonwealth. Other major companies on the island include Coca-Cola, General Electric, Intel Corp., Johnson & Johnson, Procter and Gamble, Upjohn and Westinghouse Electric.

The Clinton Administration, which originally proposed far greater changes in the Section 936 law, has said the compromise bill will raise $3.75 billion over five years from companies in Puerto Rico.

The bill gives companies two choices. They can claim 60% of the tax credit’s current value in 1994, with the benefit cut by an additional 5% each year until it reaches 40% by 1998. A second option--more attractive to labor-intensive industries--is based on a formula reflecting wages, fringe benefits and depreciation deductions.

The pharmaceutical industry--which generates half the revenue affected by changes in Section 936--viewed the bill as an attempt by critics of prescription drug prices to strike a blow to their business. In fact, one of the bill’s key sponsors, Sen. David Pryor (D-Ark.), criticized Section 936 as “nothing but a gigantic tax windfall for the pharmaceutical industry.”

Puerto Rico has become one of the world’s leading manufacturing locations for drug makers, attracting such firms as Abbott Laboratories, Amgen, Bristol-Myers Squibb, Eli Lilly, Pfizer, Schering-Plough and SmithKline Beecham.

Schering-Plough, a Madison, N.J.-based drug maker that employs 1,842 at four facilities in Puerto Rico, estimated that the measure will add about $15 million to its tax bill in 1994.

Spokesman Ronald J. Asinari said the Section 936 changes would have a “dramatic” impact on Puerto Rico and would “remove virtually all incentives for companies to establish high-tech, capital-intensive operations on the island.” Schering-Plough will not consider any expansion in Puerto Rico and may shrink its presence there in the years ahead, he said.

Hewlett-Packard’s Langdon said U.S. business has “benefited nicely under the provision.” He praised Puerto Rico’s work force as highly educated and well-trained, noting that a company study a few years ago found that workers at a Hewlett-Packard computer factory in Puerto Rico were more productive than workers at a similar Hewlett-Packard facility in California.

Myatt, the economic development official, said there is concern about the possible loss of jobs for highly skilled Puerto Ricans who work on the island’s pharmaceutical and electronics plants.

“If those types of operations dry up, these people will seek out companies and places to work where they can use their skills,” such as the United States, Myatt noted.

He said Puerto Rico needs to take a harder look at ways to make itself attractive to industry, such as speeding up its business permit process.

And it may have to devote more resources to luring business from Europe and Asia.

“This may change the whole economic scenario of Puerto Rico in terms of what kind of business will be looking to come here,” Myatt said.

Some Big Players in Puerto Rico Between 200 and 300 U.S. companies enjoy tax breaks for operating in Puerto Rico. Here are a few of them:

American Cynamid

Citibank

Coca-Cola

Eli Lilly

E.I. DuPont de Nemours

Fluor-Daniel

Genentech

Intel