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entitled 'Puerto Rico: Fiscal Relations with the Federal Government and
Economic Trends during the Phaseout of the Possessions Tax Credit'
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Report to the Chairman and Ranking Minority Member, Committee on
Finance, U.S. Senate:
May 2006:
Puerto Rico:
Fiscal Relations with the Federal Government and Economic Trends during
the Phaseout of the Possessions Tax Credit:
GAO-06-541:
GAO Highlights:
Highlights of GAO-06-541, a report to Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
The federal possessions tax credit, which was designed to encourage
U.S. corporate investment in Puerto Rico and other insular areas,
expires this year.
Proponents of continued federal economic assistance to Puerto Rico have
presented a variety of proposals for congressional consideration.
In response to a request from the U.S. Senate Committee on Finance,
this study compares trends in Puerto Rico’s principal economic
indicators with those for the United States; reports on changes in the
activities and tax status of the corporations that have claimed the
possessions tax credit; explains how fiscal relations between the
federal government and Puerto Rico differs from the federal
government’s relations with the states and other insular areas; and
compares the taxes paid to all levels of government by residents of
Puerto Rico, the states, and other insular areas.
GAO used the latest data available from multiple federal and Puerto
Rican government agencies. Data limitations are noted where relevant.
Key findings are based on multiple measures from different sources. GAO
is not making any recommendations in this report.
In comments on this report the Governor of Puerto Rico said the report
will be useful for evaluating policy options.
What GAO Found:
Puerto Rico’s per capita gross domestic product (GDP, a broad measure
of income earned within the Commonwealth) in 2005 was a little over
half of that for the United States (see figure below). Puerto Rico’s
per capita gross national product (GNP, which covers income earned only
by residents of the Commonwealth) was even lower relative to the United
States. Concerns about Puerto Rico’s official price indexes make it
difficult to say whether the per capita GNP of Puerto Rican residents
has grown more rapidly than that of U.S. residents;
however, the absolute gap between the two has increased.
U.S. corporations claiming the possessions tax credit dominated Puerto
Rico’s manufacturing sector into the late 1990s. After the tax credit
was repealed in 1996 beginning a 10-year phaseout period, the activity
of these corporations decreased significantly. Between 1997 and 2002
(the latest data available) valued added in these corporations
decreased by about two-thirds. A variety of data indicates that much of
this decline was offset by growth in other corporations, so that some
measures of aggregate activity remained close to their 1997 levels. For
example, value added in manufacturing remained fairly constant between
1997 and 2002. Most of the offsetting growth was in the pharmaceutical
industry.
Residents of Puerto Rico pay considerably less total tax per capita
than U.S. residents. However, because of lower incomes they pay about
the same percentage of their personal income in taxes. The composition
of taxes differed between Puerto Rico and the states with federal taxes
being a larger share of the total in the states. This difference
reflects the facts that (1) residents of Puerto Rico generally do not
pay federal income tax on income they earn in the Commonwealth and (2)
the Commonwealth government has a wider range of responsibilities than
do U.S. state and local governments.
Figure: U.S. and Puerto Rican Real Per Capita GDP and GNP, 1980–2005
[See PFF for Image]
[End of Figure]
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-541].
To view the full product, including the scope and methodology, click on
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[End of Section]
Contents:
Letter:
Executive Summary:
Purpose:
Background:
Scope and Methodology:
Results in Brief:
Principal Findings:
Agency Comments:
Chapter 1:
Background:
Possessions Tax Credit:
Scope and Methodology:
Chapter 2:
U.S. Tax Treatment of Insular Area Residents with U.S.-source Income
and U.S. Residents with Insular Area-source Income Varies by Area:
While FICA Taxes Are Imposed on Wages Paid to Employees in All Insular
Areas, Unemployment Insurance Tax Applies Only to Wages Paid in Puerto
Rico and U.S. Virgin Islands:
Taxation of Corporations Incorporated in the United States:
Taxation of Corporations Incorporated outside the United States:
Deduction for Income from Domestic Production Activities:
Goods Imported to Insular Areas Are Generally Exempt from U.S. Excise
Taxes, but a Special Tax Is Imposed on Goods Made in Puerto Rico and
U.S. Virgin Islands:
U.S. Government Is Responsible for Collecting Customs Duties in Puerto
Rico and Helps Collect Duties in U.S. Virgin Islands:
Chapter 3:
Measuring Economic Progress in Puerto Rico Is Challenging but the
Income of Commonwealth Residents Remains Well Below That of U.S.
Residents:
Puerto Rico Relies Heavily on Nonresidents to Finance Local Investment:
Data on Value Added and Income Show That the Pharmaceuticals Industry
Has Significantly Increased Its Dominance of Puerto Rican Manufacturing
but Evidence Suggests That These Measures May Be Overstated:
International Trade Plays a Large Role in Puerto Rico's Economy:
Official Statistics Indicate That Unemployment Has Been Much Higher in
Puerto Rico Than in the United States and Labor Force Participation Has
Been Lower:
Since 1980, Real Per Capita Personal Income in Puerto Rico Has Not
Grown Enough to Substantially Reduce the Gap between U.S. and Puerto
Rican Living Standards:
Chapter 4:
Possessions Corporations Dominated Puerto Rico's Manufacturing Sector
up until the Late 1990s:
The Pharmaceutical Industry Has Dominated the Use of the Possessions
Tax Credit in Puerto Rico:
Businesses Have a Variety of Options for Continuing Operations in
Puerto Rico after They Cease Operating as Possessions Corporations:
Some Measures of Aggregate Manufacturing Activity Have Remained
Constant Despite a Decline in Possessions Corporation Activity:
Chapter 5:
U.S. CFCs Have Become the Most Important Type of Business Entity in
Puerto Rico's Manufacturing Sector in Terms of Value Added but Not in
Terms of Employment:
The Role of U.S. Corporations Is Much Smaller in Puerto Rico's
Wholesale and Retail Trade Than in Manufacturing:
Neither Possessions Corporations nor CFCs Were Significant Employers in
2002 in Most Puerto Rican Service Industries for Which Data Are
Available:
Chapter 6:
Taxes Paid Per Capita in Puerto Rico Are Lower Than Those in the States
but the Taxes Are about the Same Share of Personal Income in Both
Places:
Income and Employment Taxes Account for about Two-thirds of the Taxes
Paid in Both Puerto Rico and the States, but the Allocation of Those
Taxes by Level of Government Differs between the Two Locations:
Puerto Rico's Outstanding Government Debt in 2002 Was Much Higher Than
That of State and Local Governments as a Share of Personal Income,
Partly Because the Commonwealth Government Has a Wider Range of
Responsibilities:
Federal Grants and Payments to Governments Per Capita Are the Same for
Puerto Rico and the States but Direct Federal Payments to Individuals
Per Capita Are Significantly Lower in Puerto Rico:
Chapter 7:
Comparison of Selected Federal Social Programs:
Appendixes:
Appendix I: Methodology for Allocating the Assets and Liabilities of
Depository Banks by Geographic Location:
Appendix II: Additional Information on Puerto Rican Economic Trends and
Capital Flows:
A Comparison of Rates of Return for Possessions Corporations and
Controlled Foreign Corporations (CFC) in Puerto Rico's Chemical
Industry:
Appendix III: Methodology for Analyses of Business Activities:
Appendix IV: Additional Data on Possessions Corporations and Their
Affiliates:
Appendix V: Additional Data on the Distribution of Business Activity by
Type of Business Entity:
Appendix VI: Additional Comparative Fiscal Data:
Appendix VII: Additional Details on the Application of Federal Social
Programs:
Education Programs:
Food and Nutrition Programs:
Health Care Financing and Grants Programs:
Income Assistance Programs:
Programs for the Care of Children:
Housing Programs:
Appendix VIII: U.S. Gross Domestic Product Deflator and Puerto Rican
Gross Product Deflator, 1980-2005:
Appendix IX: Agency Comments:
Appendix X: GAO Contact and Staff Acknowledgments:
Tables Tables:
Table 1: Summary of Selected Social Programs in Puerto Rico Compared to
Those in the States:
Table 2: Demographic Characteristics of Puerto Rico Compared to the
United States:
Table 3: Recent and Forthcoming Reports on Puerto Rico:
Table 4: Educational Attainment in the U.S. and Puerto Rico, 1990 and
2000:
Table 5: Poverty Status in the United States and Puerto Rico,
Percentage below Poverty Levels, 1999:
Table 6: Income Distribution of Households in the United States and
Puerto Rico, 1999:
Table 7: Distribution of Employment by Business Entity Type for the Six
Largest Services Included in the 2002 Economic Census of Puerto Rico:
Table 8: Federal Expenditures in Fiscal Year 2002:
Table 9: Federal Custom Duties and Excise Taxes Returned to Puerto Rico
in Fiscal Year 2002:
Table 10: Comparison of Selected Social Programs in the U.S. Insular
Areas to Those in the States:
Table 11: Allocation of Balance Sheet Items by Geographic Location:
Table 12: Percent of Discrepancies by Line Item (percent):
Table 13: The Source and Use of Funds for Selected Financial
Institutions in Puerto Rico:
Table 14: Selected Data for the Full Population of Possessions
Corporations Operating in Puerto Rico, 1993-2003:
Table 15: Selected Data for Large Corporate Groups Operating in Puerto
Rico, by Type of Entity, 1993-2003:
Table 16: Selected Data for Large Corporate Groups Operating in the
Chemical and Medical Equipment Industries in Puerto Rico, by Type of
Entity, 1993-2003:
Table 17: Selected Data for Large Corporate Groups Operating in the
Computer, Electronics, and Electrical Equipment Industries in Puerto
Rico, by Type of Entity, 1993-2003:
Table 18: Selected Data for Large Corporate Groups Operating in the
Food and Kindred Products Industries in Puerto Rico, by Type of Entity,
1993-2003:
Table 19: Distribution of Tax Credits, Income, and Assets of
Possessions Corporations Operating in Puerto Rico, by Industry, 1993-
2003:
Table 20: Employment in Puerto Rican Manufacturing by Industry and
Business Entity Type, 2002:
Table 21: Value Added in Puerto Rican Manufacturing by Industry and
Business Entity Type, 2002:
Table 22: Annual Payroll in Puerto Rican Manufacturing by Industry and
Business Entity Type, 2002:
Table 23: Capital Expenditures in Puerto Rican Manufacturing by
Industry and Business Entity Type, 2002:
Table 24: Value of Shipments in Puerto Rican Manufacturing by Industry
and Business Entity Type, 2002:
Table 25: Share of Employment for Puerto Rico's Manufacturing,
Wholesale Trade, Retail Trade, and Services Sectors in 2002:
Table 26: Share of Sales and Value of Shipments for Puerto Rico's
Manufacturing, Wholesale Trade, Retail Trade, and Services Sectors in
2002:
Table 27: Share of Payroll for Puerto Rico's Manufacturing, Wholesale
Trade, Retail Trade, and Services Sectors in 2002:
Table 28: Federal, State, Commonwealth, and Insular Area Revenues
Collected in Fiscal Year 2002:
Table 29: Special Education Grant Allocation to, and Number of Students
Covered by IDEA Part B in, the States and Puerto Rico Authorized by
IDEA Part B, Fiscal Year 2002:
Table 30: Title I Grant Allocation and Number of Covered Students,
Fiscal Year 2002:
Table 31: Comparison of the Food Stamp and Nutrition Assistance
Programs:
Table 32: National School Lunch Program Reimbursement Rates, School
Year 2003-2004:
Table 33: Estimated Food and Nutrition Program Federal Expenditures for
the States, Puerto Rico, and the Other U.S. Insular Areas, Fiscal Year
2003:
Table 34: Estimated Medicare Enrollment and Expenditures as of July
2003, Fiscal Year 2003:
Table 35: Estimated Medicaid Enrollment and Federal Expenditures,
Fiscal Year 2004:
Table 36: Estimated SCHIP Enrollment and Federal Allotments, Fiscal
Year 2004:
Table 37: Population and Estimated Grant Awards from Four Health and
Human Service Agencies, Fiscal Year 2004:
Table 38: Comparison of Selected Data on TANF Program in Puerto Rico to
TANF Program in the States, Fiscal Year 2003:
Table 39: Child Care and Development Fund Expenditures and Children
Served, Fiscal Year 2003:
Table 40: Estimated Child Welfare Population, Fiscal Year 2001:
Table 41: Estimated Federal Foster Care and Adoption Assistance
Funding, Fiscal Year 2003:
Table 42: Estimated Amount and Percent of Total Operating Subsidy
Received by the Five Largest Public Housing Authorities, Fiscal Year
2002:
Table 43: Total Number and Percent of Public Housing Units for the Five
Largest Public Housing Authorities, Fiscal Year 2005:
Table 44: Number of Housing Choice Vouchers and Estimated Budget
Authority in Puerto Rico and Selected States and Insular Areas, Fiscal
Year 2003:
Table 45: Estimated Disbursement of CDBG Funds for Housing, Fiscal
Years 2001-2004:
Table 46: Estimated Amount of HOME Grants for Puerto Rico and the Other
Insular Areas, Fiscal Year 2005:
Figures:
Figure 1: U.S. and Puerto Rican Real Per Capita GDP and GNP, 1980-2005:
Figure 2: Value Added for Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries, 1997-2002:
Figure 3: Capital Expenditures in Puerto Rico's Manufacturing Sector,
by Industry, 1987-2002:
Figure 4: Employment in Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries, 1997-2002:
Figure 5: Distribution of Value Added for All Puerto Rican
Manufacturing by Type of Business Entity, 2002:
Figure 6: Distribution of Employment for All Puerto Rican Manufacturing
by Type of Business Entity, 2002:
Figure 7: Per Capita Taxes Paid in the United States and Insular Areas,
Fiscal Year 2002:
Figure 8: Taxes Paid as a Share of Personal Income in the United States
and Insular Areas, Fiscal Year 2002:
Figure 9: U.S. and Puerto Rican Per Capita GDP and GNP, 1980-2005:
Figure 10: Composition of Puerto Rican GDP and Net Income Payments
Abroad, 1980-2005:
Figure 11: Puerto Rico's Gross Domestic Investment and National Saving,
1980-2005:
Figure 12: Puerto Rico's Depository Institutions' Liabilities, 1995-
2004:
Figure 13: Puerto Rico's Depository Institutions' Assets, 1995-2004:
Figure 14: Puerto Rico's Total Real Government-issued Debt, by Market
of Purchaser, 1995-2005:
Figure 15: Puerto Rican Gross Fixed Investment as a Percent of GDP,
1980-2005:
Figure 16: Puerto Rico's Capital Expenditures as a Percentage of Gross
Domestic Product, 1987-2002:
Figure 17: Value Added for Puerto Rican Manufacturing Industries, 1987-
2002:
Figure 18: Share of Net Manufacturing Domestic Income in Puerto Rico,
1980-2005:
Figure 19: Shares of Puerto Rico's Domestic Income by Sector, 1980-
2005:
Figure 20: Value Added per Employee for Key Puerto Rican Manufacturing
Industries, 1987-2002:
Figure 21: Value Added per Employee in Puerto Rico by Type of Business,
2002:
Figure 22: U.S. and Puerto Rican Labor Participation and Unemployment
Rates, 1980-2005:
Figure 23: Puerto Rican Employment by Sector--Household Survey, 1980-
2005:
Figure 24: Puerto Rican Employment by Sector--Establishment Survey,
1991-2005:
Figure 25: Employment in Puerto Rican Manufacturing Industries, 1987-
2002:
Figure 26: U.S. and Puerto Rican Real Per Capita Personal Income, 1980-
2005:
Figure 27: Share of Possessions Corporations in Value Added and
Employment in Puerto Rican Manufacturing, 1987-2002:
Figure 28: Income and Assets from the Tax Returns of Possessions
Corporations Operating in Puerto Rico, 1993-2003:
Figure 29: The Ratio of Possessions Tax Credit to Total Income Earned
by Possessions Corporations in Puerto Rico, 1993-2003:
Figure 30: The Number of Corporations in Puerto Rico Claiming the
Possessions Tax Credit and the Amount Claimed, 1993-2003:
Figure 31: Industry Shares of the Possessions Tax Credit in Puerto
Rico, 1993-2003:
Figure 32: Industry Shares of Gross Profits Earned by Possessions
Corporations in Puerto Rico, 1993-2003:
Figure 33: Gross Profits Earned by Large Corporate Groups in Puerto
Rico, by Type of Corporation, 1993-2003:
Figure 34: Value Added for Possessions Corporations and Other Types of
Employers in Manufacturing in Puerto Rico, 1987-2002:
Figure 35: Value Added for Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries in Puerto Rico, 1997-2002:
Figure 36: Capital Expenditures in Puerto Rico's Manufacturing Sector,
by Industry, 1987-2002:
Figure 37: Employment in Possessions Corporations and Other Types of
Employers in Manufacturing in Puerto Rico, 1987-2002:
Figure 38: Employment in Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries in Puerto Rico, 1997-2002:
Figure 39: Distribution of Value Added for All Puerto Rican
Manufacturing by Type of Business Entity, 2002:
Figure 40: Distribution of Employment for All Puerto Rican
Manufacturing by Type of Business Entity, 2002:
Figure 41: Distribution of Income in 2001 between CFCs Incorporated in
Puerto Rico and CFCs Incorporated Elsewhere:
Figure 42: Value Added in the Pharmaceutical Industry by Type of
Business Entity, 2002:
Figure 43: Value Added in Manufacturing, Excluding Pharmaceuticals, by
Type of Business Entity, 2002:
Figure 44: Share of Employment in Wholesale Trade in Puerto Rico by
Type of Business Entity, 2002:
Figure 45: Share of Employment in Retail Trade in Puerto Rico by Type
of Business Entity, 2002:
Figure 46: Per Capita Taxes Paid in the United States and Insular
Areas, Fiscal Year 2002:
Figure 47: Taxes Paid as a Share of Personal Income in the United
States and Insular Areas, Fiscal Year 2002:
Figure 48: The Composition of Taxes Paid in Puerto Rico, Fiscal Year
2002:
Figure 49: The Composition of Taxes Paid in the States, Fiscal Year
2002:
Figure 50: Per Capita Government Debt in the United States and Insular
Areas, Fiscal Year 2002:
Figure 51: Government Debt as a Share of Personal Income in the United
States and Insular Areas, Fiscal Year 2002:
Figure 52: Puerto Rico's Depository Institutions' Deposits, 1995-2004:
Figure 53: Puerto Rico's Depository Institutions' Debt, 1995-2004:
Figure 54: Exempt Deposits of Possessions Corporations and Brokered
Deposits in Puerto Rican Banks, 1997-2004:
Figure 55: Puerto Rico's Depository Institutions' Securities
Investments, 1995-2004:
Figure 56: Puerto Rico's Depository Institutions' Loans and Leases,
1995-2004:
Figure 57: Assets of Selected Financial Institutions in Puerto Rico,
1995-2004:
Figure 58: Real Debt Issued by the Government of Puerto Rico, but
Payable from Private or Federal Funds, or Asset Sales, by Market of
Purchaser, 1995-2005:
Figure 59: Real Debt Issued and Payable by the Government of Puerto
Rico, by Market of Purchaser, 1995-2005:
Figure 60: Rates of Return on Total Assets for Possessions Corporations
and CFCs in the Chemical Industry, Puerto Rico, 1997, 1999, 2001:
Figure 61: Rates of Return on Operating Assets for Possessions
Corporations and CFCs in the Chemical Industry, Puerto Rico, 1997,
1999, 2001:
Figure 62: Composition of Assets of the Possessions Corporations of All
Large Groups, Puerto Rico, 1993-2003:
Abbreviations:
AABD: Aid to the Aged, Blind, or Disabled:
BEA: Bureau of Economic Analysis:
BLS: Bureau of Labor Statistics:
CACFP: Child and Adult Care Food Program:
CCDF: Child Care and Development Fund:
CDBG: HUD's Community Development Block Grant Program:
CDC: Centers for Disease Control and Prevention:
Census: U.S. Census Bureau:
CFCs: controlled foreign corporations:
CMS: Centers for Medicare & Medicaid Services:
CNMI: Commonwealth of the Northern Mariana Islands:
CPI: consumer price index:
CPL: Commonwealth poverty level:
CPS: Current Population Survey:
EIN: employer identification number:
EPSDT: early and periodic screening, diagnostic, and treatment:
ETI: extraterritorial income:
FHA: Federal Housing Administration:
FICA: Federal Insurance Contributions Act:
FPL: federal poverty level:
GDP: gross domestic product:
GNP: gross national product:
HHS: Department of Health and Human Services:
HRSA: Health Resources and Services Administration:
HUD: Department of Housing and Urban Development:
IDEA: Individuals with Disabilities Education Act:
IEP: individualized education programs:
IRC: Internal Revenue Code:
IRS: Internal Revenue Service:
LLC: limited liability company:
NAP: IRS's National Accounts Profile:
NAP: Nutrition Assistance Program (the Puerto Rican food stamp
program):
NIH: National Institutes of Health:
NOFA: Notices of Funding Availability:
NSLP: National School Lunch Program:
OCFI: Office of the Commissioner of Financial Institutions:
PHA: public housing authorities:
PPS: prospective payment system:
PRIDCO: Puerto Rico Industrial Development Company:
PRPHA: Puerto Rico Public Housing Administration:
PRWORA: Personal Responsibility and Work Opportunity Reconciliation Act
of 1996:
QPSII: qualified possession source investment income:
SAMHSA: Substance Abuse and Mental Health Services Administration:
SCHIP: State Children's Health Insurance Program:
SOI: IRS's Statistics of Income unit:
SSI: Supplemental Security Income:
TANF: Temporary Assistance for Needy Families:
USDA: United States Department of Agriculture:
WIC: Special Supplemental Nutrition Program for Women, Infants, and
Children:
Letter:
May 19, 2006:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
In response to your request, this report provides information on the
Puerto Rican economy, including corporate activity, during the phaseout
of the possessions tax credit, as well as descriptions of the
application of federal tax law and federal social policy programs in
Puerto Rico.
As we agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 30 days from the date of this letter. We will then send copies to
the Governor's office in Puerto Rico, Resident Commissioner Fortuno,
and other interested parties. We will also make copies available to
others who request them. This report will also be available at no
charge on the GAO Web site at [Hyperlink, http://www.gao.gov]. If you
or your staffs have any questions on this report, please call me on
(202) 512- 9110. Key contributors are listed in appendix X.
Signed by:
James R. White:
Director, Tax Issues:
Strategic Issues Team:
[End of section]
Executive Summary:
Purpose:
For the past 30 years, the U.S. Tax Code has provided a possessions tax
credit specifically designed to encourage U.S. corporations to invest
in Puerto Rico and the other U.S. insular areas and create
jobs.[Footnote 1] The credit had the effect of reducing federal taxes
on income earned by qualifying U.S. corporations. Congress repealed the
credit in 1996, but allowed existing credit claimants to continue use
of the credit during a 10-year phaseout period ending in 2006.[Footnote
2]
As the expiration date of the credit approached, Congress naturally
became interested in reviewing the effects of the phaseout,
particularly on the Puerto Rican economy, where over 98 percent of the
credit has been claimed. At the same time, proponents of continued
economic assistance to Puerto Rico have offered up a variety of
proposals, including tax incentives to both businesses and low income
workers, for congressional consideration. Congress could better assess
the merits of the various proposals if it had more complete information
relating to the current treatment that Puerto Rico receives under both
federal tax policies and federal social programs, and information
relating to the taxes paid by residents of Puerto Rico, relative to
those paid by residents of the states and the other U.S. insular
areas.[Footnote 3]
To help inform itself and other members of Congress as they decide on
future policy toward Puerto Rico, the Senate Committee on Finance asked
GAO to:
1. explain how the U.S. federal tax treatment of individuals and
businesses in Puerto Rico and of the insular government differs
relative to the treatment of governments, businesses, and individuals
in the states and the other U.S. insular areas;
2. compare trends in Puerto Rico's principal economic indicators since
the early 1980s with similar indicators at the national level for the
United States and describe what is known about capital flows between
Puerto Rico and the United States and between Puerto Rico and foreign
countries;
3. report on changes in the activities and tax status of the
corporations that have claimed the possessions tax credit since 1993;
4. provide information on the distribution of private-sector economic
activity in Puerto Rico by type of business entity;
5. describe the total amount of tax paid by individuals and businesses
in the states and the U.S. insular areas and show percentage breakdowns
by type of tax;
and:
6. describe how the principal U.S. federal social programs apply to
Puerto Rican residents relative to residents of the states and the
other U.S. insular areas.
This report does not contain any recommendations. Members of the Senate
Committee on Finance have asked the Joint Committee on Taxation to
prepare a companion report evaluating legislative options concerning
Puerto Rico.
Background:
This report focuses on the Commonwealth of Puerto Rico, the largest
insular area associated with the United States, and compares Puerto
Rico to the states and the other insular areas--Guam, the U.S. Virgin
Islands, the Commonwealth of the Northern Mariana Islands (CNMI), and
American Samoa. Although fiscally autonomous, Puerto Rico is similar to
the states in many aspects. For example, matters of currency,
interstate commerce, and defense are all within the jurisdiction of the
U.S. federal government.
Puerto Rico is thought to have one of the most dynamic economies in the
Caribbean region, an economy in which manufacturing, driven by the
pharmaceutical industry, has surpassed agriculture as the primary
sector in terms of domestic income. Over 40 percent of Puerto Rico's
domestic income since the mid-1980s has been derived from
manufacturing. Pharmaceuticals accounted for about 40 percent of total
value added in manufacturing in 1987;
that share rose to over 70 percent by 2002.
The Tax Reform Act of 1976[Footnote 4] established the possessions tax
credit under Section 936 of the Internal Revenue Code (IRC), with the
stated goal of assisting the insular areas in "obtaining employment-
producing investment by U.S. corporations."[Footnote 5] Prior to 1994,
the tax credit was equal to the full amount of the corporation's U.S.
income tax liability on income from an insular area. The amount of
possession tax credit claimed by corporations operating in Puerto Rico
peaked at about $5.8 billion in 1993.[Footnote 6] A series of limits
were placed on the credit beginning with 1994 tax years, which
significantly reduced the generosity of the credit throughout the
period leading up to the credit's final expiration for tax years
beginning after December 31, 2005.[Footnote 7]
Numerous measures of business activity and broader economic activity
exist. Some broad measures that are commonly recognized as key
indicators of aggregate economic activity and were included in our past
review of Puerto Rico's economy are[Footnote 8]
* employment;
* investment, which is spending devoted to projects producing goods
that are not intended for immediate consumption;[Footnote 9]
* gross domestic product (GDP), which is a comprehensive measure of
income earned by both residents and nonresidents within a country's
(or, in the case of Puerto Rico, a Commonwealth's) borders;[Footnote
10] and:
* gross national product (GNP), which is the total income earned by
residents of a country or other entity.
Measures that focus more specifically on business activity or value
are:
* value added, which essentially is the difference between the value of
the goods and services produced by a firm and the firm's payments for
materials, supplies, energy, and contract work, and which is considered
to be the best measure of the relative economic importance of
manufacturing across industries and geographic areas;
* gross profits, which, in the case of manufacturing firms, is roughly
equivalent to value added and which is available from tax returns
(whereas value added is not);
* total income, which is the sum of gross profits plus various types of
investment income, such as interest, dividends, rents, and royalties;
* net income, which is total income less all expenses;
and:
* total assets, which is the sum of the value of a business's physical
assets (plant, machinery, land, inventories), financial assets (cash,
accounts receivable, investments), intangible assets (patents and other
intellectual property), and other assets.
To qualify for the possessions tax credit, a corporation has to be
organized in the United States; derive 80 percent or more of its gross
income from U.S. possessions; derive 75 percent or more of its gross
income from the active conduct of a trade or business in the
possessions; and file a form with the IRS electing to be treated as a
possessions corporation. As a result of these requirements, possessions
corporations usually are established as subsidiaries of a U.S.
corporate parent, making the possessions corporation a member of a
corporate group. In addition, one option under the credit allowed the
U.S. corporate parent and the possessions corporation to apply a 50/50
split of their combined taxable income from the sale of products to
third parties. Although a substantial portion of this income can be
attributed to manufacturing intangible assets developed and owned by
the U.S. corporate parent, there is no requirement that the allocation
of income from such manufacturing intangible assets reflect where costs
were actually generated, or where value was actually added to the
products. Consequently, corporate groups that produced pharmaceuticals,
or other products whose final values are largely based on the value of
intellectual property, were given flexibility under the law to shift
net income to the possessions corporation operating in Puerto Rico or
another insular area.
In addition to possessions corporations, U.S. corporate groups often
owned other types of businesses that operate in Puerto Rico. These
affiliated businesses could include:
* corporations incorporated within the United States but operating in
Puerto Rico;
* U.S. controlled foreign corporations (CFC), which are incorporated in
Puerto Rico or elsewhere outside of the United States, but which are
majority-owned (by vote or value) by one or more U.S. shareholders,
each of whom owns at least 10 percent of the CFC's voting stock;
or:
* a "pass-though entity," such as a partnership, a subchapter-S
corporation, or a limited liability company (LLC), which generally does
not pay federal income tax at the entity level, but whose income passes
through, and is taxed in the hands of its partners or shareholders.
Scope and Methodology:
Federal Tax Treatment:
To determine the U.S. federal tax treatment of individuals and
businesses in Puerto Rico, relative to the states and the other insular
areas, we examined the IRC, Department of the Treasury regulations,
relevant Treasury rulings and notices, and legislation.
Economic Indicators and Capital Flows:
To compare trends in principal economic indicators for the United
States and Puerto Rico, we obtained data from both U.S. and Puerto
Rican sources. The trends we present are commonly used measures of
overall economic activity and important components of economic
activity, such as saving, investment, labor force participation and
unemployment. The data shown are largely drawn from the National Income
and Product Account series produced annually by economic statistics
agencies in the United States and Puerto Rico. Most of the data we used
for the U.S. economic series are produced by the Bureau of Economic
Analysis and the Bureau of Labor Statistics. Most of the annual data we
used for Puerto Rico economic trends are produced by the Planning Board
of Puerto Rico. We also used data from the Economic Census of Puerto
Rico and the Economic Census of the United States, produced by the U.S.
Census Bureau (Census).
In some instances, the methodologies used by the Planning Board to
produce certain data series are outdated relative to the methodologies
now used by the United States. In these cases, we reviewed literature
concerning the limitations of various series and interviewed Puerto
Rican officials about the methods they use to collect and develop their
data. These limitations are noted in the report. Wherever possible, we
used alternative assumptions and data sources to determine if any
conclusions drawn from the data are sensitive to the particular data
series used.
To provide information on what is known regarding the flow of capital
into and out of Puerto Rico, we interviewed Puerto Rican government
officials and private sector experts to help us to ascertain what data
were available. We determined that the available data would not allow
us to present a comprehensive picture of the trends in capital flows.
We can, however, report on changes between 1995 and 2004 in the amount
of funds that nonresidents hold in the Puerto Rican banking system and
the amount of funds that the banking system invests within and outside
of the Commonwealth. In order to identify where the assets held in the
Puerto Rican banking system are invested and where the owners of the
banks' liabilities reside, we analyzed institution-specific data that
the Office of the Commissioner of Financial Institutions (OCFI)
collects for oversight purposes. We also use data provided by Puerto
Rico's Government Development Bank to show trends in Puerto Rican
government borrowing in the U.S. and local capital markets.
Changes in Possessions Corporation Activity:
In order to examine changes in the activities of possessions
corporations operating in Puerto Rico since the early 1990s, we
constructed several databases from an assortment of tax return data we
obtained from IRS and Puerto Rico's Department of Treasury. Our
principal source of data was IRS's Statistics of Income unit (SOI),
which compiles comprehensive data on possessions corporations every
other year. We obtained the complete set of these biennial databases
from 1993 through 2003 and used information from SOI to identify those
possessions corporations that operated in Puerto Rico. We combined
these separate databases into a single one that covered 656 possessions
corporations that operated in at least 1 year between 1993 and 2003 to
report on changes over time in the aggregate income, tax credit and
total assets of this population of corporations and to show how these
particular variables were distributed across different industries. We
also used data from the past four Economic Censuses of Puerto Rico
(1987, 1992, 1997, and 2002) compiled by Census to show how the
importance of possessions corporations in Puerto Rico's manufacturing
sector has changed over time.
For the second stage of our analysis, we focused on a subpopulation of
the largest groups of affiliated possessions corporations operating in
Puerto Rico. For each of these groups we compiled data on other
affiliated corporations (i.e., those sharing the same ultimate parent
corporations) that also operated in Puerto Rico, but were not
possessions corporations. The objective of this analysis was to assess
the extent to which the large corporate groups that accounted for most
of the activity of possessions corporations remained active in Puerto
Rico, even as the operations of their possessions corporations were
being phased out. We started by identifying the 77 largest groups of
possessions corporations that accounted for over 90 percent of the tax
credit and income earned and over 90 percent of the assets owned by
possessions corporations between 1993 and 2003. We then used the
database in which IRS maintained the records of all CFCs, as well as a
database that the Puerto Rican Department of Treasury had recently
transcribed from all Puerto Rican tax returns for tax years 1998
through 2001 filed by all corporations or partnerships that received
tax incentives from the Government of Puerto Rico. We linked CFCs and
other types of companies from these two databases to our 77 large
corporate groups by using identification numbers and names. We
determined that the quality of the data was sufficient for the purposes
of our report when viewed with the cautions we raise at various points
in the text.
Distribution of Business Activity:
In order to show how economic activity in Puerto Rico is distributed
across different forms of businesses, we negotiated a special
arrangement with IRS and Census that enabled us to disaggregate the
data from Census's recently completed 2002 Economic Census of Puerto
Rico by categories of business entities that are more specifically
relevant to tax policymakers than the categories Census uses for its
own publications. The data that we used to determine the tax filing
status and place of incorporation for the employers in the Census
database came from the IRS and Puerto Rico databases described above,
plus a couple of additional sources. Another important source of data
was IRS's National Accounts Profile (NAP) database, which contains
selected information for all individuals and businesses that have
federal tax filing requirements.
Fiscal Comparison:
To compare the overall taxes paid by individuals and businesses in
Puerto Rico with the taxes paid by individuals and businesses in the
states and in the other insular areas, we obtained and analyzed
detailed data on state and local government revenues from the U.S.
Census of Governments, data on Commonwealth government revenue from the
Puerto Rican Department of Treasury, data on municipal tax revenue in
Puerto Rico from Oficina del Comisionado de Asuntos Municipales, Centro
de Estadisticas Municipales, and revenue data for the other insular
areas reported in their 2002 Single Audit reports. We also obtained
data on federal taxes collected in Puerto Rico and the states from
IRS's 2002 Data Book.[Footnote 11] We compared taxes paid on a per
capita basis and as a percent of personal income. We make our
comparison for year 2002 because that is the year of the most recent
Census of Governments. We also compare federal expenditures for the
states, Puerto Rico and the insular areas using data we obtained from
the Consolidated Federal Funds Report for Fiscal Year 2002 and the
Federal Aid to States for Fiscal Year 2002.
Federal Social Programs:
Interviews with federal agencies and prior GAO work provided the basis
for our description of the application of the principal U.S. federal
social programs to Puerto Rico residents, relative to the states, and
the other insular areas. To select the social programs included in this
report we consulted with GAO experts in the areas of health care
policy; education, workforce, and income security policy; and financial
markets and community investment policy. With the help of these
experts, we arrived at a list of the principal federal social programs,
which we then pared down, based on program availability in Puerto Rico
and expenditure level in Puerto Rico. We relied on prior GAO work and
interviews with federal agency officials to determine how each program
is applied in Puerto Rico, relative to the other areas. We used program-
level data, supplied by federal agencies, to report program
expenditures for fiscal year 2002. We selected fiscal year 2002 because
in chapter 6 of this report, we provide a more complete analysis of the
revenue and expenditures of Puerto Rico, the states, and the other
insular areas using the year of the most recent Census of Governments,
2002.
Results in Brief:
Individuals who are residents of Puerto Rico or the other U.S. insular
areas pay no federal income tax on income from sources within the
insular area; however, their wages are subject to Social Security and
Medicare taxes. Wages paid to residents of Puerto Rico and the U.S.
Virgin Islands also are subject to federal unemployment tax.
Corporations organized in Puerto Rico, like those organized in the
other U.S. insular areas, are generally treated as foreign corporations
for U.S. tax purposes and do not pay federal tax on their income earned
in Puerto Rico, but are generally subject to federal tax on any income
earned in the United States. Corporations organized in the United
States are subject to federal tax on their worldwide income, including
that earned in Puerto Rico. U.S. corporations that qualified for the
possessions tax credit could reduce the federal tax on their income
from Puerto Rico by using the credit.
The economic well-being of Puerto Rican residents, measured in terms of
either per capita or median income, remains well below that of
residents of the states. Puerto Rico's per capita GNP of about $14,000
in 2005 was significantly below the $41,000 figure for the United
States. The latest available data show that in 1999, Puerto Rico's
median household income of $14,412 also was well below the U.S. median
value of $41,994. The relative progress that the Puerto Rican economy
has made since 1980 is difficult to measure with precision for a number
of reasons, including the fact that the income U.S. corporations have
reported earning in the Commonwealth may overstate their actual
activity there. The low rate of labor participation is a crucial issue
in Puerto Rico's economic performance, and the rate of investment
appears insufficient to significantly reduce the disparity between
mainland and Puerto Rican incomes.
Possessions corporations have played an important role in the Puerto
Rican economy, particularly in the manufacturing sector, where they
accounted for well over half of valued added throughout the 1990s. Most
of the possessions tax credit and income earned by possessions
corporations in Puerto Rico has been earned by corporations in the
pharmaceutical industry. Once the possessions tax credit was repealed,
many of the large corporate groups that owned possessions corporations
in Puerto Rico began to shift their operations to other types of
business entities, such as CFCs and LLCs. According to various
measures, the decline in activity of possessions corporations in the
chemical industry, which is dominated by pharmaceuticals, has been
largely offset by the increased activity of other members of the same
corporate groups (i.e., who have the same parent companies) as the
possessions corporations. For example, valued added, employment, and
capital expenditures in the chemical industry all increased between
1997 and 2002--a period during which the activity of possessions
corporations decreased significantly. Declines in the remainder of
Puerto Rico's manufacturing sector have not been similarly offset.
U.S.-owned or incorporated businesses accounted for at least 71 percent
of value added and at least 54 percent of employment in Puerto Rico's
manufacturing sector in 2002. CFCs produced most of this value added
but possessions corporations still accounted for most of the employment
by U.S. firms. The CFCs are particularly important in the
pharmaceutical industry and much less so in other manufacturing
industries. U.S.-owned or incorporated businesses appear to account for
less than 25 percent of employment in Puerto Rico's wholesale and
retail trade sectors, where local corporations are the most important
employers. Similarly, U.S.-owned corporations are not the majority
employers in any of the large Puerto Rican service industries for which
data are available.
Residents of Puerto Rico pay considerably less total tax per capita
than do U.S. residents, but they pay about the same percentage of their
personal income in taxes. The average burden of federal taxes
(excluding the corporate income tax) in Puerto Rico was considerably
lower than that in the states, but the difference was made up by the
fact that Commonwealth and local taxes in Puerto Rico were higher than
the average state and local taxes. Federal grants and payments to the
Puerto Rican government in 2002 were about the same as those to all
state and local governments in the states on a per capita basis;
however, direct federal payments to individuals in Puerto Rico were
well below the per capita amounts paid to residents in the states.
Similarly, per capita federal payments for salaries and wages and for
procurement were significantly lower in Puerto Rico than in the states.
Like the states, Puerto Rico and the other insular areas receive
federal funds for a variety of social programs, which provide
assistance to the elderly and low-income families and individuals. The
social programs that we examined in the insular areas targeted similar
populations and delivered similar services to those in the states--
although sometimes the program had different rules and funding than in
the states.
Principal Findings:
U.S. Federal Tax Treatment of Puerto Rico and Other Insular Areas
Differs by Area and Type of Tax:
Individuals who are residents of Puerto Rico or the other U.S. insular
areas pay no federal income tax on income from sources within the
insular area. The federal tax treatment of U.S.-source income earned by
these individuals varies by insular area. Federal Insurance
Contributions Act (FICA) taxes are imposed on wages paid to residents
of all of the U.S. insular areas, but the unemployment insurance tax
applies only to wages paid to residents of Puerto Rico and the U.S.
Virgin Islands.
Corporations created or organized in the United States or under the
laws of the United States or of a state are taxed by the federal
government on their worldwide income, including that earned in Puerto
Rico and the other insular areas. U.S. corporations may be able,
however, to reduce their U.S. tax liability on their foreign source
income by way of a credit against their U.S. tax for foreign income
taxes paid. Additionally, while income from a foreign business
operation that is not organized as a separate legal entity is taxed
currently, income from the active conduct of business operations set up
by U.S. shareholders as separate corporations organized under the laws
of a foreign country generally is not taxed to the U.S. shareholders
until it is repatriated as dividends. Although, if the income from the
foreign corporation is connected to business that the foreign
corporation has in the U.S., the income is taxed currently to the
foreign corporation.
Corporations organized in Puerto Rico, like those organized in the
other insular areas, are generally treated for U.S. tax purposes as if
they were organized under the laws of a foreign country. Until this
year, a possessions tax credit enabled corporations organized in the
United States that met certain conditions to reduce the federal tax
payable on income earned in and repatriated from Puerto Rico and other
insular areas. The credit had been designed to encourage U.S.-based
corporations to invest in these areas.
Federal customs duties apply to foreign goods imported into Puerto
Rico, and federal excise taxes apply to selected goods manufactured in
Puerto Rico and exported to the United States, but the revenues from
these taxes and duties are given to the Puerto Rican Treasury.
Measuring Economic Progress in Puerto Rico Is Challenging, but the
Income of Commonwealth Residents Remains Well Below That of U.S.
Residents:
As shown in figure 1, Puerto Rico's per capita GDP of about $21,000 in
2005 remained well below U.S. per capita GDP of about $41,000.
According to the Puerto Rican and U.S. national income and product
accounts, this measure has grown more rapidly in Puerto Rico than in
the United States since 1980, when viewed on a per capita basis after
adjustments for inflation. However, for a number of reasons, the growth
rate of real (meaning inflation-adjusted) GDP likely does not represent
a very accurate measure of changes in the economic well-being of Puerto
Rican residents. One important reason is that a significant amount of
the investment income included in GDP is paid out to U.S. and foreign
investors. Per capita GNP and median household income are better
measures of the income earned by residents. Puerto Rico's per capita
GNP of about $14,000 in 2005 was significantly below the $41,000 figure
for the United States. The latest available data show that in 1999,
Puerto Rico's median household income of $14,412 also was well below
the U.S. median value of $41,994. Puerto Rican government officials
acknowledged significant concerns regarding the accuracy of their
official implicit price deflator (a measure of price changes), due to
the age of the underlying methodology.[Footnote 12] (There are plans to
overhaul this methodology with the assistance of the U.S. Bureau of
Economic Analysis.) The likelihood of inaccuracy in the existing
deflator makes it difficult to say precisely how fast Puerto Rican
incomes have grown in real (inflation-adjusted) terms. The U.S. price
deflator is an alternative for converting the Puerto Rican data into
real terms; however, since that deflator is designed to measure price
changes in the U.S. economy, it is not clear how well it reflects
changes in Puerto Rican prices. Using the amounts shown in figure 1,
inflation-adjusted per capita GNP increased at an average annual rate
of 1.9 percent in the United States, while it rose at 1.5 percent in
Puerto Rico if the Puerto Rican deflator is used. However, if the U.S.
deflator is applied to Puerto Rican GNP, annual real per capita GNP
rose by 2.5 percent annually, faster than the growth in the United
States.
Figure 1: U.S. and Puerto Rican Real Per Capita GDP and GNP, 1980-2005:
[See PDF for image]
Note: Figures were adjusted for inflation using U.S. and Puerto Rican
gross product deflators.
[End of figure]
The other problems with using the trend in per capita GDP as a measure
of Puerto Rico's economic progress are that (1) federal tax rules have
given U.S.-owned corporations an incentive to overstate the amount of
income they earn in Puerto Rico and those rules changed during the
1990s in a way that may have affected the extent of the overstatement,
and (2) the scale of the informal, or underground, economy in Puerto
Rico relative to the informal economy in the United States is unknown.
The first of these problems results in an overstatement of Puerto
Rico's GDP, but not its GNP. If the size and growth in the informal
economy in Puerto Rico is large relative to the size and growth of
informal economy in the United States, comparisons between levels and
growth in both per capita GDP and GNP in the two jurisdictions could be
affected.
Overall, employment in Puerto Rico has grown over the past two decades,
despite a decline in manufacturing jobs. The gap in the rate of
unemployment between Puerto Rico and the United States has narrowed in
recent years, but Puerto Rico's rate of 10.6 percent in 2005 was still
notably higher than the rate in the United States, which was below 6
percent. Puerto Rico's labor participation has been under 50 percent
throughout the past two decades, well below the U.S. rate, which has
generally been above 65 percent. This low labor participation rate in
Puerto Rico, along with a relatively low rate of investment there,
despite considerable investment from nonresidents, are two key issues
that affect Puerto Rico's economic performance.
Some Measures of Aggregate Manufacturing Activity Have Remained
Constant Despite a Decline in Possessions Corporation Activity:
U.S. corporations claiming a possessions tax credit played a dominant
role in Puerto Rico's manufacturing sector into the late 1990s.
According to the economic censuses of the Puerto Rican manufacturing
sector that Census compiles every five years, possessions corporations
accounted for 38.2 percent of employment and 61.6 percent of output in
the manufacturing sector in 1987. These shares rose to 40.8 percent and
72.0 percent in 1997, before falling to 31.8 percent and 26.7 percent
by 2002. Tax data show that the amount of possessions tax credit that
these corporations claimed peaked at $5.8 billion in 1993, the last
year before the generosity of the credit was significantly curtailed,
and that the gross profits of these corporations earned in Puerto Rico
peaked at $28.8 billion in 1997, the year after the possessions tax
credit was repealed (starting a 10-year phaseout period).
From 1993 to 2003, the number of corporations claiming the credit for
operations in Puerto Rico fell from 378 to 124, and the amount of
credit claimed declined from $5.8 billion to $1.1 billion. The gross
profits that these corporations earned in Puerto Rico dropped from
$24.8 billion to $12.1 billion, and their total assets declined from
$59.5 billion to $41.1 billion.
A combination of tax return and Economic Census data indicate that the
decline in income and value added of possessions corporations has been
largely offset by an increase in the income and value added of
affiliated corporations that left aggregate income and value added
roughly the same. GAO tracked the best available data on the affiliated
corporate groups that have claimed almost all of the possessions tax
credit since 1993 and found that the decline in the reported gross
profits, total income, and total assets of possessions corporations
within those groups was largely offset by increases in the reported
gross profits and assets of affiliated corporations operating in Puerto
Rico between 1997 and 2001, particularly those incorporated outside of
the United States. Data from recent Economic Censuses of Puerto Rico,
presented in figure 2, show that the decline in value added by
possessions corporations in the chemical industry (which is dominated
by pharmaceuticals) between 1997 and 2002 was more than offset by
increases in the value added of other types of businesses. In contrast,
value added for both possessions corporations and all other types of
businesses declined in the remainder of the manufacturing sector over
that period. A change in Census's industrial classification system
between 1997 and 2002 means that the scope of the industries being
compared for those two years in the following figures may not be
exactly the same.[Footnote 13] However, the basic point of each of
these figures is not invalidated by this factor.
Although some evidence of a possible change in income-shifting behavior
by U.S.-owned businesses makes it difficult to say how accurately
trends in reported income and value-added data represent trends in
actual economic activity in Puerto Rico, data on capital expenditures
(fig. 3), employment (fig. 4), and total assets (none of which should
be distorted by income shifting) support the conclusion that a
substantial amount of possessions corporation activity has been
continued by other types of businesses. However, most of this continued
activity is concentrated in the pharmaceutical industry and the decline
in possessions corporation activity in the remainder of Puerto Rico's
manufacturing sector has not been offset. None of the data GAO presents
addresses the question of what corporate activity would have taken
place during this period if the possessions tax credit had not been
repealed.
Figure 2: Value Added for Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries, 1997-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Figure 3: Capital Expenditures in Puerto Rico's Manufacturing Sector,
by Industry, 1987-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Figure 4: Employment in Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries, 1997-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
U.S.-owned or U.S.-incorporated Businesses Dominated Puerto Rican
Manufacturing in 2002 but Played Much Smaller Roles in Other Sectors of
the Economy:
U.S.-owned businesses accounted for at least 71 percent of value added
and at least 54 percent of employment in Puerto Rico's manufacturing
sector in 2002. CFCs produced most of this value added but possessions
corporations still accounted for most of the employment by U.S. firms.
The CFCs are particularly important in the pharmaceutical industry and
much less so in other manufacturing industries. U.S. corporations
appear to account for less than 25 percent of employment in Puerto
Rico's wholesale and retail trade sectors, where local corporations are
the most important employers. Similarly, U.S.-owned corporations are
not the majority employers in any of the large Puerto Rican service
industries for which data are available.
As of 2002, U.S. CFCs accounted for 42 percent of value added in Puerto
Rico's manufacturing sector--a larger share than that of any other type
of business entity (see fig. 5). They were able to produce this value
added with a relatively small share--14 percent--of the sector's total
employment (see fig. 6). Possessions corporations, which had the next
largest share of value added, with 27 percent, remained the largest
single type of employer, with 31 percent of the sector's employment.
Figure 5: Distribution of Value Added for All Puerto Rican
Manufacturing by Type of Business Entity, 2002:
[See PDF for image]
Note: Value-added figures for sole proprietors round to 0 percent.
[End of figure]
Figure 6: Distribution of Employment for All Puerto Rican Manufacturing
by Type of Business Entity, 2002:
[See PDF for image]
[End of figure]
Taxes Paid Per Capita in Puerto Rico Are Considerably Lower Than Those
in the States but the Taxes are About the Same Share of Personal Income
in Both Places:
The per capita tax burden imposed by all levels of government (federal,
Commonwealth, and local) in Puerto Rico in 2002 was $3,071,
considerably less than the per capita burden of $9,426 in the states
(see fig. 7). However, the combined tax burden in Puerto Rico amounted
to 28 percent of personal income, which was close to the 30 percent
burden in the states (see fig. 8).[Footnote 14] The rate for the five
states with the highest combined tax burden was 39 percent, while that
for the five states with the lowest burden:
was 23 percent.[Footnote 15] The average burden of federal taxes
(excluding the corporate income tax, which is difficult to allocate by
location) in Puerto Rico was considerably lower than in the states, but
this difference was made up by the fact that Commonwealth and local
taxes in Puerto Rico were higher than the average state and local
taxes. Commonwealth income and sales taxes were higher as a percent of
personal income than those of state and local governments, but property
taxes in the Commonwealth were lower.
Figure 7: Per Capita Taxes Paid in the United States and Insular Areas,
Fiscal Year 2002:
[See PDF for image]
[End of figure]
Federal grants and payments to the Puerto Rican government in 2002
amounted to $1,242 per capita, about the same as the $1,264 per capita
paid to all state and local governments in the states, but less than
the $1,703 per capita paid to the other insular area governments. The
$2,057 per capita of direct federal payments to individuals in Puerto
Rico was well below the $3,648 per capita paid to state residents, but
higher than the $1,418 per capita paid to residents of the other
insular areas. The per capita federal payments of $336 for salaries,
wages, and procurement in Puerto Rico were about 20 percent of payments
for those purposes in the states and the other insular areas.
Figure 8: Taxes Paid as a Share of Personal Income in the United States
and Insular Areas, Fiscal Year 2002:
[See PDF for image]
[End of figure]
The Extent to Which Federal Social Programs in Puerto Rico Mirror Those
in the States and U.S. Insular Areas Varies:
The social programs that we examined in the insular areas generally
targeted similar populations and delivered similar services to those in
the states--although sometimes the program had different rules and
funding than in the states. For example, in lieu of the Food Stamp
Program available in the states, which is an entitlement program based
on the number of participants, Puerto Rico receives a capped block
grant that has similar eligibility requirements. The major difference
between some of the social programs GAO examined in the states versus
those in Puerto Rico and the other insular areas is how they are
funded. For example, under HOME Investment Partnerships eligibility
rules are the same in Puerto Rico and the states;
however, unlike for the states, the amount of HOME funding is subject
to a cap. To cite another example, where federal Medicaid spending is
an open-ended entitlement to the states, it is subject to a statutory
cap and a limited matching rate in Puerto Rico and the other insular
areas. Some of the social programs that GAO examined are available in
the states, but not in some of the insular areas. Table 1 summarizes
how selected social programs compare between Puerto Rico and the
states.
Table 1: Summary of Selected Social Programs in Puerto Rico Compared to
Those in the States:
Same in Puerto Rico and the states: Individuals with Disabilities
Education Act (IDEA) Part B;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Food Stamp or Nutrition Programs;
Some components have financing differences and some do not: Health
Grants.
Same in Puerto Rico and the states: Title I of the Elementary and
Secondary Education Act, reauthorized by the No Child Left Behind Act
of 2001;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Medicare;
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Child and Adult Care Food Program;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Medicaid;
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: National School Lunch Program;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: State Children's Health Insurance Program (SCHIP);
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Special Supplemental Nutrition
Program for Women, Infants, and Children (WIC);
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Aid to the Aged, Blind, or Disabled (AABD);
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: HOPE VI;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Temporary Assistance for Needy Families (TANF);
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Housing Choice Vouchers;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Child Care and Development Fund (CCDF);
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Community Development Block Grants;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: Foster Care and Adoption Assistance;
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Project-based Section 8;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: HOME Investment Partnerships;
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Public Housing;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: [Empty];
Some components have financing differences and some do not: [Empty].
Same in Puerto Rico and the states: Section 203 (b) Single Family
Mortgage Insurance Program;
Operates the same in Puerto Rico, or comparable programs operate, but
financing differs: [Empty];
Some components have financing differences and some do not: [Empty].
Source: GAO analysis of U.S. federal social programs.
[End of table]
Agency Comments:
GAO shared a draft of this report with representatives of the Governor
of Puerto Rico. In written comments the Governor said that he is
confident the report will be useful to Congress for evaluating options
for promoting jobs and investment in Puerto Rico. The Governor
highlights the disproportionate job loss in Puerto Rican manufacturing
over the last 10 years and notes, as the report states, that the report
does not attempt to project what the current level of manufacturing
employment and value added would have been had the credit not been
repealed. The Governor's letter is reprinted in appendix IX.
[End of section]
Chapter 1:
Introduction:
The federal and Commonwealth governments have had a long-term interest
in policies to stimulate economic growth in Puerto Rico. Historically,
the centerpiece of these policies has been the combination of the
possessions tax credit in the U.S. Internal Revenue Code (IRC) and
extensive tax incentives in the Puerto Rican tax code for U.S. and
foreign businesses. In the early 1990s Congress became dissatisfied
with the effectiveness of the credit and introduced restrictions to
better target employment-generating activities. Then in 1996 Congress
repealed the credit but allowed existing possessions corporations to
earn either the possessions credit or a replacement credit during a 10-
year phaseout period ending in 2006. Various proposals have been placed
before Congress for some form of replacement assistance to the Puerto
Rican economy. Congress could better assess the merits of the various
proposals if it had more complete information relating to the recent
performance of the Puerto Rican economy, the current treatment that
Commonwealth residents receive under both federal tax policies and
federal social programs, and information relating to the burden of
taxes that residents of Puerto Rico pay, relative to those paid by
residents of the states and the other U.S. insular areas.
To provide a basis for future decisions regarding legislation on Puerto
Rican economic issues, this report:
* explains how the U.S. federal tax treatment of individuals and
businesses in Puerto Rico and of the insular government differs
relative to the treatment of governments, businesses, and individuals
in the states and the other U.S. insular areas;
* compares trends in Puerto Rico's principal economic indicators since
the early 1980s with similar indicators at the national level for the
United States and provides what is known about capital flows between
Puerto Rico and the United States and between Puerto Rico and foreign
countries;
* reports on changes in the activities and tax status of the
corporations that have claimed the possessions tax credit since 1993;
* provides information on the distribution of private-sector economic
activity in Puerto Rico by type of business entity;
* describes the total amount of tax paid by individuals and businesses
in the states and the U.S. insular areas and shows percentage
breakdowns by type of tax;
and:
* describes how the principal U.S. federal social programs apply to
Puerto Rican residents, relative to residents of the states and the
other U.S. insular areas.
Background:
Puerto Rico is one of the two nonstate Commonwealths associated with
the United States. The other is the Commonwealth of the Northern
Mariana Islands (CNMI). The United States also has three major
territories under the jurisdiction of the U.S. Department of Interior.
The major territories are Guam, the U.S. Virgin Islands, and American
Samoa. The three major territories plus the two nonstate Commonwealths
are referred to in this report as "the insular areas."[Footnote 16]
These areas are often grouped together in this manner for the purpose
of federal legislation. For this reason, and when necessary for the
purpose of comparison to Puerto Rico, this report provides a limited
discussion on the other insular areas.
With the exception of American Samoa, those born in the insular areas
are U.S. citizens; however, insular area residents are not afforded all
of the rights of citizens residing in the states.[Footnote 17] More
than four million U.S. citizens and nationals live in the insular
areas. These areas vary in terms of how they came under the sovereignty
of the United States and also in terms of their demographics, such as
median age and education levels. Each of the insular areas has its own
government and maintains a unique diplomatic relationship with the
United States. General federal administrative responsibility for all
insular areas but Puerto Rico is vested in the Department of the
Interior. All departments, agencies, and officials of the executive
branch treat Puerto Rico administratively "as if it were a state";
any matters concerning the fundamentals of the U.S.-Puerto Rican
relationship are referred to the Office of the President.[Footnote 18]
Residents of all the insular areas enjoy many of the rights enjoyed by
U.S. citizens in the states. But some rights that, under the
Constitution, are reserved for citizens residing in the states have not
been extended to residents of the insular areas. For example, residents
of the insular areas cannot vote in national elections, nor do their
representatives have full voting rights in Congress. Residents of all
of the insular areas receive federally funded aid for a variety of
social programs. Although residents of an insular area do not pay
federal income taxes on income earned in that insular area, federal tax
policy does play an important role in the economies of the insular
areas.[Footnote 19] Historically, the federal government has used tax
policy as a tool to encourage investment and increase employment in the
insular areas.
Puerto Rico's Relationship with the United States:
Puerto Rico's Constitution of 1952 defines Puerto Rico as a self-
governing Commonwealth of the United States.[Footnote 20] Although
fiscally autonomous, Puerto Rico is similar to the states in many
aspects. For example, matters of currency, interstate commerce, and
defense are all within the jurisdiction of the U.S. federal government.
Puerto Rican residents are required to pay local income taxes on income
earned from Puerto Rican sources, but not federal income taxes. Puerto
Rican residents, however, do contribute to the U.S. national Medicare
and Social Security systems. Generally, federal labor, safety, minimum
wage laws and standards also apply in Puerto Rican to the same extent
they apply to the states. The federal government plays a pervasive role
in Puerto Rico that stems not only from the applicability of the United
States Constitution, laws and regulations, but from the transfer to the
island of more than $13 billion in federal funds every year to fund
social programs to aid Puerto Rican residents, including earned
benefits such as Social Security and unemployment benefits.
Chapters 2 and 7 of this report discuss in detail the how the U.S.
federal tax code applies to residents of Puerto Rico and how the
principal U.S. federal social programs are applied in Puerto Rico,
respectively.
Characteristics of Puerto Rico:
Puerto Rico occupies a central position in the West Indies. It
comprises six main islands with a land area of 3,421 square miles and a
population of almost four million people. Puerto Rico is thought to
have one of the most dynamic economies in the Caribbean region, an
economy in which manufacturing, driven by the pharmaceutical industry,
has surpassed agriculture as the primary sector in terms of domestic
income. Over 40 percent of Puerto Rico's domestic income since the mid-
1980s has been derived from manufacturing. Pharmaceuticals accounted
for almost 40 percent of total value added in manufacturing in 1987;
that share rose to over 70 percent by 2002. Table 2 describes some of
the demographic characteristics of Puerto Rico and compares them to
national averages in 2000.
Table 2: Demographic Characteristics of Puerto Rico Compared to the
United States:
Characteristics: Population;
Puerto Rico: 3,808,610;
The 50 states: 281,421,906.
Characteristics: Median age;
Puerto Rico: 32.1;
The 50 states: 35.3.
Characteristics: Percent under 19 years of age;
Puerto Rico: 32.0;
The 50 states: 27.1.
Characteristics: Percent over 65 years of age;
Puerto Rico: 11.2;
The 50 states: 12.4.
Characteristics: Infant mortality per 1,000 live births;
Puerto Rico: 9.4;
The 50 states: 6.9.
Characteristics: Percent high school graduate or more (over age 25);
Puerto Rico: 60.0;
The 50 states: 80.4.
Characteristics: Percent bachelor's degree or more (over age 25);
Puerto Rico: 18.3;
The 50 states: 24.4.
Characteristics: Estimated median household income;
Puerto Rico: $14,412;
The 50 states: $41,994.
Characteristics: Percentage of individuals below poverty level;
Puerto Rico: 48.2;
The 50 states: 12.4.
Source: 2000 Census of the United States.
[End of table]
Possessions Tax Credit:
Historically, income derived from operations of U.S. corporations in
U.S. possessions has been subject to special tax provisions. The Tax
Reform Act of 1976 modified the form of the preferential tax treatment
by establishing the possessions tax credit under Section 936 of the
Internal Revenue Code. The stated purpose of this tax credit was to
"assist the U.S. possessions in obtaining employment-producing
investments by U.S. corporations." Prior to 1994, the possessions tax
credit was equal to the full amount of the U.S. income tax liability on
income from a possession. The credit effectively exempted two kinds of
income from U.S. taxation:
* income from the active conduct of a trade or business in a
possession, or from the sale or exchange of substantially all of the
assets used by the corporation in the active conduct of such trade or
business and:
* certain income earned from financial investments in U.S. possessions
or certain foreign countries, generally referred to as qualified
possession source investment income (QPSII).
In order for the income from an investment to qualify as QPSII, the
funds for the investment must have been generated from an active
business in a possession, and they must be reinvested in the same
possession. Dividends repatriated from a U.S. subsidiary to a mainland
parent have qualified for a dividend-received deduction since 1976,
thus allowing tax-free repatriation of possession income.
The possessions tax credit was criticized on the grounds that the
associated revenue cost was high compared to the employment it
generated, that a large share of the benefits of the credit were not
reaped by Puerto Rican residents and that it distorted debate over
Puerto Rico's political status. The Omnibus Budget Reconciliation Act
of 1993 placed caps on the amounts of possessions credits that
corporations could earn for tax years beginning in 1994 or
later.[Footnote 21] The Small Business Job Protection Act of 1996
repealed the possessions tax credit for taxable years beginning after
1995.[Footnote 22] However, the act provided transition rules under
which a corporation that was an existing credit claimant was eligible
to claim credits with respect to possessions business income for a
period lasting through taxable years beginning before 2006. Additional
background on Section 936 of the U.S. Tax Code and the possessions
credit is provided in chapters 2 and 4.
Additional Studies Relating to the Economy of Puerto Rico:
Several of our previous studies, as well as work done by the Internal
Revenue Service (IRS) and the U.S. Census Bureau (Census), address
aspects of the Puerto Rican economy discussed in this report, including
the business activity of possessions corporations and employment,
payroll, value added, and capital expenditures by economic sector. Our
previous work also addresses broader trends in the Puerto Rican
economy, as does work underway by the Brookings Institution. A related
study is also expected shortly by the Joint Committee on Taxation. Its
work will evaluate legislative options concerning Puerto Rico. Table 3
highlights the scope of several recent reports on Puerto Rico, as well
as the two studies that are in progress.
Table 3: Recent and Forthcoming Reports on Puerto Rico:
Report: GAO, Puerto Rico and the Section 936 Tax Credit, GAO/GGD-93-109
(Washington, D.C.: June 8, 1993);
Scope: This report presented information relevant to Congress's
consideration of proposals to revise Section 936 of the IRC.
Report: GAO, Tax Policy: Puerto Rican Economic Trends, GAO/GGD-97-101
(Washington, D.C.: May 14, 1997);
Scope: This report provided information on economic activity in Puerto
Rico, before and after the changes in U.S. tax benefits, under Section
936 of the IRC.
Report: GAO, U.S. Insular Areas: Multiple Factors Affect Federal Health
Care Funding, GAO-06-75 (Washington, D.C.: Oct. 14, 2005);
Scope: This report identified the key sources of federal health care
funding in the insular areas, the differences between insular areas and
the states in the methods used to allocate these funds, and the
differences in spending levels per individual between the insular areas
and the states.
Report: IRS research on possessions corporations, published by
Statistics of Income, in odd years[A];
Scope: In odd years, from 1993 to 2001, IRS's Statistics of Income
division studied corporations claiming the possessions tax credit in
Puerto Rico.
Report: Census's 1992, 1997, and 2002 Economic Census of Island Areas;
Scope: The censuses include information on employment, payroll, value
added, and capital expenditures by economic sector.
Report: Brookings Institution's report on restoring growth in Puerto
Rico[B];
Scope: Economists from the United States and Puerto Rico address a
range of major policy issues affecting the island's economic
development and propose a strategy for jumpstarting Puerto Rican
economic growth. The book includes Puerto Rico's past experience with
growth policies, and an analysis of several reforms and new initiatives
in labor, education, entrepreneurship, fiscal policy, migration, trade,
and financing development.
Report: Forthcoming study by the Joint Committee on Taxation;
Scope: This study will analyze the tax and economic policy implications
of legislative options concerning Puerto Rico. In particular it will
examine the revenue costs of these options and compare the options to
current laws relative to the states and the other U.S. insular areas.
Source: GAO.
[A] Randy Miller, "U.S. Possessions Corporations, 1995," SOI Bulletin,
IRS; Sarah Nutter, "U.S. Possessions Corporations Returns, 1997 and
1999," SOI Bulletin, IRS; Daniel Holik, "U.S. Possessions Corporations
Returns, 2001," SOI Bulletin, IRS.
[B] Susan M. Collins, Barry P. Bosworth, and Miguel Soto-Class,
eds.,The Economy of Puerto Rico: Restoring Growth, (Washington, D.C.:
The Brookings Institution, 2006).
[End of table]
Scope and Methodology:
The Chairman and Ranking Minority Member of the U.S. Senate Committee
on Finance asked us to study fiscal relations between the federal
government and Puerto Rico and trends in the Commonwealth's economy
with a particular focus on the activities of possessions corporations
operating there.
Federal Tax Treatment:
To determine the U.S. federal tax treatment of individuals and
businesses in Puerto Rico, relative to the states and the other insular
areas, we examined the IRC, Department of the Treasury regulations,
relevant Treasury rulings and notices, and legislation.
Economic Indicators and Capital Flows:
To compare trends in principal economic indicators for the United
States and Puerto Rico, we obtained data from both U.S. and Puerto
Rican sources. The trends we present are commonly used measures of
overall economic activity and important components of economic
activity, such as saving, investment, labor force participation, and
unemployment. We reported on many of these indicators in our previous
report on economic trends in Puerto Rico.[Footnote 23] The data shown
are largely drawn from the National Income and Product Account series
produced annually by economic statistics agencies in the United States
and Puerto Rico. Most of the data we used for the U.S. economic series
are produced by the Bureau of Economic Analysis and the Bureau of Labor
Statistics and are publicly available from the Internet. When we
compared U.S. data to Puerto Rican data that are based on the Puerto
Rican July 1-June 30 fiscal year, we computed annual U.S. figures using
monthly or quarterly data to match the Puerto Rican fiscal year.
Most of the annual data we used for Puerto Rican economic trends are
produced by the Planning Board of Puerto Rico and are also publicly
available. In some instances, the methodologies used by the Planning
Board to produce certain data series are outdated relative to the
methodologies now used by the United States. For example, the
methodology used in calculating certain price indices in Puerto Rico is
outdated and the methods used to obtain unemployment data have been
somewhat less rigorous than in the United States. In these cases, we
reviewed literature concerning the limitations of various series and
interviewed Puerto Rican officials about the methods they use to
collect and develop their data. These limitations are noted in the
report. Wherever possible, we used alternative assumptions and data
sources to determine if any conclusions drawn from the data are
sensitive to the particular data series used. For example, we applied
both U.S. and Puerto Rican price indices to Puerto Rican gross domestic
product (GDP) data to see if applying different measures of price
changes would lead to different conclusions about whether the Puerto
Rican economy has been growing faster or slower than the U.S. economy.
Puerto Rico's Planning Board has recently contracted with several
consultants for a review of their entire set of methodologies for
preparing the Commonwealth's income and product accounts, including the
deflators. The Board has also been negotiating a memorandum of
agreement with the U.S. Bureau of Economic Analysis for the latter to
provide advice on this effort.
For some indicators of interest, annual data are not available for
Puerto Rico. In some of these cases, we used decennial census data. The
decennial census covers both the United States and Puerto Rico and
produces comparable statistics on educational attainment and poverty
levels. We also used data from the Economic Census of Puerto Rico and
the Economic Census of the United States, also produced by Census.
These data included detailed information on employment, investment, and
value added broken down by sector of the economy. These data, produced
by Census every 5th year, are of particular relevance to the possible
effects of phaseout of the possessions tax credit.
To provide information on what is known regarding the flow of capital
into and out of Puerto Rico, we interviewed Puerto Rican government
officials and private sector experts to help us to ascertain what data
were available. We determined that the available data would not allow
us to present a comprehensive picture of the trends in capital flows.
The most significant gap in that picture is data relating to direct
investment by corporations incorporated outside of Puerto Rico, which
is financed from within their own affiliated groups, rather than
through financial institutions.[Footnote 24] We can, however, report on
changes over the years between 1995 and 2004 in the amount of funds
that nonresidents hold in the Puerto Rican banking system and the
amount of funds that the banking system invests within and outside of
the Commonwealth. In order to identify where the assets held in the
Puerto Rican banking system are invested and where the owners of the
banks' liabilities reside, we analyzed institution-specific data that
the Office of the Commissioner of Financial Institutions (OCFI)
collects for oversight purposes. Banks and certain other financial
institutions in Puerto Rico are required to report detailed information
regarding their assets, liabilities, and capital to the OCFI through a
computerized "CALL report" data system. Appendix I describes our
analysis of the financial data.
We also used data provided by Puerto Rico's Government Development Bank
to show trends in Puerto Rican government borrowing in the U.S. and
local capital markets. The consensus of the government and private
sector financial experts whom we interviewed was that all Puerto Rican
government bonds that qualify for tax exemption under Section 103 of
the IRC, such as bonds that are issued for the purpose of capital
improvement projects, are sold in the U.S. market. All other Puerto
Rican government bonds that are taxable in the United States but tax
exempt in Puerto Rico are sold in the local market. The Government
Development Bank was able to provide us with a complete and detailed
accounting of each of their debt issues and to identify which ones did
or did not qualify for the U.S. tax exemption.
Changes in Possessions Corporation Activity:
In order to examine changes in the activities of possessions
corporations operating in Puerto Rico since the early 1990s, we
constructed several databases from an assortment of tax return data we
obtained from IRS and Puerto Rico's Department of Treasury. Our
principal source of data was IRS's Statistics of Income unit (SOI),
which compiles comprehensive data on possessions corporations every
other year. We obtained the complete set of these biennial databases
from 1993 through 2003 and used information from SOI to identify those
possessions corporations that operated in Puerto Rico. For the first
stage of our analysis, we linked the biennial records for each
individual corporation by its employer identification number (EIN) so
that we could identify any data gaps for specific corporations in
particular years and so we could complete a second, more complicated
data analysis (described below). We filled in missing data for
individual corporations to the extent possible from other IRS files and
through imputations based on surrounding-year data. The extent of the
imputations were minimal relative to the population totals we report.
We used the final database on 656 possessions corporations that
operated in at least 1 year between 1993 and 2003 to report on changes
over time in the aggregate income, tax credit, and total assets of this
population of corporations and to show how these particular variables
were distributed across different industries. We also used data from
the past four Economic Censuses of Puerto Rico (1987, 1992, 1997, and
2002) compiled by Census to show how the importance of possessions
corporations in Puerto Rico's manufacturing sector has changed over
time.
For the second stage of our analysis, we focused on a subpopulation of
the largest groups of affiliated possessions corporations operating in
Puerto Rico. For each of these groups we compiled data on other
affiliated corporations (i.e., those sharing the same ultimate parent
corporations) that also operated in Puerto Rico, but were not
possessions corporations. The objective of this analysis was to assess
the extent to which the large corporate groups that accounted for most
of the activity of possessions corporations remained active in Puerto
Rico, even as the operations of their possessions corporations were
being phased out. We started by identifying the 77 largest groups of
possessions corporations in terms of the amount of credit they earned,
their total income, and their total assets. These large groups gave us
a subpopulation that accounted for over 90 percent of the tax credit
and income earned and over 90 percent of the assets owned by
possessions corporations between 1993 and 2003, and at the same time
reduced the number of corporations we had to work with from 656 to 172.
This reduction in the number of corporations we had to work with was
important because data limitations caused some of the steps in our
database development to be very labor intensive.
We used two key data sources to identify and obtain data for the
members of the large groups that operated in Puerto Rico but which were
not possessions corporations. The first source was the database in
which IRS maintained the records of all forms 5471 that had been filed
between 1996 and 2002. (The owners of controlled foreign corporations
[CFC] must file a separate form 5471 every year for each CFC that they
own.) The second source was a database that the Puerto Rican Department
of Treasury (with the assistance of the Government Development Bank)
had recently transcribed from all Puerto Rican tax returns for tax
years 1998 through 2001 filed by all corporations or partnerships that
received tax incentives from the Government of Puerto Rico. Officials
from the Department of Treasury and from the Puerto Rico Industrial
Development Company (PRIDCO) told us that almost all U.S.-or foreign-
owned manufacturing corporations operating in Puerto Rico receive tax
incentives, as do corporations in designated service industries that
export products or services from Puerto Rico. A total of 1,758
different taxpayers appeared in the database for at least 1 of the tax
years. We used a series of both automated and manual search and
matching approaches to link the CFCs and other types of companies from
these two databases to our 77 large corporate groups. We also used
information from both databases to determine which of the CFCs had
operations in Puerto Rico and, in the case of CFCs with operations in
multiple countries, to make a range of estimates for the amount of
income they earned in Puerto Rico. The data on income, assets, taxes
paid, and place of incorporation that we extracted from the two
databases for these linked corporations allow us to provide a more
complete picture of the trends in activities of the corporate groups
that have taken advantage of the possessions tax credit over the years.
Through interviews with officials from the agencies providing the data
and our own computer checks for internal consistency in the data, we
determined that the quality of the data was sufficient for the purposes
of our report when viewed with the cautions we raise at various points
in the text. One problem that afflicted all of the databases to some
degree was missing values arising from the fact that IRS and the Puerto
Rican Department of Treasury could not always obtain every tax return
that should have been in their databases in a particular year and the
fact that taxpayers did not always accurately fill in every line of the
return that they should have. Our access to multiple databases that
overlapped to some extent enabled us to address this problem by filling
in gaps with data from an alternative file, making reasonable
imputations, or at a minimum assessing whether missing values would
have made a significant difference to our results.
Distribution of Business Activity:
In order to show how economic activity in Puerto Rico is distributed
across different forms of businesses, we negotiated a special
arrangement with IRS and Census that enabled us to disaggregate the
data from Census's recently completed 2002 Economic Census of Puerto
Rico by categories of business entities that are more specifically
relevant to tax policymakers than the categories Census uses for its
own publications. The 2002 Economic Census collected data on
employment, payroll, and other economic measures from all nonfarm,
private sector employers in Puerto Rico, making it a comprehensive
enumeration of Puerto Rican businesses. We used taxpayer data from IRS
and Puerto Rico to determine, in as many cases as possible, the type of
federal or Puerto Rican income tax return each of these employers filed
and, in the case of corporations, where they were incorporated. We then
used this information to place each employer into a business entity
group, such as possessions corporation, CFC incorporated in Puerto
Rico, CFC incorporated elsewhere, sole proprietor, and so forth. Census
then provided us with tabulations of their data for each of these
groups, disaggregated by industry to the extent that their disclosure
rules would permit. We developed a coding system and a data-exchange
procedure that enabled us to link tax and Census data for specific
employers in such a way that Census did not have to view restricted IRS
data and we did not have to view confidential Census data for specific
survey respondents. (See app. III for details.)
The data that we used to determine the tax filing status and place of
incorporation for the employers in the Census database came from the
IRS and Puerto Rico databases described above, plus a couple of
additional sources. Another important new source of data was IRS's
National Accounts Profile (NAP) database, which contains selected
information for all individuals and businesses that have an EIN. Each
employer in Puerto Rico has a federal EIN because it must collect
Federal Insurance Contributions Act (FICA) taxes on behalf of its
employees. Consequently, we were able to access NAP data for a very
high percentage of the employers included in the Census. For those
employers we were able to determine what, if any, federal income tax
form they were required to file, whether they were included in their
parent corporation's consolidated return, and whether or not IRS had
identified them as being sole proprietors.
The other data sources that we used for this particular analysis
included sets of income tax returns for some of the businesses
operating in Puerto Rico that IRS had provided to Census, and a list of
CFCs operating in Puerto Rico that PRIDCO had compiled. None of the non-
Census data sources that we used was comprehensive and some of the
sources more closely met our needs than others. Appendix III describes
how we used these data to place each employer into a business entity
group. For those cases where we could not reliably place an employer
into a group based on tax data or data from PRIDCO we asked Census to
place them into certain groups based on their survey responses.
Fiscal Comparison:
To compare the overall tax burden borne by individuals and businesses
in Puerto Rico with the burden borne by individuals and businesses in
the states and in the other insular areas, we obtained and analyzed
detailed data on state and local government revenues from the U.S.
Census of Governments, data on Commonwealth government revenue from the
Puerto Rican Department of Treasury, data on municipal tax revenue in
Puerto Rico from Oficina del Comisionado de Asuntos Municipales, Centro
de Estadisticas Municipales,[Footnote 25] and revenue data for the
other insular areas reported in their 2002 Single Audit reports. We
also obtained data on federal taxes collected in Puerto Rico and the
states from IRS's 2002 Data book.[Footnote 26] (No such data were
available for the insular areas.) We compared taxes paid on a per
capita basis and as a percent of personal income. We make our
comparison for year 2002 because that is the year of the most recent
Census of Governments.
We also compared federal expenditures for the states, Puerto Rico, and
the insular areas using data we obtained from the Consolidated Federal
Funds Report for Fiscal Year 2002 and the Federal Aid to States for
Fiscal Year 2002. In addition, we report specifically on transfers of
excise tax and customs duty revenues that the federal government makes
to Puerto Rico using data obtained from U.S. Customs and the Alcohol
and Tobacco Tax and Trade Bureau.
To assess the reliability of the data, for the Census and Puerto Rican
Treasury data we interviewed knowledgeable officials and reviewed
supporting documentation to understand the internal procedures in place
to ensure data quality. For the insular areas we compared data reported
in the Single Audit reports to other published data. We determined that
the data we obtained from the Puerto Rican Department of Treasury is
consistent with what was reported in the Commonwealth's Comprehensive
Annual Financial Report. Although we found the data reliable for the
purpose of our engagement, we note certain limitations in the data. In
particular, all the state and local data compiled by Census are as-
reported by cognizant government officials responsible for financial
matters in each of the political entities and may not have been
subjected to any internal or external accuracy checks. Checks performed
by Census on its data are for completeness and consistency with
internal and external sources. The independent auditor's statement in
the Single Audit reports for the insular areas indicated that the
auditors generally could not verify the accuracy of reported
information. In addition, federal, state, and insular area fiscal years
differ, so the data do not cover exactly the same period of time.
Federal Social Programs:
Interviews with federal agencies and prior GAO work provided the basis
for our description of the application of the principal U.S. federal
social programs to Puerto Rico residents, relative to the states, and
the other insular areas. To select the social programs included in this
report we consulted with GAO experts in the areas of health care
policy; education, workforce, and income security policy; and financial
markets and community investment policy. With the help of these
experts, we arrived at a list of the principal federal social programs,
which we then pared down, based on program availability in Puerto Rico
and expenditure level in Puerto Rico. We relied on prior GAO work and
interviews with federal agency officials to determine how each program
is applied in Puerto Rico, relative to the other areas. We used program-
level data, supplied by federal agencies, to report program
expenditures for fiscal year 2002. We selected fiscal year 2002 because
in chapter 6 of this report, we provide a more complete analysis of the
revenue and expenditures of Puerto Rico, the states, and the other
insular areas using the year of the most recent Census of Governments,
2002.
Our methodologies for each objective were discussed with experts
including those from the Office of the Comptroller General of Puerto
Rico, Puerto Rico's Government Development Bank, Puerto Rico's Planning
Board, Puerto Rico's Office of the Commissioner of Insurance
Institutions and Puerto Rico's Office of the Commissioner of Financial
Institutions. Federal-level experts include those from Census and IRS.
Our work was performed from February 2004 to April 2006 in accordance
with generally accepted government accounting standards.
[End of section]
Chapter 2:
U.S. Federal Tax Treatment of Puerto Rico and Other Insular Areas
Varies by Area and Type of Tax:
Individuals who are residents of Puerto Rico or other U.S. insular
areas and who earn income only from sources outside of the states
generally pay no federal income tax; however, their wages are all
subject to Social Security and Medicare taxes, and wages paid to
residents of Puerto Rico and the U.S. Virgin Islands also are subject
to federal unemployment tax. Corporations organized in Puerto Rico,
like those organized in the other U.S. insular areas, are generally
treated for U.S. tax purposes as if they were organized under the laws
of a foreign country. Until this year, special rules enabled
corporations organized in the United States that met certain conditions
to reduce the federal tax payable on income earned in and repatriated
from Puerto Rico and other insular areas.
U.S. Tax Treatment of Insular Area Residents with U.S.-source Income
and U.S. Residents with Insular Area-source Income Varies by Area:
Individuals residing in an insular area and who earn income only from
sources there file one income tax return there and are required to pay
income tax only to that area. The U.S. income tax treatment of U.S.-
source income of residents of an insular area (which does not include
income earned in the insular areas, other than that earned by U.S.
government employees) depends on the area:
* Residents of American Samoa and Puerto Rico must pay U.S. income tax
on all their income from sources outside American Samoa or Puerto Rico,
respectively, if such income exceeds the federal filing
threshold.[Footnote 27] The U.S. government retains the tax collected
from residents of Puerto Rico, but is required to transfer the tax
collected from residents of American Samoa to its government.
* Residents of Guam and CNMI owe income tax to the territory and
Commonwealth, respectively, on their U.S.-source income;
the governments of these Commonwealths and territories are required to
transfer a portion of this tax revenue to the U.S. government if the
resident's income exceeds certain income thresholds.
* Generally, the U.S. government does not tax, or receive any tax
revenue from U.S. Virgin Island residents who have U.S.-source income
so long as such residents report all of their income, identify the
source of their income, and pay their income taxes to the U.S. Virgin
Islands.
The U.S. income tax treatment of U.S. residents with Commonwealth-or
insular area-source income also depends on the insular area:
* U.S. residents with income from Puerto Rico or American Samoa are
subject to U.S. federal tax on that income. They also pay tax on that
income to Puerto Rico or American Samoa, respectively, and receive a
foreign tax credit against their U.S. tax liability for this amount.
* U.S. residents with income from Guam or CNMI owe U.S. income tax on
that income;
the federal government is required to transfer a portion of the tax
revenue received from Guam and CNMI residents back to the respective
territory and Commonwealth.
* U.S. residents who earn income in the U.S. Virgin Islands must file
identical tax returns with both the government there and the U.S.
government;
each government's share of the revenues is based on where the income
was earned.
While FICA Taxes Are Imposed on Wages Paid to Employees in All Insular
Areas, Unemployment Insurance Tax Applies Only to Wages Paid in Puerto
Rico and U.S. Virgin Islands:
The Federal Insurance Contributions Act[Footnote 28] imposes wage-based
taxes on employers and employees in the United States and the
Commonwealths and territories to support Social Security and Medicare.
The employment upon which taxes are collected includes services
performed in the United States and the insular areas. Taxes collected
under the act are not transferred to the treasuries of the insular
areas.
The Federal Unemployment Tax Act imposes[Footnote 29] a tax on wages
paid to employees, based on wages paid. Puerto Rico and the U.S. Virgin
Islands are the only insular areas covered by the Act. The proceeds of
the tax are used to support the federal-state unemployment compensation
program and are not transferred to the treasuries of either area.
Taxation of Corporations Incorporated in the United States:
The federal government taxes a U.S. corporation on its worldwide income
(reduced by any applicable foreign income tax credit), regardless of
where the income is earned. When the tax is due depends on several
factors, including whether the income is U.S.-or foreign-source and, if
it is foreign income, on the structure of the corporation's business
operations.
However, since 1976, and through taxable years beginning prior to
December 31, 2006, U.S. corporations with a domestic subsidiary
conducting a trade or business in insular areas could qualify to
receive significant tax benefits through the possessions tax
credit.[Footnote 30] Prior to taxable years beginning in 1994, the
credit effectively exempted from U.S. taxation all possession-source
income of a qualified possessions corporation. Dividends repatriated
from a wholly-owned possessions corporation to the mainland parent
qualified for a 100 percent deduction, thus allowing tax-free
repatriation of possession income. The credit also exempted qualified
possession-source investment income (QPSII), which is certain income
the possessions corporation earned from financial investments in U.S.
possessions or certain foreign countries. The credit for qualified
research expense was also allowed for such research conducted by a
possessions corporation.
Starting in taxable years beginning in 1994, the amounts of possessions
tax credits that a possessions corporation could claim were capped.
Under the cap, a possessions corporation had to choose between two
alternatives--a "percentage limitation" option or an "economic activity
limitation" option. In 1996, the possessions tax credit was fully
repealed for taxable years beginning after 2005. Existing possessions
corporations could continue to claim the possessions tax credit for tax
years beginning prior to 2006. These existing credit claimants,
however, were subject to an income cap[Footnote 31] based on the
average business income that the corporation earned in a possession
during a specified "base period." A possessions corporation electing
the percentage limitation was subject to the income cap beginning in
1998 and a possessions corporation electing the economic limitation was
subject to the income cap beginning in 2002. Only QPSII earned before
July 1, 1996, qualified for the credit for tax years beginning after
December 31, 1995.
Taxation of Corporations Incorporated outside the United States:
Corporations organized outside the United States, including
corporations organized in Puerto Rico and the other insular
areas,[Footnote 32] are generally treated as foreign corporations for
U.S. tax purposes. These corporations are taxed on their U.S. source
earnings--the tax paid generally depends on whether the income is
"effectively connected" with the conduct of a trade or business within
the United States, but income from insular areas is not subject to U.S.
tax.
Foreign corporations pay U.S. tax at two rates--a flat 30 percent rate
is withheld on certain forms of nonbusiness gross income from U.S.
sources, and a tax is imposed at progressive rates on net income from a
U.S. trade or business.[Footnote 33] Corporations in Puerto Rico must
pay the 30 percent withholding tax; corporations in the other insular
areas do not pay the withholding tax if they meet certain tests that
establish close connections with the insular area in which the
corporation was created. U.S.-source dividends paid to corporations
organized in Puerto Rico are subject to a 10 percent withholding tax
provided that the same tests mentioned above are satisfied and the
withholding tax on dividends paid to the U.S. corporations is not
greater than 10 percent.
Corporations organized under the laws of an insular area may be treated
as a controlled foreign corporation (CFC) for U.S. income tax purposes.
To qualify as a CFC, the corporation must be more than 50 percent U.S.-
owned, taking into account only U.S. shareholders that meet a 10
percent stock ownership test. Gross income from the active conduct of
business in Puerto Rico or elsewhere outside of the United States is
not taxed until it is repatriated to the U.S. shareholders in the form
of dividends. Subject to certain limitations, these shareholders are
entitled to a credit for any foreign income taxes paid by the CFC with
respect to the earnings distributed.
Certain types of passive income, such as dividends and interest, earned
by CFCs are currently includable in the income of the U.S.
shareholders, under subpart F of the U.S. Tax Code, even though those
amounts are not actually distributed to them.[Footnote 34] These
shareholders are, subject to certain limitations, also entitled to a
credit for foreign income taxes paid with respect to the amounts
includible in income under subpart F.
Certain kinds of income received by a CFC organized under the laws of
an insular area are not considered subpart F income:
* income received from the sale in the insular area of personal
property manufactured by the CFC in that area,
* dividend or interest income received from a related
corporation[Footnote 35] also organized under the laws of that insular
area, and:
* rents or royalties from a related corporation received by a CFC
organized under the laws of an insular area for the use of property in
the insular area where the CFC is organized.
The allocation of gross income, deductions, and credits between related
taxpayers, such as intercompany sales from a CFC to a U.S. domestic
parent, is subject to transfer pricing rules that are designed to
prevent manipulation of the overall tax liability.
Deduction for Income from Domestic Production Activities:
In 2004, in response to a long-running dispute with the European Union,
Congress repealed the extraterritorial income (ETI) exclusion and
enacted a deduction relating to income attributable to domestic
production:
activities.[Footnote 36] For purposes of the ETI exclusion, the United
States included Puerto Rico. Puerto Rico is not included, however, in
the definition of U.S. for purposes of the deduction for domestic
production.
Goods Imported to Insular Areas Are Generally Exempt from U.S. Excise
Taxes, but a Special Tax Is Imposed on Goods Made in Puerto Rico and
U.S. Virgin Islands:
Merchandise imported into an insular area from the United States is
exempt from U.S. excise taxes. The only U.S. excise taxes that apply to
products imported into any of the insular areas from another country
are those where specific language extends the tax beyond the "United
States," which is generally defined, for tax purposes, as only the
states. This language exists for a tax on petroleum (an environmental
tax), a tax on certain vaccines, a tax on certain chemicals, and a tax
on certain imported substances.
If any revenue from these excise taxes is collected in American Samoa,
Puerto Rico, or the U.S. Virgin Islands, the U.S. government retains
the revenue. The governments of Guam or CNMI receive any revenue from
these taxes collected in their respective territory and Commonwealth.
There is a special "equalization" U.S. excise tax on articles
manufactured in Puerto Rico or the U.S. Virgin Islands and exported to
the United States equal to the tax that would have been imposed had the
articles been manufactured in the United States. Subject to the
limitations described below for distilled spirits, the U.S. Treasury
returns all the revenue from the tax on articles manufactured in Puerto
Rico to the Treasury there except the amounts needed to pay refunds and
drawbacks[Footnote 37] to manufacturers and the amount needed to cover
its enforcement expenses. The return to the U.S. Virgin Islands also
excludes amounts needed to pay refunds and drawbacks, plus one percent
of the total tax collected. All U.S. excise taxes collected on articles
manufactured from Guam and CNMI and exported to the United States must
be transferred to their respective territory and Commonwealth
governments.
A special limitation applies for the U.S. excise tax on distilled
spirits manufactured in Puerto Rico and the U.S. Virgin Islands and
exported to the United States. The tax rate ordinarily applied to rum
is $13.50 per proof gallon exported, of which $10.50 per proof gallon
is returned to the appropriate insular area. Puerto Rico and the U.S.
Virgin Islands also share revenue from the U.S. excise tax collected on
all rum imported into the United States from a foreign country. Their
respective shares are proportionate to the relative sizes of their rum
exports to the United States during the prior fiscal year. Puerto
Rico's share, however, cannot exceed 87.626889 percent or be less than
51 percent while the U.S. Virgin Islands' share cannot exceed 49
percent nor drop below 12.373111 percent.
U.S. Government Is Responsible for Collecting Customs Duties in Puerto
Rico and Helps Collect Duties in U.S. Virgin Islands:
The U.S. government collects duties on goods imported into "U.S.
customs territory," which encompasses the states and Puerto Rico,
unless they are exempt. U.S. customs duties collected in Puerto Rico
are deposited in a special U.S. Treasury account. After deductions for
refunds and the expenses of administering customs activities in Puerto
Rico, the remaining amounts are transferred to the treasury there.
Although the U.S. Virgin Islands are not in "U.S. customs territory,"
the U.S. government helps collect local duties there. These collections
are transferred to the government of the U.S. Virgin Islands after
items such as operational expenses are deducted. The U.S. government
has authority to administer and enforce collection of custom duties in
American Samoa, upon request of the Governor. Guam and CNMI administer
and enforce their own customs policies and procedures. Items imported
into "U.S. customs territory" from American Samoa, Guam, CNMI, and the
U.S. Virgin Islands are subject to U.S. customs duties unless the items
are exempt.
[End of section]
Chapter 3:
Trends in Production, Income, and Other Economic Indicators for Puerto
Rico:
The economic well-being of Puerto Rican residents, measured in terms of
either per capita or median income, remains well below that of
residents of the states. The relative progress that the Puerto Rican
economy has made since 1980 is difficult to measure with precision for
a number of reasons, including tax-induced distortions in how U.S.
corporations have reported income earned in the Commonwealth. The low
rate of labor participation is a crucial issue in Puerto Rico's
economic performance, and the rate of investment appears insufficient
to significantly reduce the disparity between mainland and Puerto Rican
incomes.
Measuring Economic Progress in Puerto Rico Is Challenging but the
Income of Commonwealth Residents Remains Well Below That of U.S.
Residents:
As shown in figure 9, Puerto Rico's per capita GDP of about $21,000 in
2005 remained well below U.S. per capita GDP of about $41,000. GDP is a
broad measure of overall income or economic activity occurring within a
nation's borders in a given year. According to the Puerto Rican and
U.S. national income and product accounts, this measure has grown more
rapidly in Puerto Rico than in the United States since 1980, when
viewed on a per capita basis after adjustments for inflation. However,
for a number of reasons, the growth rate of real (meaning inflation-
adjusted) GDP likely does not represent a very accurate measure of
changes in the economic well-being of Puerto Rican residents.
First, as a result of U.S. tax provisions and a development strategy
pursued by successive Puerto Rican governments to use local tax
incentives to attract investment by U.S. and foreign firms, a
significant amount of the investment income included in GDP is paid out
to U.S. and foreign investors. In figure 9, the income earned by
nonresidents is approximately represented by the gap between Puerto
Rican GDP and Puerto Rican GNP. GNP is a measure of the total amount of
income earned by residents in a given year from sources within and from
outside of the country. In contrast to Puerto Rico, GDP has been
consistently about the same as GNP in the United States, which
indicates that the amount of income earned abroad by U.S. residents is
close to the amount of income earned by foreign owners of assets
located in the United States. As of 2005, Puerto Rico's per capita GNP
of about $14,000 remained well below the U.S. level of about $41,000.
Second, using the possessions tax credit, U.S.-based groups of
affiliated corporations (i.e., those owned by a common U.S. parent
corporation) with certain types of operations in Puerto Rico have had
incentives to attribute as much net income to those operations as is
legally permissible, rather than to related operations in the United
States.[Footnote 38] Moreover, the nature of these incentives has
changed during the period covered by our review. Consequently, the
income reported by these corporations to have been earned in Puerto
Rico in a given year may overstate the actual economic importance of
their Puerto Rican production, and changes in income over the years may
reflect not only changes in the economic activity of these
corporations, but also changes in how corporations have computed their
Puerto Rican source income. Some of the data reported later in this
chapter suggest that this so-called "income shifting" has taken place.
This particular issue affects data on GDP and income and possibly value
added for corporations owned by U.S. parent corporations;
it should not affect GNP or income and value added for Puerto Rican-
owned corporations.
Third, as is the case for any country, the scale of the informal, or
underground, economy in Puerto Rico is difficult to measure. If the
informal economy in Puerto Rico is large relative to the informal
economy in the United States, as some analysts believe, a relatively
large amount of economic activity in Puerto Rico may not be reflected
in national income and labor market statistics. As discussed below, the
presence of a large informal economy may be one explanation of low
reported labor force participation rates in Puerto Rico. Analysts who
have recently looked at this issue disagree on the size of the informal
economy and on whether it has been growing as a share of the total
economy. The size and any growth in the informal economy in Puerto
Rico, relative to that in the United States, would affect comparisons
between levels and growth in per capita income earned in the two
jurisdictions.
Lastly, as acknowledged by the Puerto Rico Planning Board, there are
problems with some Puerto Rican price indices, which cause an unknown
degree of inaccuracy in the inflation adjustments to the long-term
trend data on the Puerto Rican economy and, therefore, some imprecision
in the real growth rates of key economic indicators that are stated in
terms of dollar values. Most concerns center on the Puerto Rican
consumer price index (CPI, a measure of prices on consumer goods) and
the fact that the market basket of goods used to compute the index has
not been updated since the 1970s. This means that the index will tend
to overstate price changes. In the analysis in this chapter, we have
used the Puerto Rican gross product deflator--a broad measure of how
prices have changed on average for goods and services in the economy--
for our inflation adjustments. Although analysts within and outside of
Puerto Rico's Planning Board, which produces the deflator, consider it
to be less problematic than the CPI, they still have concerns relating
to fact that the CPI is one of the components used in estimating the
deflator and the fact that methodologies for other components are also
outdated.[Footnote 39]
Given the concerns with the Puerto Rican deflator, there is a question
as to whether that measure or the U.S. gross product deflator more
accurately accounts for the changes in prices in Puerto Rico. The U.S.
deflator shows slower price increases over this period than does the
Puerto Rican deflator. For this reason, we also report some results
based on the use of the U.S. deflator in cases where they differ
notably from those based on the Puerto Rican deflator.
When comparing the trends in real per capita GNP in Puerto Rico and the
United States from 1980 to 2005, the choice of deflators does make a
difference. Over that period, inflation-adjusted per capita income
increased at an average annual rate of 1.9 percent in the United
States, while it rose at 1.5 percent in Puerto Rico if the Puerto Rican
deflator is used. However, if the U.S. deflator is applied to Puerto
Rican GNP, annual real per capita GNP rose by 2.5 percent annually,
faster than the growth in the United States. Real per capita GDP rose
more rapidly in Puerto Rico than in the United States, regardless of
which deflators are used. U.S. GDP rose at an annual average rate of
1.9 percent from 1980 to 2005, while the average annual growth rate for
Puerto Rico was 2.1 percent using the Puerto Rican deflator and 3.2
percent using the U.S. deflator.
Figure 9: U.S. and Puerto Rican Per Capita GDP and GNP, 1980-2005:
[See PDF for image]
Note: Figures were adjusted for inflation using U.S. and Puerto Rican
gross product deflators.
[End of figure]
Figure 10 shows the composition of Puerto Rican GDP over time and the
trend in net income payments abroad. GDP consists of expenditures on
personal consumption, investment, government consumption of goods and
services, and net exports (the value of exports minus the value of
imports). The figure shows that net exports have risen substantially
from 1980 to 2005 as a share of GDP, and consumption, which is largely
determined by Puerto Rican income, has fallen as a share of GDP.
Figure 10 also shows net income payments abroad, expressed as a share
of GDP. This series represents the amount of income paid to foreign
owners of capital located in Puerto Rico, minus income earned by Puerto
Ricans from investments outside of Puerto Rico. GNP differs from GDP by
this amount. For Puerto Rico, the net outflow of income has increased
as a share of GDP over the period, increasing the gap between GDP and
GNP.
Figure 10: Composition of Puerto Rican GDP and Net Income Payments
Abroad, 1980-2005:
[See PDF for image]
Note: Consumption, investment, government, and net export expenditures
constitute GDP.
[End of figure]
Puerto Rico Relies Heavily on Nonresidents to Finance Local Investment:
Figure 11 shows the relationship between savings and investment in
Puerto Rico. The components of total national saving in Puerto Rico are
personal saving, government saving, business saving through retained
earnings, and depreciation. The figure shows that investment in Puerto
Rico has been greater than national saving, highlighting again that
investment in Puerto Rico has been significantly financed by foreign
sources. Since 2001, government saving has fallen and undistributed
corporate profits have risen significantly. The personal saving rate as
measured in the Puerto Rican national accounts has been negative since
1980. If transfers from:
foreigners to residents of Puerto Rico are underreported, however, the
official data for income and saving would also be understated.[Footnote
40]
Figure 11: Puerto Rico's Gross Domestic Investment and National Saving,
1980-2005:
[See PDF for image]
Note: Data for 2005 are preliminary.
[End of figure]
We cannot provide a comprehensive picture of the trends in various
components of U.S. and foreign investment in Puerto Rico because data
are not available for one of the most important components--direct
foreign investment, for which corporations obtain financing from within
their own affiliated groups, rather than through financial
institutions.[Footnote 41] We can, however, report trends for foreign
funds flowing through key types of financial institutions and the
Puerto Rican government. In the next two chapters, we will also provide
some information on investments by important subpopulations of
corporations.
Over the past decade, the amount of nonresident funds flowing into
depository institutions in Puerto Rico has increased steadily. Figure
12 shows Puerto Rico's depository institutions' liabilities between
1995 and 2004, and figures 52 and 53 in appendix II show the shift in
deposits and debt, respectively. The composition of deposits has
changed significantly with "exempt investments" by possessions
corporations (which in the past had been encouraged by a special
component of the possessions tax credit) being replaced by deposits
obtained through brokers that sell certificates of deposits for the
banks in the U.S. capital market. (Fig. 54 in app. II shows those
offsetting trends.)
Figure 13 below shows that the share of assets held by depository
institutions in the United States and foreign countries has also
increased over the past decade. A large part of this growth can be
attributed to the increase in U.S. and foreign securities investments.
Loans made by Puerto Rico's depository institutions, which we assume to
be primarily local, have also increased steadily. Figures 55 and 56 in
appendix II show these two trends.
Figure 12: Puerto Rico's Depository Institutions' Liabilities, 1995-
2004:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Figure 13: Puerto Rico's Depository Institutions' Assets, 1995-2004:
[See PDF for image]
Notes: The allocation of total assets includes the assumption that 95
percent of depository institution loans are made locally in Puerto Rico
and 5 percent in the United States or foreign countries.
[End of figure]
Figures were adjusted for inflation using Puerto Rico's gross product
deflator.
Puerto Rican government debt has increased steadily over the past
decade. Between 1995 and 2005, Puerto Rico's real total public debt
outstanding increased from $25.6 billion to $36.4 billion (see fig. 14
below).[Footnote 42] Most of Puerto Rican public debt is sold in the
U.S. market, but the amount sold within Puerto Rico has increased
steadily since 1999. In 2005 an estimated $31.6 billion was sold in the
United States, and $4.8 billion was sold locally in Puerto Rico.
In appendix II we include both the breakdown of debt payable by the
government and debt issued by the government but repaid by others (such
as the federal government or the private sector) because there are
differences of opinion about what should be termed "government debt"
(see figs. 58 and 59). An example of this type of debt is the series of
bond issues linked to The Children's Trust Fund between 2001 and 2005,
all of which are backed by assets from the United States Attorney
General's 1999 Master Tobacco Settlement Agreement. Between 1995 and
2005, total debt issued by the Puerto Rican government, but payable by
others, increased from an estimated $6.6 billion to an estimated $7.1
billion in 2005.
Figure 14: Puerto Rico's Total Real Government-issued Debt, by Market
of Purchaser, 1995-2005:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Investment Appears Insufficient to Reduce the U.S.-Puerto Rican Income
Gap:
Figure 15 shows the level and composition of gross investment spending
in Puerto Rico from 1980 to 2005. During the recession of the early
1980s, investment fell below 10 percent of GDP by 1983. Thereafter,
investment recovered and remained around 15 percent of GDP for a number
of years until a period of rapid growth in largely private-sector
investment in the late 1990s pushed the share close to 20 percent of
GDP by 2000. Investment rates have fallen back to about 15 percent of
GDP most recently.
Figure 15: Puerto Rican Gross Fixed Investment as a Percent of GDP,
1980-2005:
[See PDF for image]
Note: Gross fixed investment does not include changes in inventories or
subtract depreciation.
[End of figure]
If Puerto Rico's investment rate remains at recent levels, the gap
between U.S. and Puerto Rican per capita incomes is unlikely to
diminish. The U.S. investment rate, including both private investment
and a measure of government investment, has been about 19 percent of
GDP in recent years. Continuation of these relative investment rates
implies that the per capita income gap is unlikely to narrow
significantly, unless capital formation is augmented by increases in
employment, education, training, or other types of productivity
improvements.
Figure 16 shows a breakdown of Census data on capital spending in the
manufacturing sector for 1987, 1992, 1997, and 2002.[Footnote 43] The
data show that investment in manufacturing dipped significantly between
1992 and 1997, before rebounding by 2002. This slump in investment does
not appear in the Planning Board investment data for private sector
investment shown in figure 15. The Planning Board data cover more
sectors than do the Census data;
however, investment in manufacturing should represent a substantial
portion of the investment in private structures and machinery.
Figure 16: Puerto Rico's Capital Expenditures as a Percentage of Gross
Domestic Product, 1987-2002:
[See PDF for image]
[End of figure]
Data on Value Added and Income Show That the Pharmaceuticals Industry
Has Significantly Increased Its Dominance of Puerto Rican Manufacturing
but Evidence Suggests That These Measures May Be Overstated:
Although both Census data on value added and Puerto Rican government
data on domestic income show that the pharmaceutical industry has
significantly increased its already dominant position in the
manufacturing sector since the early 1990s, evidence suggests that
income shifting within U.S.-owned corporate groups likely has resulted
in overstatements of the importance of the manufacturing sector, as a
whole, and the pharmaceutical industry, in particular, when measured in
terms of value added or income. Unfortunately, it is difficult to know
the extent of any overstatement in these economic variables. Evidence
is mixed as to whether the extent of the overstatement increased as the
pharmaceutical operations of possessions corporations were shifted over
to other types of businesses. Other measures of economic activity, such
as employment and capital spending, should not be affected by income
shifting and, therefore, can be used to either support or challenge
conclusions based on measures of value added and income.
Census data on value added and Puerto Rican Planning Board data on
domestic income both show steady and significant growth in the
pharmaceutical industry. Figure 17 shows that value added in the
pharmaceutical industry more than doubled in real terms from 1992 to
2002, while value added in all other manufacturing industries, as a
whole, declined. Figure 18 shows that the chemical industry, which
consists mainly of pharmaceuticals, saw its share of net manufacturing
domestic income increase from around 50 percent in 1992 to over 60
percent in 2005.
Figure 17: Value Added for Puerto Rican Manufacturing Industries, 1987-
2002:
[See PDF for image]
[End of figure]
Figure 18: Share of Net Manufacturing Domestic Income in Puerto Rico,
1980-2005:
[See PDF for image]
Note: 2005 figures are preliminary.
[End of figure]
The strong reported performance of the pharmaceutical sector is the
reason that the manufacturing sector has been able to slightly increase
its share of domestic income, while the share of income of most other
manufacturing industries has declined. Manufacturing's share of income,
shown in figure 19, greatly exceeds its share of employment, as shown
in figures 23 and 24. Some of the difference may be attributable to a
higher level of labor productivity in manufacturing than in other
sectors. Recent research suggests, however, that reported levels of
value added in Puerto Rican manufacturing are implausible. For example,
the official data imply that labor's share of value added in
manufacturing fell from an average of:
50 percent from 1950 to 1970 to only 14 percent in 2004. Similar
declines are not evident in data for other sectors or in U.S.
manufacturing statistics.[Footnote 44]
Figure 19: Shares of Puerto Rico's Domestic Income by Sector, 1980-
2005:
[See PDF for image]
Note: 2005 figures are preliminary.
[End of figure]
Over the years, several analysts have concluded that the incentives
provided by the possessions tax credit have led U.S. corporate groups
to shift income to Puerto Rican affiliates.[Footnote 45] Until the mid-
1990s, the credit essentially allowed profits earned from qualified
Puerto Rican operations to be returned to the mainland free of federal
tax (even when largely exempted from Puerto Rican income taxes). In
addition, one option under the credit allowed the U.S. corporate parent
to apply a 50-50 split of their combined taxable income from the sale
of products to third parties if the products were derived from an
intangible asset, such as a patent, invention, formula, or trademark.
Although a substantial portion of this income can be attributed to
manufacturing intangibles developed and owned by the U.S. corporate
parent, there is no requirement that the allocation of income from such
manufacturing intangible assets reflect where costs were actually
generated, or where value was actually added to the products.
Consequently, corporate groups that produced pharmaceuticals, or other
products whose final values are largely based on the value of
intellectual property, were given flexibility under the law to shift
net income to the possession corporations operating in Puerto Rico or
another insular area. This shifting of income and value added to the
Puerto Rican operations of possessions corporations ultimately gets
reflected in economic data compiled by the Puerto Rican government,
which is based heavily on data pulled from samples of corporate tax
returns, and possibly in data that Census collects in its surveys of
employers for the economic censuses, if the economic data the employers
provide are based on their tax accounts.
The nature of income shifting changed significantly after 1995, when
the phaseout of the possessions tax credit began. Some of the corporate
groups that owned possessions corporations in Puerto Rico began to
close or reduce operations in those corporations and shift production
to CFCs located on the island. Corporate groups still have some
incentives to retain operations in Puerto Rico rather than shift that
production to the United States. First, Puerto Rico responded to the
phaseout of the credit by increasing the generosity of its own tax
incentives. Second, manufacturing income earned from an active trade or
business by the CFCs is not subject to federal tax unless it is
repatriated to the United States. A change in income shifting has also
occurred because the rule for arbitrarily splitting net income 50-50
between Puerto Rican and U.S. operations does not apply to CFCs.
Nevertheless, corporate groups may be able to shift income to Puerto
Rico through the manner in which they set prices on goods and services
transferred among affiliated corporations.
Data from the last four economic censuses of manufacturing in Puerto
Rico, presented in figure 20, show that valued added per employee in
the pharmaceutical industry was already at least twice as high as the
ratio for all other industries in 1987 and 1992. The difference between
the pharmaceutical industry and the other industries grew larger in
1997 and then broadened dramatically by 2002. The 2002 figure of $1.5
million for value added per employee in Puerto Rican pharmaceutical
manufacturing was three times as high as the ratio for the U.S.
pharmaceutical industry for the same year. Moreover, while the U.S.
ratio grew only 8 percent in real terms between 1997 and 2002, the
Puerto Rican ratio grew by 65 percent over that same period.[Footnote
46]
The data on value added per employee by type of business in figure 21
suggest that the sharp increase in that measure between 1997 and 2002
may have been a direct result of the shift in pharmaceutical operations
from possessions corporations to CFCs. (These data are derived from a
special research effort in which we obtained assistance from Census and
IRS to aggregate data from the 2002 Economic Census of Puerto Rico by
particular types of business entities, including possessions
corporations and CFCs.)[Footnote 47] The value added per employee of
$4.2 million for pharmaceuticals CFCs incorporated outside of Puerto
Rico was dramatically higher than for any other type of business in
Puerto Rico. The next highest ratio was $1.6 million for
pharmaceuticals CFCs incorporated in Puerto Rico, which was still
considerably higher than the ratio of $0.9 million for possessions
corporations in the pharmaceutical industry. That data, combined with
the data in figure 20, suggest a significant change in transfer pricing
by large pharmaceuticals groups, which makes it difficult to say how
much of the strong reported growth in output and income in the Puerto
Rican pharmaceutical industry, and in the manufacturing sector as a
whole, represents an increase in actual economic activity.
Figure 20: Value Added per Employee for Key Puerto Rican Manufacturing
Industries, 1987-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Figure 21: Value Added per Employee in Puerto Rico by Type of Business,
2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Data on rates of return on assets for possessions corporations and CFCs
in the chemical industry do not confirm the conclusion that a dramatic
change in income-shifting practices occurred as CFCs replaced
possessions corporations in the industry. We used data from federal tax
returns to compare various rates of return for CFCs and possessions
corporations in the Puerto Rican chemical industry. The comparisons we
were able to make for 1997 through 2001 did not show a consistent
difference between the two types of corporations. The ratios of gross
profits (the closest tax-data equivalent to value added) to total
assets for CFCs were significantly higher than those for possessions
corporations in both 1997 and 1999, but the ratios were very close
together in 2001. We also compared the gross and net operating rates of
return of the two types of corporations and found that neither type
dominated the other one consistently across the years. The results of
our analysis are presented in appendix IV.
International Trade Plays a Large Role in Puerto Rico's Economy:
International trade plays a much larger role in the Puerto Rican
economy than it does in the U.S. economy. While the output of an
economy (GDP) depends on the difference between exports and imports
(net exports), the size of exports and imports relative to GDP are
indicators of the importance of trade to the economy. For the United
States, exports of goods and services averaged about 10 percent of GDP
between 1980 and 2005. Imports increased from about 10 percent of GDP
in the early 1980s to about 16 percent of GDP in 2005. While potential
distortions in trade data should be kept in mind, the share of exports
and imports has been substantially greater in Puerto Rico. For Puerto
Rico, the value of exported goods and services as a percentage of GDP
grew from about 70 percent of GDP in the 1980s to about 80 percent in
2005. Imports fell as a share of GDP from about 70 percent to about 63
percent in recent years.
As reported in the Puerto Rican national accounts, the value of
pharmaceutical imports and exports increased substantially from 1996 to
2005. The value of imported pharmaceuticals increased from about 9
percent of all merchandise imports to about 33 percent during that
period. As a share of GDP, the value of imported pharmaceuticals
increased from about 4 percent to about 15 percent. The value of
pharmaceutical exports rose rapidly as a share of merchandise exports-
-from about 27 percent to about 61 percent. As a percentage of GDP, the
value of pharmaceutical exports rose from about 14 percent to about 42
percent. However, as noted above, a significant portion of the recorded
increase in Puerto Rico's trade surplus may reflect changes in transfer
pricing, with artificially low values for Puerto Rico's imports and
high values for Puerto Rico's exports, rather than increased activity.
While the United States is the largest trading partner for Puerto Rico
for exports and is a large source of Puerto Rican imports, the foreign
country share of imports to Puerto Rico has been growing since 1995. In
2005, slightly less than half of the value of imports to Puerto Rico
came from foreign countries. About 80 percent of Puerto Rico's exports
go to the United States. Puerto Rico's overall trade surplus reflects a
trade surplus with the United States as Puerto Rico exports more to the
United States than it imports from the United States, and a smaller
trade deficit with the foreign countries.
Official Statistics Indicate That Unemployment Has Been Much Higher in
Puerto Rico Than in the United States and Labor Force Participation Has
Been Lower:
Figure 22 shows the unemployment rates and labor force participation
rates for the United States and Puerto Rico from 1980 to 2005. The
unemployment rate has been significantly higher in Puerto Rico than in
the United States, and the labor force participation rate has been much
lower.
Figure 22: U.S. and Puerto Rican Labor Participation and Unemployment
Rates, 1980-2005:
[See PDF for image]
[End of figure]
Academics and economists from research institutions have offered
several possible explanations for the relatively low labor force
participation rate in Puerto Rico and attempted to determine which of
these factors might be important. While the low labor force
participation rate is seen as a crucial issue for the economic
performance of Puerto Rico, there is no consensus on its
cause.[Footnote 48]
Possible explanations for the low labor force participation rate
include:
* the migration of Puerto Rican citizens with the most interest in
participating in the labor force to seek higher wage employment in the
United States, leaving residents that have relatively less attachment
to the labor force;[Footnote 49]
* the fact that government programs that are in place, such as the
Nutrition Assistance Program (NAP, the Puerto Rican food stamp program)
and disability insurance, can discourage work, while the U.S. program
that encourages labor force participation--the Earned Income Tax
Credit--is not a part of the tax system in Puerto Rico;
* the fact that the U.S. minimum wage applies in Puerto Rico may
discourage business demand for lower-skilled workers, who are likely to
make up a larger share of the potential work force in Puerto Rico than
in the United States;
and:
* that a relatively large share of Puerto Ricans work in the informal
economy and that this work is not reflected in economic statistics.
Regarding this last issue, analysts have raised issues with the quality
of the Puerto Rican labor force survey, which is the data source for
the unemployment rate and the labor force participation rate. The
survey is designed to be similar to the U.S. Current Population Survey
(CPS), from which the U.S. data are derived, but the questions
regarding labor market activity in the surveys differed and the
question asked by the Puerto Rico household survey may not have
captured work activity in the informal sector of the economy as well as
the question asked in the CPS.[Footnote 50] On the other hand, labor
force participation as measured in the decennial census--which uses the
same question as the CPS--has also been low and the estimate for 2000
was lower than the household survey estimate for that year.[Footnote
51] The Bureau of Labor Statistics (BLS) has been working with the
Puerto Rican government to improve the household survey in several
areas. In addition, labor force data for 2005 are scheduled to be
reported for Puerto Rico as a part of the Census Bureau's American
Community Survey effort.
Educational attainment can play an important role in developing labor
market skills. Data on educational attainment in Puerto Rico is
collected in the decennial census and can be compared to data for the
United States. These data show that the gap in educational attainment
between Puerto Rico and the United States narrowed significantly during
the 1990s. Nonetheless, in 2000, 40 percent of the population over 25
in Puerto Rico had not finished high school, which is nearly the double
the U.S. share. At the same time, about 38 percent of adults reported
having at least some college education (see table 4).
Table 4: Educational Attainment in the U.S. and Puerto Rico, 1990 and
2000:
Educational attainment (percent of population 25 years old and over):
High school or more;
1990: United States: 75.2;
1990: Puerto Rico: 49.7;
2000: United States: 80.4;
2000: Puerto Rico: 60.0.
Educational attainment (percent of population 25 years old and over):
Some college or more;
1990: United States: 45.2;
1990: Puerto Rico: 28.7;
2000: United States: 51.8;
2000: Puerto Rico: 37.7.
Educational attainment (percent of population 25 years old and over):
Bachelor's degree or more;
1990: United States: 20.3;
1990: Puerto Rico: 14.3;
2000: United States: 24.4;
2000: Puerto Rico: 18.3.
Educational attainment (percent of population 25 years old and over):
Advanced degree;
1990: United States: 7.2;
1990: Puerto Rico: 3.6;
2000: United States: 8.9;
2000: Puerto Rico: 4.7.
Source: Census.
[End of table]
Recent research concluded that there is a substantial mismatch between
Puerto Rico's industry structure and the educational achievement of its
population.[Footnote 52] While the mean years of schooling among Puerto
Rican adults was substantially below that of any state in the last
three censuses, the average years of schooling of people typically
employed by the industries operating in Puerto Rico exceeds that of at
least two-thirds of the states. The researchers suggest that the Puerto
Rican economy has failed to generate jobs that fit the educational
qualifications of the Commonwealth's population. In some sense,
therefore, Puerto Rico's "missing jobs" can be found in labor intensive
industries heavily reliant on less-educated workers. The authors
conclude that the Possessions Tax Credit and other federal tax
incentives contributed to an industry structure that is poorly aligned
with the sort of job opportunities needed by Puerto Rico's population.
Annual data on employment in Puerto Rico come from two sources: the
Puerto Rico household survey, and the BLS establishment survey. The
Puerto Rico household survey has consistent sector definitions across
time and includes the self-employed. The establishment survey data are
limited to employees and reflect the new North American Industry
Classification System industry definitions. In the figures that follow,
we aggregated some of the industry categories and show the distribution
of employment by sector. Both surveys show employment in Puerto Rico
generally increasing since 1991 and show manufacturing employment
declining since 1995. As shown in figure 25, data from the Census of
Manufacturing for Puerto Rico for 1997 and 2002 also indicate a decline
in manufacturing employment. Manufacturing employment fell by about 27
percent from 1995 to 2005, according to establishment survey
data.[Footnote 53] Both the household and establishment data sources
show that the government sector employs a large percentage of workers-
-about 23 percent in the household survey and about 30 percent in the
establishment survey.
For the United States, manufacturing employment has been falling, both
in absolute numbers of employees and as a percentage of all employees.
Between 1980 and 2005, manufacturing employment fell by about 4.5
million employees (about 24 percent). From 1995 to 2005, manufacturing
employment fell by about 3 million employees (about 17 percent). As of
2005, manufacturing employees represented about 10.7 percent of all
employees. Government employees constituted about 16 percent of total
employees in the United States, down from about 18 percent in 1980.
Figure 23: Puerto Rican Employment by Sector--Household Survey, 1980-
2005:
[See PDF for image]
[End of figure]
Figure 24: Puerto Rican Employment by Sector--Establishment Survey,
1991-2005:
[See PDF for image]
[End of figure]
Figure 25: Employment in Puerto Rican Manufacturing Industries, 1987-
2002:
[See PDF for image]
[End of figure]
Since 1980, Real Per Capita Personal Income in Puerto Rico Has Not
Grown Enough to Substantially Reduce the Gap between U.S. and Puerto
Rican Living Standards:
Although the likely imprecision of price deflators for Puerto Rico
leaves the exact growth rate of real per capita personal income there
difficult to determine, the rate has not been sufficient to
substantially reduce the gap between U.S. and Puerto Rican living
standards. Puerto Rican per capita personal income is well below that
in the United States (see fig. 26).
Figure 26: U.S. and Puerto Rican Real Per Capita Personal Income, 1980-
2005:
[See PDF for image]
Note: Figures were adjusted for inflation using U.S. and Puerto Rican
gross product deflators.
[End of figure]
As we did in comparing U.S. and Puerto Rican GDP and GNP, we adjusted
aggregate per capita personal income data using both U.S. and Puerto
Rican price deflators. The growth rate in per capita personal income is
somewhat higher in Puerto Rico than in the United States when the U.S.
deflator is used to adjust Puerto Rican per capita personal income for
inflation. In this case, the average annual percentage increase in
Puerto Rican per capita personal income was 2.1 percent while U.S. per
capita personal income rose by 2.0 percent on average per year. When
the Puerto Rican deflator is used to make adjustments for inflation,
Puerto Rican per capita personal income grew at a slower rate (1.1
percent) than in the United States (2.0 percent). The difference arises
because the U.S. price deflator increased less than the Puerto Rico
price deflator. Using both price indices serves to illustrate the
sensitivity of the calculation to the index used.
In addition, private income transfers from Puerto Rico emigrants now
living in the United States made to Puerto Rican residents may be
understated, which would lead to an understatement of Puerto Rican
personal income. As U.S. citizens, Puerto Ricans are free to migrate to
the mainland United States and return as they wish. According to Census
estimates, net migration from Puerto Rico to the United States in the
1980s totaled about 126,000.[Footnote 54] During the 1990s, net
migration was estimated to be about 111,000.
Census data show the distribution of income in Puerto Rico and the
United States and the percentages of individuals and families with
incomes below official poverty lines.[Footnote 55] The median household
income in 1999 was $41,994 in the United States and $14,412 in Puerto
Rico. In 1999, 48.2 percent of households in Puerto Rico had incomes
below the poverty level, which was nearly four times the U.S. share, as
shown in table 5.
Table 5: Poverty Status in the United States and Puerto Rico,
Percentage below Poverty Levels, 1999:
Percent.
All ages;
United States: 12.4%;
Puerto Rico: 48.2%.
Related children under 18;
United States: 16.1%;
Puerto Rico: 58.3%.
5-17 years;
United States: 15.4%;
Puerto Rico: 58.5%.
Population 65 and over;
United States: 9.9%;
Puerto Rico: 44.0%.
All families;
United States: 9.2%;
Puerto Rico: 44.6%.
Families with female head and at least one child;
United States: 34.3%;
Puerto Rico: 70.8%.
Source: Census.
[End of table]
As the disparity between average incomes in the United States and
Puerto Rico suggests, a much higher percentage of Puerto Rican
households is in the lower income categories. In 1999, only about 10
percent of U.S. households had annual incomes below $10,000, compared
to 37 percent of Puerto Rican households (see table 6).
Table 6: Income Distribution of Households in the United States and
Puerto Rico, 1999:
Household income: Less than $10,000;
United States: 9.5%;
Puerto Rico: 37.1%.
Household income: 10,000-24,999;
United States: 19.2%;
Puerto Rico: 32.9%.
Household income: 25,000-49,999;
United States: 29.4%;
Puerto Rico: 19.9%.
Household income: 50,000-74,999;
United States: 19.4%;
Puerto Rico: 5.7%.
Household income: 75,000-99,999;
United States: 10.2%;
Puerto Rico: 2.0%.
Household income: 100,000-149,999;
United States: 7.7%;
Puerto Rico: 1.4%.
Household income: 150,000-199,999;
United States: 2.2%;
Puerto Rico: 0.4%.
Household income: 200,000 or more;
United States: 2.4%;
Puerto Rico: 0.6%.
Source: Census.
Note: Income data do not include capital gains and the value of in-kind
government benefits and employer contributions.
[End of table]
The distribution of income is more unequal in Puerto Rico than in the
United States. Economies in general have a small share of households
receiving a disproportionately large share of income. As a result, the
ratio of mean to median household income exceeds 1.0. As an indication
of the greater degree of income inequality in Puerto Rico, the ratio of
mean to median household income in 1999 was 1.69 in Puerto
Rico[Footnote 56] compared to 1.35 in the United States.
[End of section]
Chapter 4:
Much Possessions Corporation Activity Has Shifted to Affiliated
Corporations:
Possessions corporations have played an important role in the Puerto
Rican economy, particularly in the manufacturing sector, where they
accounted for well over half of valued added throughout the 1990s. Most
of the possessions tax credit and income earned by possessions
corporations in Puerto Rico has been earned by corporations in the
pharmaceutical industry. Once the possessions tax credit was repealed,
many of the large corporate groups that owned possessions corporations
in Puerto Rico began to shift their operations to other types of
business entities. Although the various tax and economic census data
that we present in this chapter have significant limitations, we
believe that, together, they form the basis for a reasonably accurate
picture of the broad changes that have occurred in Puerto Rico's
manufacturing sector over the past two decades. Those data indicate
that much of the decline in activity of possessions corporations in the
manufacturing sector was offset by the growth in other corporations, so
that some measures of aggregate activity remained close to their 1997
levels. For example, value added in manufacturing remained fairly
constant between 1997 and 2002. Most of the offsetting growth was
concentrated in the chemical industry, which is dominated by
pharmaceuticals.
Possessions Corporations Dominated Puerto Rico's Manufacturing Sector
up until the Late 1990s:
Possessions corporations continued to dominate Puerto Rican
manufacturing through the mid-1990s, despite the legislative changes
that made the possessions tax credit significantly less generous after
1993. According to the 1992 Economic Census of Puerto Rico
Manufacturing, these corporations accounted for 42.2 percent of
employment and 64.3 percent of valued added in the manufacturing sector
(as seen in fig. 27). By the next economic census in 1997, possessions
corporations' share of value added had increased to 72 percent, while
their share of employment remained little changed at 40.8
percent.[Footnote 57] This pattern of growth up to 1997 is also
apparent in the data from the federal tax returns of possessions
corporations shown in figure 28. The aggregate total income, gross
profits, and net income of possessions corporations operating in Puerto
Rico all increased slightly between 1993 and 1997 (after adjusting for
inflation), although there was a small decline in the corporations'
total assets.
Figure 27: Share of Possessions Corporations in Value Added and
Employment in Puerto Rican Manufacturing, 1987-2002:
[See PDF for image]
[End of figure]
Figure 28: Income and Assets from the Tax Returns of Possessions
Corporations Operating in Puerto Rico, 1993-2003:
[See PDF for image]
[End of figure]
The growth in possessions corporation activity occurred despite the
limitations that Congress placed on the possessions tax credit after
1993 and a decline in the number of corporations claiming the credit.
Figure 29 shows that those limitations significantly reduced the
generosity of the credit. Possessions corporations earned about 20
cents of credit for each dollar of income they earned in 1993, but only
half that amount by 1997. Over that period, the number of corporations
claiming the credit for operations in Puerto Rico fell from 378 to 291
and the amount of credit claimed declined from $5.8 billion to $3.2
billion.
The decline in possessions corporation income, value added, and
employment began after the Small Business Job Protection Act of 1996,
which placed additional limits on the amount of credit that
corporations could earn and, more importantly, repealed the credit
completely for tax years beginning after 1995, subject to a 10-year
phaseout. The generosity of the credit reached a low of less than 7
cents per dollar of income by 1999. The number of corporations claiming
the credit fell to 124 by 2003 and the amount of credit they claimed
that year fell to $1.1 billion. Moreover, in contrast to the period
leading up to 1997, the aggregate total income, gross profits, and net
income earned by possessions corporations all declined by more than 50
percent between 1997 and 2003, while their total assets declined by
almost 30 percent. The significantly decreased importance of
possessions corporations is also apparent in the most recent economic
census data (fig. 27), showing that these corporations accounted for
only 26.7 percent of manufacturing value added and only 31.8 percent of
manufacturing employment in 2002.
Figure 29: The Ratio of Possessions Tax Credit to Total Income Earned
by Possessions Corporations in Puerto Rico, 1993-2003:
[See PDF for image]
Note: The rate of credit per dollar of income increased slightly
between 1999 and 2003, as corporations with relatively low rates of
credit were more likely to stop operating as possessions corporations
(and, therefore, drop out of the population represented in fig. 29)
than those with higher rates.
[End of figure]
Figure 30: The Number of Corporations in Puerto Rico Claiming the
Possessions Tax Credit and the Amount Claimed, 1993-2003:
[See PDF for image]
[End of figure]
The Pharmaceutical Industry Has Dominated the Use of the Possessions
Tax Credit in Puerto Rico:
Most of the possessions tax credit and income earned by possessions
corporations in Puerto Rico has been earned by corporations in the
pharmaceutical industry. Figure 31 shows that pharmaceuticals
corporations earned over half of all the credit earned each year from
1995 through 2003. Figure 32 shows that these corporations earned an
even larger share of the aggregate gross profit earned by possessions
corporations in each of those years. Manufacturers of beverages and
tobacco products, medical equipment, and computers, electronics, and
electrical equipment were also heavy users of the credit during this
period, though not nearly to the same extent as pharmaceuticals
manufacturers. Both of these figures are based on data for possessions
corporations in the 77 largest corporate groups operating in Puerto
Rico. (See the following section.)
Figure 31: Industry Shares of the Possessions Tax Credit in Puerto
Rico, 1993-2003:
[See PDF for image]
[End of figure]
Figure 32: Industry Shares of Gross Profits Earned by Possessions
Corporations in Puerto Rico, 1993-2003:
[See PDF for image]
[End of figure]
Businesses Have a Variety of Options for Continuing Operations in
Puerto Rico after They Cease Operating as Possessions Corporations:
Parent corporations have a number of options for conducting business in
Puerto Rico if they wish to do so after termination of the possessions
tax credit. Large corporate groups are believed to have used at least
four different approaches to rearranging their overall corporate
structure (including the possessions corporation and their Puerto Rican
operations) in anticipation of termination of the possessions tax
credit. The U.S. federal tax consequences of these approaches vary as
follows:
* The possessions corporation loses its 936 status but remains a
subsidiary incorporated in the United States and is consolidated into
its parent's federal tax return. The parent corporation includes the
relevant income and expenses of the subsidiary when computing its own
federal taxes. Tax attributes, such as carryovers of certain
accumulated losses, of the former possessions corporation would be
governed by applicable IRS regulations and guidance.
* The possessions corporation liquidates into its parent (i.e., it no
longer remains a separate corporate entity). Generally, if the parent
satisfies certain ownership requirements, no gain or loss would be
recognized to either the parent or the subsidiary for U.S. federal
income tax purposes. The domestic parent would inherit and take into
account certain items of the former possessions corporation, such as
earnings and profits, net operating and capital loss carryovers, and
methods of accounting. No foreign tax credit is allowed for any foreign
taxes paid in connection with the liquidation, and the deduction of
certain losses and other tax attributes may be limited.
* The possessions corporation is converted into or replaced by a CFC.
This change can occur if the possessions corporation reincorporates and
conducts business as a CFC; if it sells or contributes most of its
assets to a CFC; or if it winds down its operations as its parent
corporation starts up a new CFC to operate in Puerto Rico. Any income
that the replacement CFC earns from the active conduct of business in
Puerto Rico or elsewhere outside of the United States generally is not
taxed until it is repatriated to the U.S. shareholders in the form of
dividends. A number of tax consequences arise in cases where the
possessions corporation actually reincorporates as a CFC.[Footnote 58]
There are also significant tax issues (discussed further below)
relating to the transfer of assets (through either a contribution or a
sale) from possessions corporations to CFCs.
* The possessions corporation is converted into or replaced by a
limited liability corporation (LLC) or partnership. An LLC can elect to
be treated as a corporation, as a partnership, or as a "disregarded
entity." If the LLC elects to be treated as a corporation, its net
earnings would be included either individually or, if required to file
a consolidated return, on its parent's return. If it chose partnership
treatment, the LLC itself would generally not be subject to federal
income tax but its income, deductions, gains, and losses would be
distributed to its members, who would include such amounts in
calculating their federal income tax. If the LLC is treated as a
disregarded entity, its income, deductions, gains, and losses are
included on the member's federal tax return.
Parent corporations could substantially change the manner in which
income from their Puerto Rican business operations were treated for
federal tax purposes even without making a formal change in the legal
status of their possessions corporations. The parents could simply
reduce production by their possessions corporations and start up or
expand production in other forms of businesses operating in Puerto
Rico. We used tax return data from both IRS and the Treasury of Puerto
Rico to track changes in the activity of possessions corporations, as
well as to assess the extent to which declines in that activity have
been offset by increases in the activity of affiliated businesses
operating in Puerto Rico. In order to make this assessment for a
particular group of affiliated corporations, we needed to examine data
for each member of the group that had operations in Puerto
Rico.[Footnote 59]Given that considerable effort was required to
identify the group members that operated in Puerto Rico, we limited our
review to the largest 77 groups, which included at least one
possessions corporation between 1993 and 2001. These 77 large groups
accounted for over 92 percent of the credit and income earned by
possessions corporations in every year from 1993 through 2001 and for
over 91 percent of the assets owned by such corporations in each of
those years.
The large groups included a total of 172 possessions corporations that
we tracked between 1993 and 2003.[Footnote 60] The number of
possessions corporations that these 77 large groups owned and operated
in Puerto Rico declined from a high of 146 in 1995 to 58 by 2003. As of
2001, these groups also conducted operations in Puerto Rico through 49
CFCs and at least 28 other businesses. Fourteen of the groups operated
both possessions corporations and CFCs in Puerto Rico in 2001. In the
following section we report on trends in the income and assets of these
large corporate groups.
The popular choice of replacing the operations of possessions
corporations with CFCs offers long-term tax benefits but could entail
high initial tax costs for some corporations. Many corporate groups
have chosen to operate in Puerto Rico through CFCs, possibly to take
advantage of the federal tax deferral on income earned there. Some may
have rejected this choice because their possessions subsidiaries owned
valuable intangible assets, such as drug patents or food recipes, and
the transfer of these assets to a non-U.S. entity, such as a CFC, could
have been treated as a taxable exchange, possibly resulting in a
substantial, one-time tax liability.[Footnote 61] Affiliated groups can
avoid this tax if they keep the intangible assets in their U.S. firms,
rather than transferring them to their new CFCs. However, in order for
those CFCs to use those intangibles in their production processes, they
must pay royalties to the U.S. owners and those royalties would be
subject to federal income tax.
IRS officials have expressed concern that the repeal of section 936 has
not had its intended effect. Congress repealed section 936 because it
was viewed as providing an overly generous tax benefit to taxpayers
with operations in Puerto Rico. However, IRS officials believe that
despite the repeal of section 936, many taxpayers with operations in
Puerto Rico could be incurring approximately the same or even lower tax
liabilities than they did under section 936 by restructuring their
activities through CFCs. Taxpayers who converted into CFCs may have
avoided the tax consequences typically associated with such a
conversion, namely, tax liabilities arising from the transfer of
intangibles from possessions corporations to CFCs or a significant
increase in royalty payments from Puerto Rico. One private sector tax
expert familiar with the practices of U.S. businesses operating in
Puerto Rico could not recall any case in which a taxpayer reported a
transfer of intangibles of any significant value from a possessions
corporation to a CFC. The expert also told us that the reason why the
IRS has not seen a notable increase in royalty payments from CFCs to
U.S. firms holding intangibles is that, well before the expiration of
the possessions tax credit, corporate groups had their existing or
newly formed CFCs enter into research cost-sharing arrangements with
their possessions corporations so that they would be codevelopers of
new intangibles and, thereby, would have certain ownership rights to
use the technology without paying royalties. The groups also tried to
involve their CFCs as much as possible in the development of new
products through other arrangements, such as research partnerships with
unrelated technology-developing firms.
Some Measures of Aggregate Manufacturing Activity Have Remained
Constant Despite a Decline in Possessions Corporation Activity:
A combination of tax return and economic census data indicate that the
decline in income and value added of possessions corporations between
1997 and 2002 has been largely offset by an increase in the income and
value added of affiliated corporations that left aggregate income and
value added roughly constant. Although some evidence of a change in
income-shifting behavior by these corporate groups makes it difficult
to say how accurately trends in reported income and value-added data
represent trends in actual economic activity in Puerto Rico, data on
employment, capital expenditures, and total assets (which should not be
distorted by income shifting) support the conclusion that a substantial
amount of possessions corporation activity has been continued by other
types of businesses. However, most of this continued activity is
concentrated in the pharmaceutical industry and the decline in
possessions corporation activity in other industries has not been
offset. None of the data we present address the question of what
corporate activity would have taken place during this period if the
possessions tax credit had not been repealed.
Tax Return and Economic Census Data Indicate That Much of the Income
and Value Added of Possessions Corporations Declined While That of
Affiliated Businesses Increased:
Tax return data on the affiliated corporate groups that have claimed
almost all of the possessions tax credit indicate that between 1997 and
2001 at least a large portion (and possibly all) of the decline in
reported incomes of possessions corporations operating in Puerto Rico
was offset by increases in the reported incomes and total assets of
affiliated corporations operating in Puerto Rico, particularly that of
CFCs. The offset left the income that these groups earned in Puerto
Rico roughly the same in 2001 as in 1997. This finding is consistent
with data on value added in manufacturing from recent economic censuses
of Puerto Rico.
Gross profit, which equals income from sales minus the cost of goods
sold, is the income measure from tax returns that is closest in
definition to the value-added measure from census data that we
presented earlier.[Footnote 62] Both of these measures may be distorted
by income shifting, as we explain in the next section;
however, value added is considered to be the best measure of the
economic importance of manufacturing activity. We examined data for
both of these measures, as well as other measures not distorted by
income shifting, to assess the extent to which possessions corporation
activity has been replaced by the activity of other types of
businesses.
Figure 33 shows that the aggregate gross profit of the possessions
corporations in our 77 large groups peaked at $28.8 billion in 1997 and
then fell to $11.4 billion by 2003. The figure also presents our "lower-
bound" estimates for the amount of gross profits from Puerto Rico that
CFCs reported. These estimates include only the profits of those CFCs
for which we had Puerto Rican tax returns or that appeared to have
operations only in Puerto Rico because those are the cases where we can
be the most confident that our figures represent profits attributable
only to Puerto Rican operations. The gross profits of those CFCs grew
from $2.4 billion to $7.1 billion between 1997 and 2001.[Footnote 63]
These estimates are likely to represent a lower bound for the amount of
CFC profits in Puerto Rico because they do not include any of the
profits for CFCs whose income was difficult to allocate between Puerto
Rico and other locations. We present alternative estimates, labeled
"CFC total if allocated by tax ratio," of the gross profits from Puerto
Rico of all of the CFCs in our large groups.[Footnote 64] These more
comprehensive estimates are not likely to be very precise, but they are
consistent with some of the census data that we present on CFCs in
chapter 5. The estimates show CFC gross profits growing from $3.0
billion to $11.5 billion between 1997 and 2001. Finally, figure 33 also
shows the gross profits reported on Puerto Rican tax returns by members
of the 77 large groups, other than possessions corporations and CFCs.
The gross profits of these businesses increased from $3.0 billion to
$7.0 billion between 1999 and 2001.
Figure 33: Gross Profits Earned by Large Corporate Groups in Puerto
Rico, by Type of Corporation, 1993-2003:
[See PDF for image]
[End of figure]
The data in figure 33 indicate that much of the $10.7 billion decline
in the gross profits of possessions corporations between 1997 and 2001
was offset by increases in the profits of affiliated corporations. The
lower-bound estimates for CFCs grew by $4.7 billion over that period,
while the profits of the other affiliates, including LLCs, grew by $3.9
billion between 1999 and 2001.[Footnote 65] The combined profits of
these two sets of businesses, therefore, grew by about $8.7 billion. If
we use the "tax ratio" estimate for all CFCs, the combined growth in
profits grew by about $12.5 billion. The gross profit of the "other
affiliated" businesses is likely to be understated relative to those of
the possessions corporations because of differences in the income
definitions used for federal and Puerto Rican tax purposes. For those
possessions corporations for which we had both federal and Puerto Rican
returns, the gross profit from the Puerto Rican return averaged about
70 percent of the gross profit on the federal return. For this reason
figure 33 may understate the extent to which the decline in possessions
corporations' Puerto Rican operations has been offset by these other
affiliates.
Data from recent economic censuses on value added in Puerto Rican
manufacturing lend additional support to the conclusion that we draw
from figure 33--that much, if not all, of the decline in income of
possessions corporations in Puerto Rico between 1997 and 2001 was
largely offset by increases in the incomes of other types of
businesses. Figure 34 shows that valued added by possessions
corporations in Puerto Rican manufacturing followed roughly the same
pattern as the gross profits data presented in figure 33;
it also shows that other types of businesses made up for approximately
all of the possessions corporations' decline between 1997 and 2002.
Figure 34: Value Added for Possessions Corporations and Other Types of
Employers in Manufacturing in Puerto Rico, 1987-2002:
[See PDF for image]
[End of figure]
The extent to which the decline in income and value added of
possessions corporations was offset by the growth of their affiliates
varied significantly by industry. Figure 35 decomposes the last two
columns of figure 34 into the chemical industry (which includes
pharmaceuticals) and all other manufacturing industries. It shows that
a significant drop in the value added of possessions corporations in
the chemical industry was more than offset by the substantial growth in
value added by other types of businesses. In contrast, the value added
of both possessions corporations and all other types of businesses
declined between 1997 and 2002 in the remainder of the manufacturing
sector, outside of chemicals.
Figure 35: Value Added for Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries in Puerto Rico, 1997-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Our tax data for large corporate groups showed similar variation across
industries. The corporate groups in the chemicals and medical equipment
industry group offset a larger proportion of the decline in the income
of their possessions corporations between 1997 and 2002 with income
from other types of affiliates operating in Puerto Rico than was the
case for large corporate groups as a whole.[Footnote 66] Trends in the
income of possessions corporations in the other two industrial
groupings that we are able to present with our tax data--computer,
electronics, and electrical equipment; and food and kindred products--
were somewhat erratic between 1993 and 2001 before declining by 2003.
There was negligible to no growth in the incomes of CFCs and other
types of businesses in these two industrial groupings during the period
we could observe between 1997 and 2002. (See tables 17 and 18 in app.
IV.)
Data on Capital Expenditures, Total Assets, and Employment Also
Indicate That a Substantial Amount of Possessions Corporation Activity
Has Been Continued by Other Types of Businesses in Certain Industries:
As we explained in chapter 3, the data on income and value added for
members of large corporate groups operating in Puerto Rico may be
distorted by changes in the income reporting practices of these groups
during the late 1990s. For this reason it is difficult to know how
accurately trends in reported income and value added represent trends
in actual economic activity in Puerto Rico. Nevertheless, data on
capital expenditures, total assets, and employment (which should not be
distorted by income shifting) support the conclusion that a substantial
amount of possessions corporation activity has been continued by other
types of businesses. Much of this continued activity is concentrated in
the chemical industry, which is dominated by pharmaceutical producers.
The economic census data on capital expenditures on manufacturing plant
and equipment in figure 36 show that this investment increased
dramatically between 1997 and 2002 after having dropped from 1992 to
1997. We cannot divide this time series of capital spending data
between possessions corporations and other forms of business;
however, figure 36 shows that most of the spending increase was in the
pharmaceutical industry, which was the source of about two-thirds of
total possessions corporations profits in 1997. Consequently, it
appears that any overall decline in possessions corporations' capital
spending that may have occurred since 1997 must have been more than
offset by the investment of other businesses.
Figure 36: Capital Expenditures in Puerto Rico's Manufacturing Sector,
by Industry, 1987-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
The tax data for our 77 large corporate groups show that the $12.1
billion decline in the total assets of the possessions corporations in
these groups between 1997 and 2001 was largely offset by an increase of
at least $9.4 billion in the total assets of affiliated corporations
operating in Puerto Rico (see table 15 in app. IV). The decline in
assets may have been more than fully offset, depending on the growth in
the Puerto Rican assets of the CFCs that we were not able to include in
our estimates.[Footnote 67] However, as was the case with income and
value added, there were significant differences across industries
behind the trends for the manufacturing sector as a whole. The decline
in assets of possessions corporations in the chemical and medical
equipment industries between 1997 and 2001 was more than offset by the
increased assets of their affiliates even if we use just our lower-
bound estimates for CFCs. In comparison, a little over half of the
decline in possessions corporations' assets in the computer,
electronics, and electrical equipment industries between 1997 and 2001
was offset by the growth in affiliated CFCs' assets. (See tables 16 and
17 in app. IV.)
The economic census data on employment in Puerto Rico's manufacturing
sector in figure 37 shows that the decline in employment by possessions
corporations between 1997 and 2002 was not as drastic as the declines
in their profits or value added over that period (shown previously in
figs. 33 and 34); however, there was no offsetting increase in overall
employment by other types of manufacturing firms. Figure 38, which
decomposes the last two columns of figure 37 into the chemical industry
and all other industries, shows that employment by possessions
corporations in the chemical industry did, in fact, fall sharply
between 1997 and 2002, but other types of businesses in the industry
more than made up for that decline. In the remaining industries as a
whole, there was a smaller percentage decrease in employment by
possessions corporations but there was also a decrease, rather than an
offsetting increase, in the employment by other types of businesses.
The chemical industry is much less important in terms of overall
employment in manufacturing than it is in terms of value added. For
this reason the continued strength of that industry was not enough to
prevent an overall decline in manufacturing employment.
Figure 37: Employment in Possessions Corporations and Other Types of
Employers in Manufacturing in Puerto Rico, 1987-2002:
[See PDF for image]
[End of figure]
Figure 38: Employment in Possessions Corporations and Other Types of
Employers in the Chemical Industry and All Other Manufacturing
Industries in Puerto Rico, 1997-2002:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
[End of section]
Chapter 5:
U.S. Businesses Dominated Puerto Rican Manufacturing in 2002 but Played
Smaller Roles in Other Sectors:
U.S.-owned businesses accounted for at least 71 percent of value added
and at least 54 percent of employment in Puerto Rico's manufacturing
sector in 2002. CFCs produced most of this value added but possessions
corporations still accounted for most of the employment by U.S. firms.
The CFCs are particularly important in the pharmaceutical industry and
much less so in other manufacturing industries. U.S. corporations
appear to account for less than 25 percent of employment in Puerto
Rico's wholesale and retail trade sectors, where local corporations are
the most important employers. Similarly, U.S.-owned corporations are
not the majority employers in any of the large Puerto Rican service
industries for which data are available.[Footnote 68]
U.S. CFCs Have Become the Most Important Type of Business Entity in
Puerto Rico's Manufacturing Sector in Terms of Value Added but Not in
Terms of Employment:
As of 2002, U.S. CFCs accounted for 42 percent of value added in Puerto
Rico's manufacturing sector--a larger share than that of any other type
of business entity (see fig. 39). Possessions corporations had the next
largest share of value added with 27 percent, and other U.S.
corporations accounted for 2 percent of the total. Together, these
three types of businesses produced at least 71 percent of total
manufacturing value added. A small number of U.S.-owned or U.S.-
incorporated businesses may be included in the category "corporations
of type unknown," but we believe that most of the data for that
category (in all of the figures in this chapter) are attributable to
corporations that are not incorporated in the United States and are not
CFCs.[Footnote 69]
Figure 39: Distribution of Value Added for All Puerto Rican
Manufacturing by Type of Business Entity, 2002:
[See PDF for image]
Note: Value-added figures for sole proprietors round to 0 percent.
[End of figure]
Possessions corporations remained the largest single type of employer,
with 31 percent of the sector's total employment (see fig. 40). Despite
their large share of manufacturing value added, CFCs had a relatively
small share--14 percent--of the sector's total employment, which
resulted in the extraordinarily high ratios of value added per employee
that we discussed earlier. In contrast, other U.S. corporations and
corporations incorporated in Puerto Rico had significantly larger
shares of total employment than they did of value added.
Figure 40: Distribution of Employment for All Puerto Rican
Manufacturing by Type of Business Entity, 2002:
[See PDF for image]
[End of figure]
A little less than two-thirds of the CFCs' value added and half of
their employment is attributable to CFCs incorporated outside of Puerto
Rico. This distribution of value added is similar to the estimated
distribution of gross profit between the two types of CFCs, based on
the tax data for our 77 large corporate groups for 2001. The estimates
presented in figure 41 are based on our tax ratio approach for
attributing portions of the income of multilocation CFCs to Puerto
Rico. The estimates indicate that 70 percent of the gross profit and 73
percent of net income that CFCs earned in Puerto Rico in 2001 were
earned by CFCs incorporated outside of Puerto Rico. Using the tax data,
we estimate that more than three-quarters of the total gross and net
income earned by the CFCs incorporated outside of Puerto Rico in 2001
is attributable to CFCs incorporated in the Cayman Islands, Ireland,
the Netherlands, and the U.S. Virgin Islands.
Figure 41: Distribution of Income in 2001 between CFCs Incorporated in
Puerto Rico and CFCs Incorporated Elsewhere:
[See PDF for image]
[End of figure]
A comparison of figures 42 and 43 shows that the value added of CFCs in
2002 was concentrated in the pharmaceutical industry. These firms
accounted for over half of the value added in that industry, or almost
three times as much as the value added of possessions corporations. In
contrast, CFCs accounted for only 13 percent of the value added in all
of the remaining manufacturing sectors, where possessions corporations
still dominated with a 48 percent share. At this more specific industry
level of data, Census nondisclosure rules prevent us from providing as
much detail about other forms of businesses. We needed to add pass-
through entities into the "all other and unknown" category. However,
from table 20 in appendix V, we do know that between approximately 80
percent and 90 percent of the employees of these entities were
concentrated in two industries--pharmaceuticals and medical equipment-
-and that between 25 percent and 63 percent of these employees were in
each of these industries. If the value added of these entities was
distributed across industries in approximately the same manner as their
employment, then pass-through entities would have accounted for between
3 percent and 7 percent of value added in pharmaceuticals.
Figure 42: Value Added in the Pharmaceutical Industry by Type of
Business Entity, 2002:
[See PDF for image]
[End of figure]
Figure 43: Value Added in Manufacturing, Excluding Pharmaceuticals, by
Type of Business Entity, 2002:
[See PDF for image]
[End of figure]
Data in table 20 of appendix V show that possessions corporations and
CFCs were approximately equal in importance in terms of employment in
the pharmaceutical industry in 2002 and, together, they accounted for
61 percent of the industry's employment. The data also show that
possessions accounted for a little over a quarter of total employment
in all other manufacturing industries, while CFCs accounted for only 9
percent.
The Role of U.S. Corporations Is Much Smaller in Puerto Rico's
Wholesale and Retail Trade Than in Manufacturing:
Corporations that were U.S. CFCs and businesses incorporated in the
United States accounted for less than a quarter of total employment in
the Puerto Rican wholesale trade sector and, as figure 44 shows, about
half of their employment was in corporations other than CFCs or
possessions corporations. Corporations in the unknown category, which
we believe to be largely ones that are not incorporated in the United
States or owned by U.S. parent corporations were by far the largest
employers in the wholesale trade in 2002, as shown in figure 44. Figure
45 indicates that this employment distribution was similar for the
retail trade sector. The primary difference between the two sectors is
that possessions corporations played no role at all in retail trade and
sole proprietors played a more important role in that sector than in
wholesale trade. The distributions of payroll across entities in these
two sectors largely mirrors the distributions of employment (see table
17 in app. V).
Figure 44: Share of Employment in Wholesale Trade in Puerto Rico by
Type of Business Entity, 2002:
[See PDF for image]
Note: Sole proprietors and partnerships could not be reported because
of disclosure constraints. Therefore, they are captured in the "all
other employers" category.
[End of figure]
Figure 45: Share of Employment in Retail Trade in Puerto Rico by Type
of Business Entity, 2002:
[See PDF for image]
[End of figure]
Neither Possessions Corporations nor CFCs Were Significant Employers in
2002 in Most Puerto Rican Service Industries for Which Data Are
Available:
In general, possessions corporations and CFCs played minor roles as
employers in Puerto Rico's service sector. The 2002 Economic Census of
Island Areas compiled data for 11 service industries, as well as the
mining, utilities, and transportation and warehousing sectors in Puerto
Rico. Table 7 shows the distribution of employment across types of
businesses for the six largest services (in terms of employment)
covered by the census. Appendix V tables 25-27 show the distribution of
employment, sales, and payroll, for all 11 service industries and the
three other sectors.
CFCs accounted for 32.7 percent of employment in the information
services industry (which includes telecommunications, broadcasting,
publishing, motion pictures, and Internet services), but for no more
than 5.1 percent in any of the other five large services. Possessions
corporations accounted for 10 percent of employment in the
accommodations industry but for no more than 2.4 percent in any of the
other large services. Other U.S. corporations accounted for between 10
percent and 20 percent of employment in each of the six services. Most
of the remaining employment in the large service industry is
attributable to local corporations (in the type unknown group) and sole
proprietors. The category "all other employers," which includes
nonprofit entities, accounts for up to 22 percent of total employment
in healthcare services, which is the largest service industry.
Table 7: Distribution of Employment by Business Entity Type for the Six
Largest Services Included in the 2002 Economic Census of Puerto Rico:
Type of business entity: Total employment number.
Type of business entity: All employers;
Healthcare services: Total employment number: 68,338;
Accommodations: Total employment number: 63,810;
Administrative support services: Total employment number: 61,703;
Finance: Total employment number: 36,059;
Professional services: Total employment number: 26,197;
Information: Total employment number: 16,696.
Type of business entity: Share of employment (percent).
Type of business entity: Possessions corporations;
Healthcare services: Total employment number: 0.4-0.8 ;
Accommodations: Total employment number: 10.0;
Administrative support services: Total employment number: 0.2-0.4 ;
Finance: Total employment number: 0.1-0.3 ;
Professional services: Total employment number: 2.1;
Information: Total employment number: 2.4.
Type of business entity: Other U.S. corporations;
Healthcare services: Total employment number: 11.3;
Accommodations: Total employment number: 17.4;
Administrative support services: Total employment number: 15.4;
Finance: Total employment number: 10.9;
Professional services: Total employment number: 20.2;
Information: Total employment number: 11.0.
Type of business entity: U.S. CFCs;
Healthcare services: Total employment number: 3.3;
Accommodations: Total employment number: 0.4- 0.8 ;
Administrative support services: Total employment number: 5.1;
Finance: Total employment number: 5.1;
Professional services: Total employment number: 3.4;
Information: Total employment number: 32.7.
Type of business entity: Other corporations incorporated in Puerto
Rico;
Healthcare services: Total employment number: 0.1;
Accommodations: Total employment number: (D);
Administrative support services: Total employment number: 1.0;
Finance: Total employment number: 3.5.2;
Professional services: Total employment number: 3.4;
Information: Total employment number: 10.9.
Type of business entity: Corporations of type unknown;
Healthcare services: Total employment number: (D);
Accommodations: Total employment number: (D);
Administrative support services: Total employment number: (D);
Finance: Total employment number: (D);
Professional services: Total employment number: (D);
Information: Total employment number: (D).
Type of business entity: Sole proprietors;
Healthcare services: Total employment number: (D);
Accommodations: Total employment number: (D);
Administrative support services: Total employment number: (D);
Finance: Total employment number: (D);
Professional services: Total employment number: (D);
Information: Total employment number: (D).
Type of business entity: Partnerships/pass-through entities;
Healthcare services: Total employment number: 1.4-1.8;
Accommodations: Total employment number: 6.8;
Administrative support services: Total employment number: 1.5-2.4;
Finance: Total employment number: 0.3-1.0;
Professional services: Total employment number: 11.2;
Information: Total employment number: 1.6-1.7.
Type of business entity: All other employers;
Healthcare services: Total employment number: 33.9-38;
Accommodations: Total employment number: 0.2-0.3;
Administrative support services: Total employment number: 10.6-11.5;
Finance: Total employment number: 10.6-11.5;
Professional services: Total employment number: 4.3-5.6;
Information: Total employment number: 0.6.
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Note: We are unable to report specific figures on "corporations of type
unknown" or "sole proprietors" due to disclosure constraints.
[End of table]
[End of section]
Chapter 6:
Taxes Per Capita in Puerto Rico Are Lower Than in the States but Are
about the Same Share of Income:
The taxes paid to all levels of government (federal, Commonwealth, and
local) in Puerto Rico in 2002 were $3,071 per capita--considerably less
than the per capita taxes of $9,426 paid in the states. However, the
combined taxes paid by Puerto Rico residents amounted to 28 percent of
their personal income, which was close to the 30 percent figure in the
states. Puerto Rico's outstanding government debt in 2002 was much
higher than that of state and local governments as a share of personal
income, partly because the Commonwealth government has a wider range of
responsibilities.
Taxes Paid Per Capita in Puerto Rico Are Lower Than Those in the States
but the Taxes Are about the Same Share of Personal Income in Both
Places:
The amount of taxes that Puerto Rico residents paid per capita in
fiscal year 2002 ($3,071) was about one-third of the amount paid by
residents of the states ($9,426) (see fig. 46).[Footnote 70] The mix of
the taxes was also quite different. While nearly 60 percent ($5,619) of
the taxes paid by residents of the states were federal taxes, only
about 25 percent ($760) of the total taxes paid by Puerto Rico
residents were federal taxes because those residents generally are not
subject to federal income tax on the income they earn in Puerto Rico.
Data on federal taxes paid in the other insular areas are not
available. Taxes paid by residents of the other insular areas to their
own governments in 2002 amounted to $2,451 per capita--slightly higher
than the $2,310 per capita that residents of Puerto Rico paid to the
Commonwealth and municipal governments. The location where a tax is
paid is not necessarily the same location as where the economic burden
of the tax falls. The data we present in this chapter pertain to the
former.[Footnote 71]
Comparing the taxes Puerto Rico residents paid to the average of the
five states whose residents paid the least total taxes, we found that
Puerto Rico residents paid about 54 percent of the amount paid by these
state residents ($5,713).[Footnote 72] The average percentage of taxes
paid in these same five states that were federal taxes was nearly 47
percent ($2,705), still nearly double the percentage for Puerto Rico.
The average per capita amount of taxes paid in the five highest tax
states was $15,491--five times the per capita tax in Puerto
Rico.[Footnote 73]
Figure 46: Per Capita Taxes Paid in the United States and Insular
Areas, Fiscal Year 2002:
[See PDF for image]
Note: Data on federal taxes paid in the other insular areas are not
available.
[End of figure]
Taxes as a share of personal income are about the same in Puerto Rico
and the states, which is not surprising because Puerto Rico's income
per capita is so much lower. Taxes paid in Puerto Rico amounted to 28
percent of the Commonwealth's personal income, while those paid in the
states amounted to 30 percent of aggregate state personal income. Taxes
in the five lowest-tax states were an average of 23 percent of the
states' aggregate personal income, while those in the five highest-tax
states averaged 39 percent. (See table 28 in app. VI for additional
detail.)
Figure 47: Taxes Paid as a Share of Personal Income in the United
States and Insular Areas, Fiscal Year 2002:
[See PDF for image]
Note: Data on personal income in the other insular areas are not
available.
[End of figure]
Income and Employment Taxes Account for about Two-thirds of the Taxes
Paid in Both Puerto Rico and the States, but the Allocation of Those
Taxes by Level of Government Differs between the Two Locations:
As shown in figure 48, about 75 percent of the taxes paid in Puerto
Rico are levied by the Commonwealth and municipal governments.[Footnote
74] The property tax and gross receipts tax imposed by the municipal
government accounted for a little over 17 percent of taxes paid with
the remainder going to the Commonwealth government.[Footnote 75]
Commonwealth income taxes accounted for 41 percent of total taxes with
slightly more than half of that being paid by resident individuals.
Sales and excise taxes represented 23 percent of the total.
Data available from IRS for Puerto Rico and the states do not separate
federal individual income tax payments from payments of federal
employment taxes, such as those for Social Security, Medicare, and
unemployment compensation; however, most of the tax shown for that
combined category in figure 48 should be employment taxes because most
residents of Puerto Rico pay little, if any federal income tax. Even
less federal estate, gift, or excise tax is paid in Puerto Rico.
Federal excise taxes on goods manufactured in Puerto Rico and sold in
the states are transferred to the Commonwealth and more than offset any
federal excise tax on products consumed there.[Footnote 76]
Figure 48: The Composition of Taxes Paid in Puerto Rico, Fiscal Year
2002:
[See PDF for image]
Notes: Numbers do not sum because of rounding.
The figures for federal estate and gift taxes round to 0 percent.
[End of figure]
In contrast to the case of Puerto Rico, more than half of the taxes
paid in the states go to the federal government, which provides a
larger range of services to the states than it does to the
Commonwealth. Federal individual income and employment taxes accounted
for 56 percent of the taxes paid, while federal estate, gift, and
excise taxes amounted to an additional 3 percent, resulting in a
combined federal share of 59 percent (see fig. 49). When the 10 percent
of taxes paid in the form of state and local income taxes are added to
the 56 percent that go to federal individual income and employment
taxes, the resulting 66 percent share is almost equal to the 67 percent
share in Puerto Rico for this same group of taxes. Of the remaining
total, state and local property taxes and "other" revenues (including
lotteries and licenses) account for greater shares of the total taxes
paid in the state than they do in Puerto Rico, while sales and excise
taxes represent a smaller share.
Figure 49: The Composition of Taxes Paid in the States, Fiscal Year
2002:
[See PDF for image]
[End of figure]
Puerto Rico's Outstanding Government Debt in 2002 Was Much Higher Than
That of State and Local Governments as a Share of Personal Income,
Partly Because the Commonwealth Government Has a Wider Range of
Responsibilities:
The amount of Puerto Rican government-issued debt outstanding as of
2002 was slightly higher in per capita terms, but much higher as a
share of personal income, than was state and local government-issued
debt. As shown in figure 50, the outstanding amount of Puerto Rican
government debt per capita in 2002 was about $7,580, compared to a
national average of $5,820 for state and local government-issued debt.
The per capita debt of the governments of the other insular areas in
2002 was about $5,690. Although all of this debt was issued by the
respective governments, some of it is directed to private use and will
be paid back by targeted beneficiaries. About 16 percent of Puerto
Rico's government debt fell into this "private use" category, compared
to about 23 percent for state and local government debt.[Footnote 77]
Figure 50: Per Capita Government Debt in the United States and Insular
Areas, Fiscal Year 2002:
[See PDF for image]
Note: We did not categorize federal or other insular areas debt into
"public use" or "private use."
[End of figure]
Figure 51: Government Debt as a Share of Personal Income in the United
States and Insular Areas, Fiscal Year 2002:
[See PDF for image]
Note: We did not categorize federal debt into "public use" or "private
use."
[End of figure]
Federal Grants and Payments to Governments Per Capita Are the Same for
Puerto Rico and the States but Direct Federal Payments to Individuals
Per Capita Are Significantly Lower in Puerto Rico:
The states and insular areas receive funds from the federal government
in the form of grants, direct aid, loans, and insurance and procurement
payments (see table 8). Federal grants and payments to the Puerto Rican
government in 2002 amounted to $1,242 per capita, about the same as the
$1,264 per capita paid to all state and local governments in the
states, but less than the $1,703 per capita paid to the other insular
area governments. The $2,057 per capita of direct federal payments to
individuals in Puerto Rico was well below the $3,648 per capita paid to
state residents, but higher than the $1,418 per capita paid to
residents of the other insular areas.[Footnote 78] The following
chapter and appendix VII provide detailed information on the amount of
spending for specific federal social programs in Puerto Rico, the
states, and other insular areas and describes similarities and
differences in the operation of these programs in the various
locations. The per capita federal payments of $336 for salaries, wages,
and procurement in Puerto Rico were about 20 percent of payments for
those purposes in the states and the other insular areas.
Table 8: Federal Expenditures in Fiscal Year 2002:
[See PDF for image]
Source: GAO analysis of Census data.
[A] Data reported are actual cash outlays. Includes transfers of custom
duties and excise tax revenues.
[End of figure]
[See PDF for image]
[End of figure]
Some federal funds that Puerto Rico received as grants and direct
payments were in the form of a rebate on custom duties and a cover
over[Footnote 79] of excise taxes collected on rum. These funding
sources are not available to the states or the District of Columbia, or
most of the insular areas except for the U.S. Virgin Islands. On a per
capita basis the U.S. Virgin Islands received a larger rebate payment
than Puerto Rico and a larger cover over payment than Puerto Rico (see
table 9).
Table 9: Federal Custom Duties and Excise Taxes Returned to Puerto Rico
in Fiscal Year 2002:
Rebates of customs' duties;
Puerto Rico: Revenues: (in thousands): $33,635;
Puerto Rico: Per capita: $8.7;
U.S. Virgin Islands: Revenues: (in thousands): $2,405;
U.S. Virgin Islands: Per capita: $22.1;
50 states and the District of Columbia: Revenues: (in thousands):
(median): n.a.
Excise cover over;
Puerto Rico: Revenues: (in thousands): 339,414;
Puerto Rico: Per capita: 87.9;
U.S. Virgin Islands: Revenues: (in thousands): 64,936;
U.S. Virgin Islands: Per capita: 595.7;
[Empty];
50 states and the District of Columbia: Revenues: (in thousands):
(median): n.a.
Source: GAO analysis of Customs and Alcohol and Tobacco Tax and Trade
Bureau data.
Note: n.a. means not applicable.
[End of table]
[End of section]
Chapter 7:
The Extent That Federal Social Programs in Puerto Rico Mirror Those in
the States and Other U.S. Insular Areas Varies:
Comparison of Selected Federal Social Programs:
Like the states, Puerto Rico and the other U.S. insular areas receive
federal funds for a variety of social programs--including federal
housing assistance, education, and health care financing programs--
which provide assistance to elderly and needy families and individuals.
Generally, the social programs we examined in these areas targeted
similar populations and delivered similar services--although Puerto
Rico and the other insular areas did not always do so through the
program as it exists in the states (see table 10). For example, in lieu
of the Food Stamp Program available in the states, which is an
entitlement[Footnote 80] program based on the number of participants,
Puerto Rico receives a capped block grant that has similar eligibility
requirements. The major difference between some of the social programs
we examined in the states versus those in Puerto Rico and the other
insular areas is how they are funded. For example, where federal
Medicaid spending is an open-ended entitlement to the states, it is
subject to a statutory cap and a limited matching rate in Puerto Rico
and the other insular areas.[Footnote 81] Some of the social programs
and housing programs that we examined are available in the states, but
are not available in some of the insular areas.
Table 10: Comparison of Selected Social Programs in the U.S. Insular
Areas to Those in the States:
Program: Education programs.
Program: Individuals with Disabilities Education Act (IDEA) Part B;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Puerto Rico and the other insular areas
receive IDEA funds and must comply with IDEA requirements that apply in
the states as a condition of funding.
Program: Title I of the Elementary and Secondary Education Act,
reauthorized by the No Child Left Behind Act of 2001;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Title I funds are provided to schools in
Puerto Rico and in the other insular areas. Schools in these locations
are subject to the same requirements as schools in the states.
Program: Food and nutrition programs.
Program: Child and Adult Care Food Program;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states, Puerto Rico, the U.S.
Virgin Islands, and Guam;
program does not operate in CNMI and American Samoa.
Program: Food Stamp or Nutrition Programs;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states, the U.S. Virgin
Islands, and Guam;
Puerto Rico, American Samoa, and CNMI provide assistance similar to the
Food Stamp Program through a capped block grant;
certain eligibility rules for the grant differ.
Program: National School Lunch Program;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states, Puerto Rico, the U.S.
Virgin Islands, and Guam;
program does not operate in CNMI and American Samoa, but funds under
capped block grants for nutrition programs may be used to provide
school meals in these insular areas.
Program: Special Supplemental Nutrition Program for Women, Infants, and
Children (SS Nutrition for WIC);
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states, Puerto Rico, American
Samoa, Guam, and the U.S. Virgin Islands;
program does not operate in CNMI.
Program: Health care financing and grant programs.
Program: Medicare;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Program eligibility and benefits largely
similar between the insular areas and the states;
however, differences exist regarding the new Part D outpatient
prescription drug benefit.
Program: Medicaid;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Federal share of expenditures in the
insular areas is limited to a 50 percent matching rate and federal
Medicaid spending for the insular areas is subject to statutory caps.
In light of federal funding limits, the Centers for Medicare & Medicaid
Services (CMS) does not hold Puerto Rico and the other insular areas
accountable for covering all the mandatory Medicaid benefits required
of the states.
Program: State Children's Health Insurance Program (SCHIP);
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Federal allotment to Puerto Rico and the
other insular areas is based on statutorily set proportions versus the
population of low-income, uninsured children, as is the case in the
states. Insular areas receive minimum federal matching contributions
that do not apply to the states.
Program: Health grants;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Method used to determine funding amounts
varies by grant. Certain grants use the same allocation method for the
states and the insular areas, while other grants treat some or all of
the insular areas differently.
Program: Income assistance programs.
Program: Aid to the Aged, Blind, or Disabled (AABD);
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Supplemental Security Income (SSI), which
serves a similar population, exists in the states and CNMI, but not in
the other insular areas. The other insular areas continue to operate
their grant programs that existed before SSI was created, specifically
AABD for Puerto Rico.
Program: Temporary Assistance for Needy Families (TANF);
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Program provisions generally the same for
Puerto Rico, Guam, and the U.S. Virgin Islands, but they cannot receive
all funding sources available to the states;
American Samoa and CNMI do not participate.
Program: Child care programs.
Program: Child Care and Development Fund (CCDF);
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Program provisions generally the same for
the states, Puerto Rico, and the insular areas, but the insular areas
cannot receive all funding sources available to the states.
Program: Foster Care and Adoption Assistance Funds;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Puerto Rico participates in these programs
and receives funds, which are limited by the federal funding cap, set
by the 1996 federal welfare law. Other insular areas do not participate
in these programs.
Program: Housing programs.
Program: Public Housing;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Funding formula the same in the states,
Puerto Rico, the U.S. Virgin Islands, and Guam.[A].
Program: HOPE VI;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states and insular areas.
Program: Housing Choice Vouchers;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states and insular areas.
Program: Community Development Block Grant;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states and Puerto Rico;
other insular areas receive an amount determined by the U.S. Department
of Housing and Urban Development (HUD) based on population and
performance in previous years.
Program: HOME Investment Partnerships Program;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Puerto Rico subject to a funding cap that
does not apply to the other states;
the initial HOME allocation amount for each of the insular areas is
based on its population and occupied rental units compared to all the
insular areas.
Program: Project-based Section 8 Program;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the states and insular areas.
Program: Section 203 (b) Single Family Mortgage Insurance Program;
Program rules in the U.S. insular areas compared to those in the
states: Education programs: Same in the contiguous 48 States and Puerto
Rico;
different mortgage insurance limits for Guam, the U.S. Virgin Islands,
Alaska, and Hawaii.[A].
Source: GAO analysis of U.S. federal social programs.
[A] Information was not readily available for CNMI and American Samoa.
More detailed information on how each of the programs is applied in the
insular areas and the states can be found in appendix VII.
[End of table]
[End of section]
Appendixes:
Appendix I:
Methodology for Allocating the Assets and Liabilities of Depository
Banks by Geographic Location:
In order to identify where the assets held in the Puerto Rican banking
system are invested and where the owners of the banks' liabilities
reside, we analyzed institution-specific data that the Office of the
Commissioner of Financial Institutions (OCFI) collects for oversight
purposes. Banks and certain other financial institutions in Puerto Rico
are required to report detailed information regarding their assets,
liabilities, and capital to OCFI through a computerized "CALL report"
data system.[Footnote 82] In addition to a basic balance sheet, the
institutions are required to file various supporting schedules and
addenda. In the case of depository banks (Puerto Rican, U.S., and
foreign commercial banks, plus Puerto Rican government banks) some of
the schedules and addenda ask the institutions to identify the
geographic location of assets they own; others ask for the residency of
the owners of the banks' liabilities. We obtained a copy of the
computer file OCFI has compiled containing all of the detailed CALL
report data submitted by each of these institutions for the years 1997
through 2004. The data, in combination with other information, allowed
us to allocate substantial portions of the total assets and liabilities
of depository banks between Puerto Rico and elsewhere. (There were no
reporting requirements that enabled us to allocate the banks' capital
by residency of shareholders.) In 2004 the depository banks accounted
for about two-thirds of the assets held in financial institutions
supervised by OCFI. Given the lack of location-specific data for the
other financial institutions, we simply report their total assets to
indicate their size in relation to the depository banks.
Table 11 identifies the lines from the various schedules that we used
to allocate specific balance sheet items by geographic location. We
sent a draft version of this allocation methodology to OFCI for their
review and incorporated several corrections that they identified for
us. We ultimately allocated each dollar from the balance sheets into
one of three categories: U.S. and foreign, Puerto Rican, or unknown.
The last category covers all amounts that we could not identify as
belonging to either of the first two categories. The CALL report data
did not provide a means for allocating most loans and leases. For this
line item we assume that 95 percent of loans and leases are made to
borrowers in Puerto Rico, based on the fact that several financial
experts from Puerto Rico all agreed that at least 95 percent of the
loans were made locally, even though some of the larger banks have
begun to enter the U.S. market.
Table 11: Allocation of Balance Sheet Items by Geographic Location:
Sheet line item: ASSETS;
Sources identified for portions that could be allocated: [Empty].
Sheet line item: Cash;
Sources identified for portions that could be allocated: [Empty].
Sheet line item: Non-interest-bearing balances;
Sources identified for portions that could be allocated: U.S. and
Foreign combined identified: Addendum-RC-Balance sheet (CALL report)
line 1b. Puerto Rican identified: Addendum-RC-Balance sheet (CALL
report) line 1a.
Sheet line item: Interest-bearing balances;
Sources identified for portions that could be allocated: U.S. and
Foreign combined identified: Addendum-RC-Balance sheet (CALL report)
line 2b. Puerto Rican identified: Addendum-RC-Balance sheet (CALL
report) line 2a.
Sheet line item: Securities;
Sources identified for portions that could be allocated: U.S.
identified: Schedule RC-B Securities lines 1, 2a, 2b, 4a(1), 4a(2),
4b(1), and 4b(2). Foreign identified: RC-B Securities line 6b. U.S. and
Puerto Rican combined identified: RC-B Securities lines 3 and 6a.
Sheet line item: Federal funds sold and securities purchased;
Sources identified for portions that could be allocated: U.S. and
Foreign combined identified: Addendum-RC-Balance sheet (CALL report)
lines 3a and 4a. Puerto Rican identified: Addendum-RC-Balance sheet
(CALL report) lines 3b and 4b.
Sheet line item: Loans and leases;
Sources identified for portions that could be allocated: Allocated 95
percent to Puerto Rico and 5 percent to the U.S. and Foreign categories
based on the consensus of experts that we interviewed.
Sheet line item: Trading assets;
Sources identified for portions that could be allocated: No ability to
allocate to any source.
Sheet line item: Other assets;
Sources identified for portions that could be allocated: No ability to
allocate to any source.
Sheet line item: LIABILITIES;
Sources identified for portions that could be allocated: [Empty].
Sheet line item: Deposits;
Sources identified for portions that could be allocated: [Empty].
Sheet line item: Private;
Sources identified for portions that could be allocated: Puerto Rican
identified: Addendum-RC-Balance sheet lines 17a, 17b. U.S. and Foreign
identified: line17d.
Sheet line item: 936 deposits;
Sources identified for portions that could be allocated: U.S.
identified: Addendum-RC-Balance sheet lines 17c.
Sheet line item: States, political divisions;
Sources identified for portions that could be allocated: U.S.
identified: Addendum-RC-Balance sheet (CALL report) lines 18b, 18c,
18d. Puerto Rican identified: Addendum-RC-Balance sheet (CALL report)
lines 18a.
Sheet line item: Commercial banks;
Sources identified for portions that could be allocated: U.S.
identified: Addendum-RC-Balance sheet (CALL report) lines 20b(1) and
20b(2). Foreign identified: Addendum-RC- Balance sheet (CALL report)
lines 20a(1) and 20a(2).
Sheet line item: Foreign/government banks;
Sources identified for portions that could be allocated: U.S.
identified: Schedule RC-E- Deposit liabilities line 2. Foreign
identified: Schedule RC-E-Deposit liabilities lines 5 and 6.
Sheet line item: Total debt;
Sources identified for portions that could be allocated: Puerto Rican
identified: Addendum-RC-Balance sheet (CALL report) lines 6a, 7a, and
8a. U.S. identified: Addendum-RC-Balance sheet (CALL report) line 7c.
U.S. and Foreign combined identified: Addendum-RC-Balance sheet (CALL
report) lines 6b, 7b, and 8b.
Sheet line item: Trading liabilities;
Sources identified for portions that could be allocated: No ability to
allocate to any source.
Sheet line item: Other liabilities;
Sources identified for portions that could be allocated: U.S. and
Foreign identified: Addendum-RC- Balance sheet (CALL report) line 9b.
Puerto Rican identified: Addendum- RC-Balance sheet (CALL report) line
9a.
Source: GAO.
[End of table]
OCFI conducts a set of quality reviews on the CALL report data that the
financial institutions submit. We undertook our own consistency checks
on the data relevant to our allocation analysis. We detected some
differences between the total amounts reported on the balance sheet and
the summations of amounts listed in the addenda that should have
totaled to the balance sheet amounts. Some differences were extremely
small, which we attributed to inconsequential reporting errors.
However, we identified three types of significant discrepancies. The
first type of discrepancy was due to financial institutions reporting a
positive amount for a balance sheet item but not providing the
geographic detail that should have been reported in an addendum. The
second type of discrepancy resulted from financial institutions listing
more in the addendum than in the balance sheet for a given line item.
In these cases there was always a specific amount that appeared to be
either double-counted in the addendum or not reported in the balance
sheet amount. The last type of discrepancy comprised cases of financial
institutions that reported either too little or too much in the
addendum for corresponding balance sheet items but with no obvious
pattern or explanation.
We provided experts in OCFI a spreadsheet with the specific cases of
discrepancies for each type of discrepancy and each affected balance
sheet line item along with a detailed explanation and suggested
resolutions where we could offer any. Based on OCFI's responses, we
adjusted our unknown group to include discrepancy amounts due to
financial institutions reporting zero on the addendum. Officials from
the Commissioner's office considered the balance sheet values to be
more accurate than the addendum breakouts so in the second and third
types of discrepancies we were unable to make any corrections to adjust
for these differences. In our consultation with Puerto Rican officials
we further determined that in early years the financial institutions
were not required to fill out the addendum and that the remaining
differences result largely from reporting discrepancies at the
institution level.
Table 12 provides a summary of the absolute value of the unexplained
discrepancies as a percentage of the balance sheet line item for
selected items. For those cases where the unexplained discrepancies
exceeded 5 percent of the total value for a line item in a given year
we decided that our allocation results were too uncertain to be
presented and we simply show the totals for those items in our figures.
Table 12: Percent of Discrepancies by Line Item (percent):
Year: 2004;
Total assets: 0.3;
Loans and leases: 0.5;
Total liabilities: 4.6;
Deposits: 0.8;
Total debt: 0.3.
Year: 2003;
Total assets: 1.5;
Loans and leases: 2.2;
Total liabilities: 2.0;
Deposits: 0.8;
Total debt: 1.5.
Year: 2002;
Total assets: 1.0;
Loans and leases: 2.0;
Total liabilities: 4.2;
Deposits: 0.2;
Total debt: 1.0.
Year: 2001;
Total assets: 2.6;
Loans and leases: 3.5;
Total liabilities: 2.6;
Deposits: 2.4;
Total debt: 2.6.
Year: 2000;
Total assets: 1.2;
Loans and leases: 0.7;
Total liabilities: 4.2;
Deposits: 5.7;
Total debt: 1.2.
Year: 1999;
Total assets: 1.8;
Loans and leases: 0.9;
Total liabilities: 3.1;
Deposits: 2.5;
Total debt: 1.8.
Year: 1998;
Total assets: 0.6;
Loans and leases: 0.5;
Total liabilities: 5.0;
Deposits: 2.4;
Total debt: 0.6.
Year: 1997;
Total assets: 2.5;
Loans and leases: 1.0;
Total liabilities: 17.7;
Deposits: 15.0;
Total debt: 2.5.
Year: 1996;
Total assets: 0.4;
Loans and leases: 0.7;
Total liabilities: 16.5;
Deposits: 5.5;
Total debt: 0.4.
Year: 1995;
Total assets: 0.4;
Loans and leases: 0.7;
Total liabilities: 10.1;
Deposits: 1.3;
Total debt: 0.4.
Source: GAO.
[End of table]
[End of section]
Appendix II:
Additional Information on Puerto Rican Economic Trends and Capital
Flows:
The following series of figures present additional information on the
sources and uses of funds for financial institutions operating in
Puerto Rico.
Figure 52: Puerto Rico's Depository Institutions' Deposits, 1995-2004:
[See PDF for image]
Notes: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
In 1997 and 2000, the sum of Puerto Rican, U.S., and foreign deposits
from the addenda exceeded the balance sheet totals by $4,811 and $86
million, respectively.
Figure 53: Puerto Rico's Depository Institutions' Debt, 1995-2004:
[See PDF for image]
Notes: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
In 2004, the sum of Puerto Rican, U.S., and foreign debt from the
addenda exceeded the balance sheet totals by $823 million.
Figure 54: Exempt Deposits of Possessions Corporations and Brokered
Deposits in Puerto Rican Banks, 1997-2004:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Figure 55: Puerto Rico's Depository Institutions' Securities
Investments, 1995-2004:
[See PDF for image]
Notes: No securities were clearly identified as being located in Puerto
Rico.
[End of figure]
Known investment in foreign securities make up less than 1 percent of
the total for every year between 1995 and 2004.
Figures were adjusted for inflation using Puerto Rico's gross product
deflator.
Figure 56: Puerto Rico's Depository Institutions' Loans and Leases,
1995-2004:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
In chapter 3 of this report we provided information on the physical
location of the assets and liabilities of depository institutions
operating in Puerto Rico. Although we are unable to report this kind of
detail for the other types of financial institutions in Puerto Rico, in
figure 57 we are able to present data from OCIF on selected other types
of institutions. Table 14 presents summary descriptions of the sources
and uses of funds for these institutions, as explained to us by several
private sector financial experts in Puerto Rico and confirmed by OCIF.
The figure and table do not include international banking entities,
which OCIF also oversees, because those entities do not form part of
the local capital market.
Figure 57: Assets of Selected Financial Institutions in Puerto Rico,
1995-2004:
[See PDF for image]
Notes: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
No data were available for investment or venture capital prior to 1997;
no data were available for securities brokers prior to 2002.
[End of figure]
Table 13: The Source and Use of Funds for Selected Financial
Institutions in Puerto Rico:
Type of Institution: Credit unions;
Description of Source and Use of Funds: They obtain and use their funds
in the local (Puerto Rican) market.
Type of Institution: Broker/dealers;
Description of Source and Use of Funds: The broker/dealers represented
in fig. 57 obtain all but a small portion of their funds locally and
invest most of those funds locally.
Type of Institution: Small-loan companies;
Description of Source and Use of Funds: These companies obtain their
funds in the U.S. market and lend to subprime borrowers in Puerto Rico.
Type of Institution: Mortgage banks;
Description of Source and Use of Funds: On the funding side the Puerto
Rican mortgage market is indistinguishable from the U.S. market. Most
funds are lent locally.
Type of Institution: Investment companies;
Description of Source and Use of Funds: Only Puerto Rican residents can
invest in these companies. Most of their funds are invested in Puerto
Rico with a minor portion going to the United States.
Type of Institution: Leasing companies;
Description of Source and Use of Funds: These companies are
subsidiaries of banks and their funding is the same as for their parent
banks.
Type of Institution: Financing companies;
Description of Source and Use of Funds: These companies, which operate
in the car loan market, obtain their funds in the United States and
lend locally.
Source: GAO.
[End of table]
Figure 58: Real Debt Issued by the Government of Puerto Rico, but
Payable from Private or Federal Funds, or Asset Sales, by Market of
Purchaser, 1995-2005:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
Figure 59: Real Debt Issued and Payable by the Government of Puerto
Rico, by Market of Purchaser, 1995-2005:
[See PDF for image]
Note: Figures were adjusted for inflation using Puerto Rico's gross
product deflator.
[End of figure]
A Comparison of Rates of Return for Possessions Corporations and
Controlled Foreign Corporations (CFC) in Puerto Rico's Chemical
Industry:
In contrast to the various U.S. Census Bureau (Census) data we have
presented that show a sharp increase in value added per employee as
pharmaceuticals production was shifted from possessions corporations to
CFCs, the tax data for our large corporate groups do not show a clear
trend in the rates of return on assets for these two types of
corporations. We could not exactly replicate the comparison we made
with the Census data with our tax data because we lacked employment
data for our large groups of corporations. Instead, we compared the
ratios of gross profit (the closest tax data equivalent of value added)
to total assets. The results presented in figure 60 shows that the
ratios for CFCs in the chemical industry were significantly higher than
those for possessions corporations in the same industry in both 1997
and 1999, but the ratios were very close in 2001.[Footnote 83] We also
compared the ratio of net income over total assets and found a similar
pattern, except for the fact that the net return for possessions
corporations in 2001 was slightly higher than that for CFCs.
Figure 60: Rates of Return on Total Assets for Possessions Corporations
and CFCs in the Chemical Industry, Puerto Rico, 1997, 1999, 2001:
[See PDF for image]
[End of figure]
In addition, we compared the gross and net operating rates of return of
possessions corporations and CFCs in the chemical industry and found
that neither type of corporation dominated the other type consistently
across the years (see fig. 61). We used the same measure of net
operating rate of return that Grubert and Slemrod had computed for
possessions corporations for 1987.[Footnote 84] With one exception (for
CFCs in 2001), our net return estimates for both types of corporations
for 1997, 1999, and 2001 all exceeded 200 percent and were
significantly higher than Grubert and Slemrod's estimate of 138.6
percent for possessions corporations in the pharmaceutical industry in
1987.
Figure 61: Rates of Return on Operating Assets for Possessions
Corporations and CFCs in the Chemical Industry, Puerto Rico, 1997,
1999, 2001:
[See PDF for image]
[End of figure]
Possessions corporations fared better relative to CFCs in terms of
their returns on operating assets, rather than total assets, because
the operating assets of possessions corporations represented a
significantly lower share of their total assets than was the case for
CFCs. Figure 62 shows that as the large corporate groups gradually
decreased the size of their possessions corporations' operations in
Puerto Rico after 1997, operating assets accounted for a progressively
smaller share of total assets until 2003, when an accumulation of
inventories stopped the decline. In 2001, operating assets accounted
for only 17.7 percent of possessions corporations' total assets in the
chemical industry. In contrast, operating assets accounted for 41.9
percent of the total assets of all of the CFCs in the chemical industry
for which we had reliable asset information in 2001. Internal Revenue
Service (IRS) officials with expertise in possessions corporations
issues told us that the large corporate groups would have an incentive
to keep as many of the liquid assets of the possessions corporations
(everything but land and depreciable and depletable assets) within
those entities, even as they transferred the latter's fixed assets to
CFCs, because a transfer of those liquid assets to a foreign
corporation could be subject to federal income tax.
Figure 62: Composition of Assets of the Possessions Corporations of All
Large Groups, Puerto Rico, 1993-2003:
[See PDF for image]
[End of figure]
[End of section]
Appendix III:
Methodology for Analyses of Business Activities:
Methodology for Determining How Economic Activity in Puerto Rico is
Distributed across Types of Business Entities:
We used a combination of data provided by Census, IRS, and the Puerto
Rican Department of Treasury to determine how economic activity in
Puerto Rico is distributed across types of business entities. The
multistage procedure we followed in cooperation with Census and IRS was
as follows:
1. We obtained a database from IRS that contained the employer
identification numbers (EIN) and names for approximately 50,126
employers that either (1) operated in Puerto Rico or (2) were
businesses related to those operating in Puerto Rico. The initial
population for Census's surveys of employers for the 2002 Economic
Census of Puerto Rico was included among these 50,126 employers.
2. We assigned each EIN to one of 11 groups based on IRS or Puerto
Rican tax data, using the criteria described below. Ten of the groups
represented types of businesses. We assigned each group an
identification letter and did not tell Census the types of businesses
that they represented. We labeled the 11TH group "unknown" and assigned
all of the EINs that we could not place into other groups into that
one.[Footnote 85]
3. Census matched the EINs in each group to the EINs of respondents to
their surveys. Census then aggregated the economic data, such as value
added, number of paid employees, and capital expenditures, for all of
the EINs in a given group and industry. Census did the same for the
EINs in our "unknown" group, but for that group they also provided a
breakdown according to the type of business entity that the respondents
reported themselves to be in the Census surveys. Census reviewed these
results to ensure compliance with their legal requirement to ensure
confidentiality of individual survey respondents;
they suppressed the data in any entity-industry grouping that,
otherwise, would have disclosed confidential information. In some cases
we combined two of our original groups to avoid having data suppressed.
4. Where possible, we added the data from 1 of our 10 entity groups to
the data from one or more of the entity categories that Census
identified in our unknown group. For example, we added data for
partnerships that Census identified to the data for our pass-through
entity group.
The entity groupings that we report in our figures and tables are
defined as follows:
Possessions corporations. All EINs associated with corporations that
IRS identified as being a possessions corporation in 2002 and which
were identified as operating in Puerto Rico.
U.S. CFCs.[Footnote 86] This category contains all EINs belonging to
corporations that (1) were reported on a form 5471 in 2001 or 2002;
(2) were identified for us as U.S. CFCs by the Puerto Rico Industrial
Development Company (PRIDCO), which gathered information from the
Office of Industrial Tax; or (3) were incorporated outside of the
United States, had no record of a filing a standard form 1120
(corporate tax return) or 1065 (partnership tax return) with IRS, and
had names indicating they were members of one of the 77 large U.S.
corporate groups operating in Puerto Rico. We divided this category
into two groups, depending on whether a form 5471 or a Puerto Rican tax
return identified the corporation as being incorporated in Puerto Rico
or elsewhere.
Other U.S. Corporations. This category contains EINs of corporations
that were incorporated in the United States, but were not possessions
or pass-through (partnership) corporations.
Other corporations incorporated in Puerto Rico. These were corporations
for which we found Puerto Rican tax returns that identified the place
of incorporation as Puerto Rico, but which did not meet the criteria we
used to identify CFCs.
Corporations of type unknown. The overwhelming majority of the EINs
that we sent to Census in this group were for employers that we
determined to be corporations (because their name did not suggest they
were a partnership or LLC, they filed a form 1120-F [tax return of a
foreign corporation], or their name indicated that they were
corporations) and for which we had no indicator of a place of
incorporation. We also included small numbers of three other types of
corporations in this category because disclosure constraints prevented
us from reporting on them separately. They are (1) CFCs for which we
could not determine a place of incorporation, (2) corporations that
were incorporated outside of the United States or Puerto Rico but which
were not CFCs, and (3) nonprofit corporations that Census identified
from our unknown group but whose data they suppressed.[Footnote 87]
Sole proprietors. This category contains EINs that were associated with
sole proprietors in IRS's records or in Census's surveys.
Pass-through entities. This category contains EINs for employers that
IRS reported to have filing requirements as partnerships or subchapter
S corporations, or that had names on Puerto Rican tax returns
indicating that they were partnerships or LLCs.
Other entities. The IRS codes that we used to identify EINs that we put
in this category covered government agencies, churches, nonprofits,
estates and trusts, political organizations, homeowners organizations,
and settlement funds. This does not imply that the Census population of
employers included all these type of entities. We also included in this
category the data that Census provided to us relating to nonprofit
corporations.
[End of section]
Appendix IV:
Additional Data on Possessions Corporations and Their Affiliates:
Table 14: Selected Data for the Full Population of Possessions
Corporations Operating in Puerto Rico, 1993-2003:
Dollars in billions (constant 2005).
Number of corporations claiming tax credit;
1993: $378;
1995: $332;
1997: $291;
1999: $204;
2001: $158;
2003: $124.
Amount of tax credit;
1993: $5.8;
1995: $3.7;
1997: $3.2;
1999: $1.8;
2001: $1.4;
2003: $1.1.
Total income;
1993: $28.8;
1995: $28.6;
1997: $32.3;
1999: $27.0;
2001: $20.5;
2003: $13.3.
Gross profits;
1993: $24.8;
1995: $26.1;
1997: $30.1;
1999: $24.8;
2001: $18.8;
2003: $12.1.
Net income;
1993: $16.7;
1995: $15.9;
1997: $17.3;
1999: $13.3;
2001: $9.5;
2003: $7.3.
Total assets;
1993: $59.5;
1995: $59.6;
1997: $58.7;
1999: $54.9;
2001: $45.3;
2003: $41.1.
Source: GAO analysis of IRS data.
[End of table]
Table 15: Selected Data for Large Corporate Groups Operating in Puerto
Rico, by Type of Entity, 1993-2003:
Dollars in billions (constant 2005).
Number of corporations;
Possessions corporations;
Dollars in billions (constant 2005): 1993: 136;
Dollars in billions (constant 2005): 1995: 146;
Dollars in billions (constant 2005): 1997: 127;
Dollars in billions (constant 2005): 1999: 105;
Dollars in billions (constant 2005): 2001: 79;
Dollars in billions (constant 2005): 2003: 58.
CFCs;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 34;
Dollars in billions (constant 2005): 1999: 43;
Dollars in billions (constant 2005): 2001: 49;
Dollars in billions (constant 2005): 2003: [Empty].
Other;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: [Empty];
Dollars in billions (constant 2005): 1999: 25;
Dollars in billions (constant 2005): 2001: 28;
Dollars in billions (constant 2005): 2003: [Empty].
Possessions tax credit;
Possessions corporations;
Dollars in billions (constant 2005): 1993: $5.5;
Dollars in billions (constant 2005): 1995: $3.5;
Dollars in billions (constant 2005): 1997: $3.0;
Dollars in billions (constant 2005): 1999: $1.7;
Dollars in billions (constant 2005): 2001: $1.3;
Dollars in billions (constant 2005): 2003: $1.1.
Total income;
Possessions corporations;
Dollars in billions (constant 2005): 1993: 26.7;
Dollars in billions (constant 2005): 1995: 26.8;
Dollars in billions (constant 2005): 1997: 30.7;
Dollars in billions (constant 2005): 1999: 25.9;
Dollars in billions (constant 2005): 2001: 19.8;
Dollars in billions (constant 2005): 2003: 12.5.
Lower bound for CFCs;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 2.4;
Dollars in billions (constant 2005): 1999: 5.2;
Dollars in billions (constant 2005): 2001: 7.4;
Dollars in billions (constant 2005): 2003: [Empty].
CFC total if allocated by tax ratio;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 3.0;
Dollars in billions (constant 2005): 1999: 7.2;
Dollars in billions (constant 2005): 2001: 11.5;
Dollars in billions (constant 2005): 2003: [Empty].
Other affiliates;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: [Empty];
Dollars in billions (constant 2005): 1999: 3.3;
Dollars in billions (constant 2005): 2001: 7.5;
Dollars in billions (constant 2005): 2003: [Empty].
Gross profit;
Possessions corporations;
Dollars in billions (constant 2005): 1993: 22.9;
Dollars in billions (constant 2005): 1995: 24.4;
Dollars in billions (constant 2005): 1997: 28.8;
Dollars in billions (constant 2005): 1999: 23.9;
Dollars in billions (constant 2005): 2001: 18.1;
Dollars in billions (constant 2005): 2003: 11.4.
Lower bound for CFCs;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 2.4;
Dollars in billions (constant 2005): 1999: 5.3;
Dollars in billions (constant 2005): 2001: 7.1;
Dollars in billions (constant 2005): 2003: [Empty].
CFC total if allocated by tax ratio;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 3.0;
Dollars in billions (constant 2005): 1999: 7.5;
Dollars in billions (constant 2005): 2001: 11.5;
Dollars in billions (constant 2005): 2003: [Empty].
Other affiliates;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: [Empty];
Dollars in billions (constant 2005): 1999: 3.0;
Dollars in billions (constant 2005): 2001: 7.0;
Dollars in billions (constant 2005): 2003: [Empty].
Net income;
Possessions corporations;
Dollars in billions (constant 2005): 1993: 15.9;
Dollars in billions (constant 2005): 1995: 15.1;
Dollars in billions (constant 2005): 1997: 16.6;
Dollars in billions (constant 2005): 1999: 12.8;
Dollars in billions (constant 2005): 2001: 9.3;
Dollars in billions (constant 2005): 2003: 7.1.
Lower bound for CFCs;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 1.6;
Dollars in billions (constant 2005): 1999: 2.4;
Dollars in billions (constant 2005): 2001: 3.9;
Dollars in billions (constant 2005): 2003: [Empty].
CFC total if allocated by tax ratio;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 1.9;
Dollars in billions (constant 2005): 1999: 3.4;
Dollars in billions (constant 2005): 2001: 6.0;
Dollars in billions (constant 2005): 2003: [Empty].
Other affiliates;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: [Empty];
Dollars in billions (constant 2005): 1999: 2.1;
Dollars in billions (constant 2005): 2001: 5.8;
Dollars in billions (constant 2005): 2003: [Empty].
Total assets;
Possessions corporations;
Dollars in billions (constant 2005): 1993: 54.3;
Dollars in billions (constant 2005): 1995: 54.4;
Dollars in billions (constant 2005): 1997: 54.4;
Dollars in billions (constant 2005): 1999: 50.8;
Dollars in billions (constant 2005): 2001: 42.3;
Dollars in billions (constant 2005): 2003: 38.2.
Lower bound for CFCs;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: 7.8;
Dollars in billions (constant 2005): 1999: 14.5;
Dollars in billions (constant 2005): 2001: 16.7;
Dollars in billions (constant 2005): 2003: [Empty].
Other affiliates;
Dollars in billions (constant 2005): 1993: [Empty];
Dollars in billions (constant 2005): 1995: [Empty];
Dollars in billions (constant 2005): 1997: [Empty];
Dollars in billions (constant 2005): 1999: 6.7;
Dollars in billions (constant 2005): 2001: 7.2;
Dollars in billions (constant 2005): 2003: [Empty].
Source: GAO analysis of data from IRS and the Puerto Rican Department
of Treasury.
[End of table]
Table 16: Selected Data for Large Corporate Groups Operating in the
Chemical and Medical Equipment Industries in Puerto Rico, by Type of
Entity, 1993-2003:
Dollars in billions (constant 2005).
Number of corporations:
Possessions corporations;
1993: 74;
1995: 74;
1997: 60;
1999: 52;
2001: 38;
2003: 27.
CFCs;
1993: [Empty];
1995: [Empty];
1997: 15;
1999: 21;
2001: 26;
2003: [Empty].
Other;
1993: [Empty];
1995: [Empty];
1997: [Empty];
1999: 17;
2001: 18;
2003: [Empty].
Possessions tax credit;
Possessions corporations;
1993: $3.1;
1995: $2.3;
1997: $2.2;
1999: $1.2;
2001: $0.9;
2003: $0.8.
Total income;
Possessions corporations;
1993: 15.9;
1995: 18.2;
1997: 22.0;
1999: 19.4;
2001: 13.0;
2003: 9.3.
Lower bound for CFCs;
1993: [Empty];
1995: [Empty];
1997: 1.8;
1999: 3.7;
2001: 4.7;
2003: [Empty].
CFC total if allocated by tax ratio;
1993: [Empty];
1995: [Empty];
1997: 1.8;
1999: 5.7;
2001: 8.8;
2003: [Empty].
Other affiliates;
1993: [Empty];
1995: [Empty];
1997: [Empty];
1999: 2.8;
2001: 7.3;
2003: [Empty].
Gross profit;
Possessions corporations;
1993: 15.4;
1995: 17.0;
1997: 21.0;
1999: 18.3;
2001: 12.0;
2003: 8.6.
Lower bound for CFCs;
1993: [Empty];
1995: [Empty];
1997: 1.8;
1999: 4.0;
2001: 4.8;
2003: [Empty].
CFC total if allocated by tax ratio;
1993: [Empty];
1995: [Empty];
1997: 1.8;
1999: 6.1;
2001: 9.1;
2003: [Empty].
Other affiliates;
1993: [Empty];
1995: [Empty];
1997: [Empty];
1999: 2.7;
2001: 6.9;
2003: [Empty].
Net Income;
Possessions corporations;
1993: 8.9;
1995: 10.7;
1997: 12.4;
1999: 10.2;
2001: 6.8;
2003: 5.5.
Lower bound for CFCs;
1993: [Empty];
1995: [Empty];
1997: 1.2;
1999: 2.3;
2001: 2.8;
2003: [Empty].
CFC total if allocated by tax ratio;
1993: [Empty];
1995: [Empty];
1997: 1.2;
1999: 3.4;
2001: 4.8;
2003: [Empty].
Other affiliates;
1993: [Empty];
1995: [Empty];
1997: [Empty];
1999: 2.0;
2001: 5.8;
2003: [Empty].
Total assets;
Possessions corporations;
1993: 29.7;
1995: 32.7;
1997: 30.1;
1999: 33.1;
2001: 25.2;
2003: 23.3.
Lower bound for CFCs;
1993: [Empty];
1995: [Empty];
1997: 2.3;
1999: 4.9;
2001: 7.7;
2003: [Empty].
Other affiliates;
1993: [Empty];
1995: [Empty];
1997: [Empty];
1999: 5.5;
2001: 6.0;
2003: [Empty].
Source: GAO analysis of data from IRS and the Puerto Rican Department
of Treasury.
[End of table]
Table 17: Selected Data for Large Corporate Groups Operating in the
Computer, Electronics, and Electrical Equipment Industries in Puerto
Rico, by Type of Entity, 1993-2003:
Dollars in billions (constant 2005).
Number of corporations;
Possessions corporations;
Large computer/electronics/electrical equipment groups: 1993: 15;
Large computer/electronics/electrical equipment groups: 1995: 29;
Large computer/electronics/electrical equipment groups: 1997: 25;
Large computer/electronics/electrical equipment groups: 1999: 16;
Large computer/electronics/electrical equipment groups: 2001: 13;
Large computer/electronics/electrical equipment groups: 2003: 11.
CFCs;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: 10;
Large computer/electronics/electrical equipment groups: 1999: 10;
Large computer/electronics/electrical equipment groups: 2001: 12;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Other;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: [Empty];
Large computer/electronics/electrical equipment groups: 1999: 6;
Large computer/electronics/electrical equipment groups: 2001: 4;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Possessions tax credit;
Possessions corporations;
Large computer/electronics/electrical equipment groups: 1993: $1.2;
Large computer/electronics/electrical equipment groups: 1995: $0.3;
Large computer/electronics/electrical equipment groups: 1997: $0.2;
Large computer/electronics/electrical equipment groups: 1999: $0.1;
Large computer/electronics/electrical equipment groups: 2001: $0.1;
Large computer/electronics/electrical equipment groups: 2003: $0.1.
Total income;
Possessions corporations;
Large computer/electronics/electrical equipment groups: 1993: 3.9;
Large computer/electronics/electrical equipment groups: 1995: 1.9;
Large computer/electronics/electrical equipment groups: 1997: 2.1;
Large computer/electronics/electrical equipment groups: 1999: 0.8;
Large computer/electronics/electrical equipment groups: 2001: 1.8;
Large computer/electronics/electrical equipment groups: 2003: 0.6.
CFCs;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: 0.2;
Large computer/electronics/electrical equipment groups: 1999: 0.2;
Large computer/electronics/electrical equipment groups: 2001: 0.3;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Other affiliates;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: [Empty];
Large computer/electronics/electrical equipment groups: 1999: 0.5;
Large computer/electronics/electrical equipment groups: 2001: 0.1;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Gross profit;
Possessions corporations;
Large computer/electronics/electrical equipment groups: 1993: 1.6;
Large computer/electronics/electrical equipment groups: 1995: 1.8;
Large computer/electronics/electrical equipment groups: 1997: 2.0;
Large computer/electronics/electrical equipment groups: 1999: 0.7;
Large computer/electronics/electrical equipment groups: 2001: 1.7;
Large computer/electronics/electrical equipment groups: 2003: 0.4.
CFCs;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: 0.2;
Large computer/electronics/electrical equipment groups: 1999: 0.2;
Large computer/electronics/electrical equipment groups: 2001: 0.2;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Other affiliates;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: [Empty];
Large computer/electronics/electrical equipment groups: 1999: 0.4;
Large computer/electronics/electrical equipment groups: 2001: 0.0;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Net income;
Possessions corporations;
Large computer/electronics/electrical equipment groups: 1993: 3.3;
Large computer/electronics/electrical equipment groups: 1995: 1.1;
Large computer/electronics/electrical equipment groups: 1997: 1.0;
Large computer/electronics/electrical equipment groups: 1999: 0.5;
Large computer/electronics/electrical equipment groups: 2001: 0.5;
Large computer/electronics/electrical equipment groups: 2003: 0.5.
CFCs;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: 0.1;
Large computer/electronics/electrical equipment groups: 1999: 0.2;
Large computer/electronics/electrical equipment groups: 2001: 0.2;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Other affiliates;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: [Empty];
Large computer/electronics/electrical equipment groups: 1999: 0.1;
Large computer/electronics/electrical equipment groups: 2001: 0.0;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Total assets;
Possessions corporations;
Large computer/electronics/electrical equipment groups: 1993: 3.3;
Large computer/electronics/electrical equipment groups: 1995: 5.0;
Large computer/electronics/electrical equipment groups: 1997: 5.2;
Large computer/electronics/electrical equipment groups: 1999: 2.8;
Large computer/electronics/electrical equipment groups: 2001: 2.1;
Large computer/electronics/electrical equipment groups: 2003: 1.7.
CFCs;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: 0.5;
Large computer/electronics/electrical equipment groups: 1999: 0.7;
Large computer/electronics/electrical equipment groups: 2001: 2.3;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Other affiliates;
Large computer/electronics/electrical equipment groups: 1993: [Empty];
Large computer/electronics/electrical equipment groups: 1995: [Empty];
Large computer/electronics/electrical equipment groups: 1997: [Empty];
Large computer/electronics/electrical equipment groups: 1999: 1.2;
Large computer/electronics/electrical equipment groups: 2001: 0.8;
Large computer/electronics/electrical equipment groups: 2003: [Empty].
Source: GAO analysis of data from IRS and the Puerto Rican Department
of Treasury.
[End of table]
Table 18: Selected Data for Large Corporate Groups Operating in the
Food and Kindred Products Industries in Puerto Rico, by Type of Entity,
1993-2003:
Dollars in billions (constant 2005).
Number of corporations;
Possessions corporations in the large food and kindred products groups:
1993: 14;
Possessions corporations in the large food and kindred products groups:
1995: 17;
Possessions corporations in the large food and kindred products groups:
1997: 17;
Possessions corporations in the large food and kindred products groups:
1999: 15;
Possessions corporations in the large food and kindred products groups:
2001: 11;
Possessions corporations in the large food and kindred products groups:
2003: 6.
Possessions tax credit;
Possessions corporations in the large food and kindred products groups:
1993: 0.7;
Possessions corporations in the large food and kindred products groups:
1995: 0.4;
Possessions corporations in the large food and kindred products groups:
1997: 0.2;
Possessions corporations in the large food and kindred products groups:
1999: 0.2;
Possessions corporations in the large food and kindred products groups:
2001: 0.2;
Possessions corporations in the large food and kindred products groups:
2003: 0.1.
Total income;
Possessions corporations in the large food and kindred products groups:
1993: 3.1;
Possessions corporations in the large food and kindred products groups:
1995: 3.0;
Possessions corporations in the large food and kindred products groups:
1997: 2.3;
Possessions corporations in the large food and kindred products groups:
1999: 4.0;
Possessions corporations in the large food and kindred products groups:
2001: 3.9;
Possessions corporations in the large food and kindred products groups:
2003: 1.6.
Gross profit;
Possessions corporations in the large food and kindred products groups:
1993: 2.9;
Possessions corporations in the large food and kindred products groups:
1995: 2.3;
Possessions corporations in the large food and kindred products groups:
1997: 1.8;
Possessions corporations in the large food and kindred products groups:
1999: 3.2;
Possessions corporations in the large food and kindred products groups:
2001: 3.4;
Possessions corporations in the large food and kindred products groups:
2003: 1.6.
Net income;
Possessions corporations in the large food and kindred products groups:
1993: 2.1;
Possessions corporations in the large food and kindred products groups:
1995: 1.8;
Possessions corporations in the large food and kindred products groups:
1997: 1.5;
Possessions corporations in the large food and kindred products groups:
1999: 1.6;
Possessions corporations in the large food and kindred products groups:
2001: 1.5;
Possessions corporations in the large food and kindred products groups:
2003: 0.9.
Total assets;
Possessions corporations in the large food and kindred products groups:
1993: 5.4;
Possessions corporations in the large food and kindred products groups:
1995: 6.4;
Possessions corporations in the large food and kindred products groups:
1997: 9.2;
Possessions corporations in the large food and kindred products groups:
1999: 10.6;
Possessions corporations in the large food and kindred products groups:
2001: 11.3;
Possessions corporations in the large food and kindred products groups:
2003: 9.8.
Source: GAO analysis of data from IRS and the Puerto Rican Department
of Treasury.
Note: Other affiliates of possessions corporations had less than $0.1
billion of all of these measures.
[End of table]
Table 19: Distribution of Tax Credits, Income, and Assets of
Possessions Corporations Operating in Puerto Rico, by Industry, 1993-
2003:
Percent.
Possessions tax credit;
Apparel;
1993: 1.2%;
1995: 1.9%;
1997: 2.4%;
1999: 6.1%;
2001: 5.7%;
2003: 0.8%.
Beverages and tobacco;
1993: 12.8%;
1995: 10.8%;
1997: 6.6%;
1999: 9.3%;
2001: 12.7%;
2003: 10.8%.
Computers, electronics, and electrical equipment;
1993: 21.5%;
1995: 9.4%;
1997: 8.2%;
1999: 8.5%;
2001: 9.7%;
2003: 13.8%.
Medical equipment;
1993: 8.6%;
1995: 10.1%;
1997: 11.3%;
1999: 9.8%;
2001: 11.6%;
2003: 7.8%.
Nonmanufacturing;
1993: 3.7%;
1995: 4.8%;
1997: 4.9%;
1999: 2.4%;
2001: 2.7%;
2003: 10.6%.
Other manufacturing;
1993: 5.7%;
1995: 7.4%;
1997: 6.0%;
1999: 6.4%;
2001: 6.7%;
2003: 5.8%.
Pharmaceuticals;
1993: 46.5%;
1995: 55.7%;
1997: 60.5%;
1999: 57.6%;
2001: 50.9%;
2003: 50.4%.
Total income;
Apparel;
1993: 0.8%;
1995: 1.1%;
1997: 1.0%;
1999: 1.4%;
2001: 1.7%;
2003: 1.1%.
Beverages and tobacco;
1993: 10.9%;
1995: 10.4%;
1997: 6.9%;
1999: 14.6%;
2001: 19.2%;
2003: 12.5%.
Computers, electronics, and electrical equipment;
1993: 14.7%;
1995: 7.3%;
1997: 7.0%;
1999: 3.1%;
2001: 9.0%;
2003: 5.4%.
Medical equipment;
1993: 7.9%;
1995: 7.7%;
1997: 9.3%;
1999: 6.3%;
2001: 7.6%;
2003: 7.8%.
Nonmanufacturing;
1993: 10.0%;
1995: 9.1%;
1997: 8.9%;
1999: 5.4%;
2001: 4.6%;
2003: 6.1%.
Other manufacturing;
1993: 5.8%;
1995: 6.0%;
1997: 4.2%;
1999: 2.8%;
2001: 3.4%;
2003: 3.7%.
Pharmaceuticals;
1993: 49.9%;
1995: 58.4%;
1997: 62.7%;
1999: 66.4%;
2001: 54.4%;
2003: 63.5%.
Gross profits;
Apparel;
1993: 0.9%;
1995: 1.2%;
1997: 1.0%;
1999: 1.5%;
2001: 1.8%;
2003: 1.2%.
Beverages and tobacco;
1993: 12.1%;
1995: 8.7%;
1997: 5.8%;
1999: 12.9%;
2001: 18.2%;
2003: 13.5%.
Computers, electronics, and electrical equipment;
1993: 7.2%;
1995: 7.5%;
1997: 7.0%;
1999: 3.2%;
2001: 9.8%;
2003: 3.6%.
Medical equipment;
1993: 8.7%;
1995: 7.9%;
1997: 9.3%;
1999: 6.3%;
2001: 7.8%;
2003: 6.9%.
Nonmanufacturing;
1993: 7.9%;
1995: 9.0%;
1997: 8.7%;
1999: 4.3%;
2001: 2.9%;
2003: 4.8%.
Other manufacturing;
1993: 6.5%;
1995: 5.8%;
1997: 4.2%;
1999: 2.7%;
2001: 3.8%;
2003: 4.0%.
Pharmaceuticals;
1993: 56.6%;
1995: 60.0%;
1997: 64.0%;
1999: 69.1%;
2001: 55.8%;
2003: 66.0%.
Net income;
Apparel;
1993: 1.2%;
1995: 1.8%;
1997: 1.6%;
1999: 2.5%;
2001: 3.0%;
2003: 1.5%.
Beverages and tobacco;
1993: 13.0%;
1995: 11.7%;
1997: 8.5%;
1999: 12.1%;
2001: 16.0%;
2003: 11.6%.
Computers, electronics, and electrical equipment;
1993: 21.3%;
1995: 7.7%;
1997: 6.0%;
1999: 3.8%;
2001: 5.9%;
2003: 7.1%.
Medical equipment;
1993: 8.8%;
1995: 9.3%;
1997: 10.9%;
1999: 6.2%;
2001: 8.4%;
2003: 8.9%.
Nonmanufacturing;
1993: 3.9%;
1995: 3.4%;
1997: 2.8%;
1999: 1.6%;
2001: 1.6%;
2003: 0.8%.
Other manufacturing;
1993: 5.7%;
1995: 6.6%;
1997: 4.5%;
1999: 2.0%;
2001: 1.5%;
2003: 2.1%.
Pharmaceuticals;
1993: 46.2%;
1995: 59.6%;
1997: 65.7%;
1999: 71.8%;
2001: 63.6%;
2003: 67.9%.
Total assets;
Apparel;
1993: 0.5%;
1995: 0.5%;
1997: 0.5%;
1999: 0.8%;
2001: 2.5%;
2003: 3.0%.
Beverages and tobacco;
1993: 9.5%;
1995: 11.1%;
1997: 16.0%;
1999: 19.4%;
2001: 25.2%;
2003: 25.4%.
Computers, electronics, and electrical equipment;
1993: 6.3%;
1995: 8.9%;
1997: 7.9%;
1999: 5.6%;
2001: 4.9%;
2003: 4.4%.
Medical equipment;
1993: 10.8%;
1995: 12.9%;
1997: 10.7%;
1999: 5.1%;
2001: 5.4%;
2003: 6.4%.
Nonmanufacturing;
1993: 21.1%;
1995: 10.2%;
1997: 12.9%;
1999: 11.7%;
2001: 10.9%;
2003: 11.6%.
Other manufacturing;
1993: 9.0%;
1995: 8.1%;
1997: 7.0%;
1999: 5.9%;
2001: 5.5%;
2003: 3.4%.
Pharmaceuticals;
1993: 42.8%;
1995: 48.3%;
1997: 45.1%;
1999: 51.5%;
2001: 45.6%;
2003: 45.7%.
Source: GAO analysis of data from IRS.
[End of table]
[End of section]
Appendix V:
Additional Data on the Distribution of Business Activity by Type of
Business Entity:
Table 20: Employment in Puerto Rican Manufacturing by Industry and
Business Entity Type, 2002:
[See PDF for image]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] Census did not disclose specific figures for entities in the "all
other employers" group in manufacturing. However, we were able to
impute employment figures for this group by calculating the residual of
employees not included in any other group.
[B] The data in this line do not include those for five partnerships
that we were able to identify, but which we could not add into this
line (see app. III for explanation). Data for those five partnerships,
which together had between 100 and 249 employees, are included in the
"all other employers" line.
[C] The data for sole proprietors are from the published version of the
2002 Economic Census of Island Areas (see app. III for explanation).
[End of table]
Table 21: Value Added in Puerto Rican Manufacturing by Industry and
Business Entity Type, 2002:
[See PDF for image]
[End of figure]
Table 22: Annual Payroll in Puerto Rican Manufacturing by Industry and
Business Entity Type, 2002:
[See PDF for image]
[End of figure]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] Census did not disclose specific figures for entities in the "all
other employers" group in manufacturing. However, we were able to
impute payroll figures for this group by calculating the residual of
payroll that was not included in any other group.
[B] The data in this line do not include those for five partnerships
that we were able to identify, but which we could not add into this
line. Data for those five partnerships, which together had between 100
and 249 employees, are included in the "all other employers" line.
[C] The data for sole proprietors are from the published version of the
2002 Economic Census of Island Areas (see app. III for explanation).
[See PDF for image]
[End of figure]
Table 23: Capital Expenditures in Puerto Rican Manufacturing by
Industry and Business Entity Type, 2002:
[See PDF for image]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] Census did not disclose specific figures for entities in the "all
other employers" group in manufacturing. However, we were able to
impute figures for this group by calculating the residual of capital
expenditures that were not included in any other group.
[B] The data in this line do not include those for five partnerships
that we were able to identify, but which we could not add into this
line. Data for those five partnerships, which together had between 100
and 249 employees, are included in the "all other employers" line.
[C] The data for sole proprietors are from the published version of the
2002 Economic Census of Island Areas (see app. III for explanation).
[End of table]
Table 24: Value of Shipments in Puerto Rican Manufacturing by Industry
and Business Entity Type, 2002:
[See PDF for image]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] Census did not disclose specific figures for entities in the "all
other employers" group in manufacturing. However, we were able to
impute figures for this group by calculating the residual of value of
shipments that were not included in any other group.
[B] The data in this line do not include those for five partnerships
that we were able to identify, but which we could not add into this
line. Data for those five partnerships, which together had between 100
and 249 employees, are included in the "all other employers" line.
[C] The data for sole proprietors are from the published version of the
2002 Economic Census of Island Areas (see app. III for explanation).
[End of table]
Table 25: Share of Employment for Puerto Rico's Manufacturing,
Wholesale Trade, Retail Trade, and Services Sectors in 2002:
[See PDF for image]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] We included nonprofits in the group labeled "other employers."
However, Census included these employers in the group labeled
"corporations of type unknown." In order to be consistent with the
groups that we created for the manufacturing sector, we removed
nonprofits from Census's "corporations of type unknown" and combined
them with our "other employers" group, whenever possible.
[B] Census did not disclose specific employment figures for entities in
the "other employers" group. However, we were able to impute employment
figures for this group by calculating the residual of employees not
included in any other group.
[End of figure]
Table 26: Share of Sales and Value of Shipments for Puerto Rico's
Manufacturing, Wholesale Trade, Retail Trade, and Services Sectors in
2002:
[See PDF for image]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] We generally included nonprofits in the group labeled "other
employers," however, for wholesale trade some nonprofits are included
in the group labeled "corporations of type unknown," as a result of the
disclosure constraints under which we worked (see app. III for
details).
[B] Census did not disclose specific figures for employers in the
"other employers" group in manufacturing. However, we were able to
impute sales figures for this group by calculating the residual of
sales not included in any other group.
[End of figure]
Table 27: Share of Payroll for Puerto Rico's Manufacturing, Wholesale
Trade, Retail Trade, and Services Sectors in 2002:
[See PDF for image]
Source: GAO analysis of IRS data and custom tabulations from the 2002
Economic Census of Island Areas provided by the U.S. Census Bureau.
Notes: We use the symbol (D) in this table to represent data that
Census withheld to avoid disclosing information for individual
companies.
[A] Census did not disclose specific figures for employers in the
"other employers" group in manufacturing. However, we were able to
impute payroll figures for this group by calculating the residual of
employees not included in any other group.
[End of figure]
[End of section]
Appendix VI: Additional Comparative Fiscal Data:
This appendix provides more detail on how Puerto Rico's fiscal
situation compares to the states and the other insular areas.
Table 28: Federal, State, Commonwealth, and Insular Area Revenues
Collected in Fiscal Year 2002A:
[See PDF for image]
Source: GAO analysis of IRS, Customs, and Insular Area Treasury
Department data.
[A] Data reflect fiscal year of the jurisdiction. The federal
government's fiscal year and those of the other insular areas end
September 30, 2002. Puerto Rico's and most states' fiscal years end
June 30, 2002.
[B] Excludes states with zero values.
[C] All federal tax figures represent net tax collections.
[D] Does not include the federal corporate income tax.
[E] Not available, IRS does not report data separately for insular
areas, other than Puerto Rico.
[F] A more detailed breakdown is not available.
[G] Includes partnerships and tollgate taxes.
[H] Census data for income tax include dividend and interest income.
Puerto Rican Treasury data listed these items separately. For the
purpose of comparison we added them together.
[End of Table]
[End of section]
Appendix VII:
Additional Details on the Application of Federal Social Programs:
Education Programs:
Individuals with Disabilities Education Act Part B:
The Individuals with Disabilities Education Act (IDEA) is the primary
federal law that addresses the unique needs of children with
disabilities, including children with specific learning disabilities,
speech and language impairments, mental retardation, and serious
emotional disturbance. The law mandates that a free, appropriate public
education be made available for all eligible children with
disabilities. As such, local education agencies are required to provide
accommodations for children as needed, including accommodations for
instruction and assessment. IDEA also requires the inclusion of
students with disabilities in state-and districtwide assessment
programs and the placement of students in the least restrictive
environment, to the maximum extent appropriate. Teachers and staff work
with parents and special education experts to create individualized
education programs (IEP) for students with disabilities. These IEPs
outline academic goals, appropriate accommodations, and measurable
objectives. IDEA provides grants to states to help them implement the
requirements. All 50 states, Puerto Rico, and all insular areas must
comply with IDEA requirements as a condition of funding. Part B of IDEA
authorizes grants for children age 3 to 21 with disabilities and
contains provisions regarding the structure of special education and
related services and the procedural safeguards that guarantee the
provision of a free and appropriate public education to children with
disabilities. Information on the special education students and grants
provided under IDEA part B for fiscal year 2002 is summarized in table
29.
Table 29: Special Education Grant Allocation to, and Number of Students
Covered by IDEA Part B in, the States and Puerto Rico Authorized by
IDEA Part B, Fiscal Year 2002:
Special education allocation;
Total for the states, Puerto Rico, and the other insular areas:
$7,528,533,000;
Puerto Rico: $67,879,755;
Puerto Rico as percent of total: 0.9.
Number of students;
Total for the states, Puerto Rico, and the other insular areas:
48,995,357;
Puerto Rico: 596,502;
Puerto Rico as percent of total: 1.2.
Number of students with individualized education programs;
Total for the states, Puerto Rico, and the other insular areas:
6,531,405;
Puerto Rico: 69,327;
Puerto Rico as percent of total: 1.1.
Source: U.S. Department of Education.
[End of table]
Title I of the Elementary and Secondary Education Act:
Title I of the Elementary and Secondary Education Act, reauthorized by
the No Child Left Behind Act of 2001,[Footnote 88] is the largest
federal program supporting elementary and secondary education;
with annual expenditures of more than $10.3 billion, the Act accounts
for about 3 percent of total education expenditures nationally. Title I
is an important source of funding for many high-poverty school
districts and individual schools as funds are directed toward states
and school districts with greater numbers and percentages of poor
children. Title I offers grants designed to help local education
agencies and schools improve the teaching and learning of children
failing, or most at risk of failing, to meet state academic standards.
The program aims to ensure that all children have a fair, equal, and
significant opportunity to obtain a high-quality education and reach or
exceed proficiency on state academic achievement standards and
assessments. Program goals can be accomplished by efforts including:
1. ensuring that high-quality academic assessments, accountability
systems, teacher preparation and training, curriculum, and
instructional materials are aligned with challenging state academic
standards;
2. meeting the educational needs of low-achieving children in the
nation's highest-poverty schools, limited-English-proficient children,
migratory children, children with disabilities, Indian children,
neglected or delinquent children, and young children in need of reading
assistance;
3. closing the achievement gap between high-and low-performing
children;
4. holding schools, local educational agencies, and states accountable
for improving the academic achievement of all students and identifying
and improving low-performing schools, while providing alternatives to
students in such schools to enable them to receive a high-quality
education;
and:
5. distributing and targeting resources sufficiently to make a
difference to local educational agencies and schools where needs are
greatest.
Title I funds are provided to the states, Puerto Rico, and the other
insular areas, and all must comply with the same requirements of the
law as a condition of funding. Each location has established its own
specific performance goals and program accountability system (e.g.,
academic assessments, graduation rates, teacher qualifications),
consistent with federal regulations. Table 30 shows Title I grant data
for Puerto Rico relative to national data for fiscal year 2002.
Table 30: Title I Grant Allocation and Number of Covered Students,
Fiscal Year 2002:
Title I grant allocation;
Total for the states, Puerto Rico, and the other insular areas: $10.35
billion;
Puerto Rico: $333,295,520;
Puerto Rico as percent of total: 3.3.
Number of students;
Total for the states, Puerto Rico, and the other insular areas:
48,995,357;
Puerto Rico: 596,502;
Puerto Rico as percent of total: 1.2.
Source: U.S. Department of Education.
[End of table]
Food and Nutrition Programs:
The Child and Adult Care Food Program:
The Child and Adult Care Food Program (CACFP) serves nutritious meals
and snacks to eligible children and adults who are enrolled for care at
participating child-care centers, day-care homes, and adult day-care
centers. CACFP also provides meals to children residing in homeless
shelters and snacks to youths participating in after-school care
programs. Meal providers in licensed care facilities or institutions
receive reimbursement per meals served;
meals must meet nutrition guidelines. Reimbursement rates are adjusted
for changes in the consumer price index (CPI)[Footnote 89] for food-
away-from-home. This program was started in 1975 as the Child Care Food
Program. In 1989, the name of the program was changed to Child and
Adult Care Food Program.[Footnote 90]
CACFP operates in the same way in the states, the U.S. Virgin Islands,
Puerto Rico, and Guam, and has the following characteristics:
* The target population includes children, chronically impaired adults,
and adults 60 or older who eat meals in group settings, such as
centers, homes, and shelters. Teenagers in after-school programs in low-
income areas can also participate.
* Public or private not-for-profit and for-profit centers may
participate. For-profit centers must have at least 25 percent low-
income participants;
there is no similar requirement for not-for-profit centers.
* In centers, participants from households with income at or below 130
percent of the federal poverty level (FPL) can receive free meals, and
those with income between 130 and 185 percent can receive reduced-price
meals. Low-income day-care providers or day-care homes in low-income
areas can receive reimbursement at higher rates than those for other
homes.
CACFP does not operate in CNMI and American Samoa;
however, the Nutrition Assistance Program block grant can be used to
provide such meals and snacks in American Samoa.
Food Stamp and Nutrition Assistance Programs:
Created in 1964, the Food Stamp Program is intended to help low-income
individuals and families obtain a more nutritious diet by supplementing
their income with benefits to purchase food.[Footnote 91] The structure
of the Food Stamp Program is the same in the states, the U.S. Virgin
Islands, and Guam. Puerto Rico, CNMI, and American Samoa do not operate
the Food Stamp Program;
instead, they receive block grants from the federal government, which
are referred to as Nutrition Assistance Programs, whose design and
eligibility rules differ from those of the Food Stamp Program. Table 31
summarizes the key features of these programs.
Table 31: Comparison of the Food Stamp and Nutrition Assistance
Programs:
Funding basis;
Food Stamp Program: The states, the U.S. Virgin Islands, Guam:
Entitlement based on number of participants;
benefits adjusted annually to reflect changes in the thrifty food
plan.[A];
Nutrition Assistance Programs: Puerto Rico: Capped block grant adjusted
to reflect the percent change in the indexed level of the thrifty food
plan;
Nutrition Assistance Programs: CNMI: Capped block grant, the amount of
which is agreed to annually in a memorandum of understanding;
Nutrition Assistance Programs: American Samoa: Capped block grant
adjusted to reflect the percent change in the indexed level of the
thrifty food plan.
Eligibility rules;
Food Stamp Program: The states, the U.S. Virgin Islands, Guam: Complex
formula based on household size, income, assets, and other factors.
Generally, household net income cannot exceed 100 percent of the
federal poverty level. Hawaii, Alaska, the U.S. Virgin Islands, and
Guam have slightly different eligibility criteria;
Nutrition Assistance Programs: Puerto Rico: Formula similar to Food
Stamp Program;
Nutrition Assistance Programs: CNMI: Has its own rules, some of which
differ from those in the Food Stamp Program, to stay within the capped
block grant;
Nutrition Assistance Programs: American Samoa: Has its own rules, some
of which differ from the Food Stamp Program, to stay within the capped
block grant. Serves only low- income elderly, blind, and disabled
individuals.
Average monthly benefit amount per person (fiscal year 2003);
Food Stamp Program: The states, the U.S. Virgin Islands, Guam: $84 for
the 50 states, $92 for the District of Columbia, $119 for the U.S.
Virgin Islands, and $186 for Guam;
Nutrition Assistance Programs: Puerto Rico: $103;
Nutrition Assistance Programs: CNMI: $79;
Nutrition Assistance Programs: American Samoa: $103.
Administrative costs;
Food Stamp Program: The states, the U.S. Virgin Islands, Guam: States
and insular areas each fund about half;
Nutrition Assistance Programs: Puerto Rico: Block grant and Puerto Rico
each fund about half;
Nutrition Assistance Programs: CNMI: Block grant funds all;
Nutrition Assistance Programs: American Samoa: Block grant funds all.
Source: GAO analysis of U.S. Department of Agriculture (USDA) Food and
Nutrition Service documents and interviews with program staff.
[A] The thrifty food plan is a market basket of foods for a nutritious,
low-cost diet for a four-person reference family.
[End of table]
National School Lunch Program:
The National School Lunch Program (NSLP) was created in 1946 to provide
nutritionally balanced, low-cost or free lunches to children in public
and not-for-profit private schools and residential child-care
institutions. The program was expanded in 1998 to include snacks served
in after-school and enrichment programs.[Footnote 92]
The NSLP operates in the same way in the states, the U.S. Virgin
Islands, Puerto Rico, and Guam. The program provides free meals to
children from families with incomes at or below 130 percent of the
FPL.[Footnote 93] Children from families with incomes between 130 and
185 percent of the FPL can receive reduced-price meals for which no
more than 40 cents may be charged. Children from families with incomes
above 185 percent of the FPL pay full price. Local officials who
administer the program decide what fees to charge for full-price meals
and determine participants' eligibility. NSLP does not operate in CNMI
or American Samoa, but funds provided under the Nutrition Assistance
Program block grant support lunches and snacks for school age children
in these insular areas.
NSLP is an entitlement program. School districts and independent
schools that take part in the lunch program are reimbursed for each
meal served and get donated commodities from the U.S. Department of
Agriculture (USDA). In return, they must serve lunches that meet
federal nutrition requirements and offer free or reduced-price lunches
to eligible children. Reimbursement rates are adjusted with changes in
the CPI for food-away-from-home.[Footnote 94] The reimbursements rates
for the 2003-2004 school year are summarized in table 32.
Table 32: National School Lunch Program Reimbursement Rates, School
Year 2003-2004:
Reimbursement category: Free;
48 contiguous states: $2.19;
Alaska: $3.55;
Hawaii: $2.55;
Puerto Rico: $2.19;
Guam: $2.21;
The U.S. Virgin Islands: $2.36.
Reimbursement category: Reduced;
48 contiguous states: 1.79;
Alaska: 3.15;
Hawaii: 2.15;
Puerto Rico: 1.79;
Guam: 1.81;
The U.S. Virgin Islands: 1.96.
Reimbursement category: Full;
48 contiguous states: 0.21;
Alaska: 0.34;
Hawaii: 0.24;
Puerto Rico: 0.21;
Guam: 0.23;
The U.S. Virgin Islands: 0.29.
Source: USDA Food and Nutrition Service documents.
[End of table]
Special Supplemental Nutrition Program for Women, Infants, and
Children:
The Special Supplemental Nutrition Program for Women, Infants, and
Children (WIC) was created in 1972.[Footnote 95] WIC is designed to
safeguard the health of low-income women who are pregnant, postpartum,
or breastfeeding; infants; and children up to age 5 who are at
nutritional risk. Participants receive supplemental nutritious foods,
nutrition education and counseling, and screening and referrals to
other health, welfare, and social services. WIC is a federal grant
program for which Congress authorizes a specific amount each year.
Participants' income must not exceed 185 percent of the FPL. They must
also meet state residency requirements and be determined by a health
professional to be at nutritional risk. WIC operates the same in the
states, American Samoa, Guam, Puerto Rico, and the Virgin Islands.
There is no WIC program in CNMI. Table 33 below provides estimated food
and nutrition program federal expenditures for the states, Puerto Rico,
and the other U.S. insular areas for fiscal year 2003.
Table 33: Estimated Food and Nutrition Program Federal Expenditures for
the States, Puerto Rico, and the Other U.S. Insular Areas, Fiscal Year
2003:
Program: Food Stamp Program/Nutrition Assistance Program;
50 States: $21.3 billion;
The District of Columbia: $90.1 million;
Puerto Rico: $1.4 billion;
The U.S. Virgin Islands: $18.5 million;
Guam: $53.4 million;
CNMI: $7.1 million;
American Samoa: $5.6 million.
Program: National School Lunch Program;
50 States: 7.0 billion;
The District of Columbia: 16.5 million;
Puerto Rico: 123 million;
The U.S. Virgin Islands: 4.6 million;
Guam: 3.8 million;
CNMI: 5.0 million;
American Samoa: 11.2 million.
Program: WIC;
50 States: 4.1 billion;
The District of Columbia: 11.0 million;
Puerto Rico: 169 million;
The U.S. Virgin Islands: 5.3 million;
Guam: 5.3 million;
CNMI: n.a;
American Samoa: 5.9 million.
Program: Child and Adult Care Food Program;
50 States: 1.9 billion;
The District of Columbia: 3.1 million;
Puerto Rico: 20.0 million;
The U.S. Virgin Islands: 597,000;
Guam: 54,000;
CNMI: n.a;
American Samoa: n.a.
Source: GAO analysis of USDA Food and Nutrition Service documents and
interviews with program staff.
Note: n.a. = Estimates not available.
[End of table]
Health Care Financing and Grants Programs:
Medicare:
Created in 1965 as Title XVIII of the Social Security Act, Medicare
provides health insurance coverage for the elderly and disabled, as
well as for individuals with end-stage renal disease. The Medicare
program covers beneficiaries in the states and American Samoa, CNMI,
Guam, Puerto Rico, and the U.S. Virgin Islands. In fiscal year 2003,
over 41 million beneficiaries had Medicare coverage, including nearly
600,000 in the U.S. insular areas, and Medicare spending represented
the largest single source of federal health care spending nationwide.
Medicare includes separate components, or "parts," that cover different
types of services. Individuals eligible for Medicare automatically
receive Hospital Insurance, known as Part A, which helps pay for
inpatient hospital care, skilled nursing facility services following a
hospital stay, certain home health services, and hospice care. U.S.
residents aged 65 or over are automatically entitled to Medicare Part A
if they or their spouses are eligible for Social Security
payments.[Footnote 96] Medicare-eligible individuals may elect to
purchase Part B Supplemental Medical Insurance, which helps pay for
certain physician, outpatient hospital care, laboratory, and other
services. Part C encompasses private health plans that provide Medicare
covered benefits to enrollees. Part D is the outpatient prescription
drug benefit that was authorized in 2003 and was implemented in January
2006. In fiscal year 2003, federal Medicare expenditures totaled over
$274 billion. In that year, total Medicare enrollment in Puerto Rico
was over 574,000 and total expenditures were nearly $1.6 billion.
Table 34: Estimated Medicare Enrollment and Expenditures as of July
2003, Fiscal Year 2003:
Enrollment[A];
Total for the states, Puerto Rico, and the other insular areas: 40.2
million;
Puerto Rico: 575,000;
Puerto Rico as percent of total: 1.4.
Federal expenditures[B];
Total for the states, Puerto Rico, and the other insular areas: $274.3
billion;
Puerto Rico: $1.6 billion;
Puerto Rico as percent of total: 0.6.
Source: GAO analysis of data from the Centers for Medicare and Medicaid
Services (CMS).
[A] Enrollment includes individuals enrolled in Part A or Parts A and B
of the program.
[B] Expenditures include benefit payments and exclude program
administration.
[End of table]
Medicare beneficiaries in Puerto Rico and the other insular areas have
been treated the same as those in the states in terms of eligibility
and entitlement to benefits; however, certain structural differences,
such as the methods used to calculate Medicare payments to hospitals,
exist. For example, Medicare reimburses hospitals in Puerto Rico under
a prospective payment system (PPS) distinct from the PPS used for
hospitals in the states.[Footnote 97] Each of Puerto Rico's PPS rates
is a "blended rate," comprising 75 percent of the national rate used
for hospitals in the states and 25 percent of a local rate, which is
lower than the national rate. The rates are further adjusted for each
hospital using cost factors. These adjustments account for the lower
costs of providing hospital services in Puerto Rico compared to the
states and for differing costs among hospitals across Puerto Rico.
The Medicare Part D prescription drug program marks the first time that
Medicare beneficiaries in the insular areas are treated differently
with regard to available benefits. In 2004 and 2005, Medicare
beneficiaries in the states who enrolled paid a fee to receive a
discount drug card, with an expected discount of 10 to 15 percent on
covered drugs, and certain low-income beneficiaries who participated
were entitled to assistance to subsidize drug costs, in an amount
generally $600 per year. In contrast, beneficiaries in Puerto Rico and
the other insular areas did not receive these direct benefits. Instead,
each insular area was given a lump sum, which most, including Puerto
Rico, used to subsidize Medicaid prescription drug coverage to certain
low-income Medicare beneficiaries. The permanent Part D program, which
went into effect in January of 2006, allows for similar coverage to
most beneficiaries in the insular areas and states. However, as in the
interim program, certain low-income beneficiaries in the insular areas
will not directly receive funds to subsidize their prescription drug
expenses. Instead, the insular areas' governments will receive a lump-
sum payment and administer benefits to certain low-income beneficiaries
based on a locally developed plan.
Medicaid:
Created in 1965 as Title XIX of the Social Security Act, Medicaid is a
federal-state health care financing program that covers medical and
health-related services to certain categories of the country's low-
income population, primarily children and individuals who are aged,
blind, or disabled. Medicaid programs operate in each state, the
District of Columbia, Puerto Rico, and the other insular areas.
Table 35: Estimated Medicaid Enrollment and Federal Expenditures,
Fiscal Year 2004:
Enrollment[A];
Total for the states, Puerto Rico, and the other insular areas: 42.9
million;
Puerto Rico: 938,000;
Puerto Rico as percent of total: 2.2.
Federal expenditures;
Total for the states, Puerto Rico, and the other insular areas: $173.7
billion[B];
Puerto Rico: $219.4 million;
Puerto Rico as percent of total: 0.1.
Source: GAO analysis of CMS and Puerto Rico data.
[A] The figure represents the number of enrollees in terms of person
years. The total number of individuals served by Medicaid in 2004 was
nearly 55 million, some of whom were enrolled in the program for less
than the full year. A similar number for total individuals served by
Medicaid in Puerto Rico was not available.
[B] The figure includes expenditures for medical services and
administration.
[End of table]
The Medicaid programs in Puerto Rico and the other insular areas has
financing, eligibility, service, and administrative requirements that
differ from Medicaid requirements and operations in the states.
Financing:
In the states, there are no limits on federal payments for Medicaid as
long as the state contributes its share of program expenditures for
services provided under a federally approved plan. A statutory formula
is used to calculate the portion of each state's Medicaid expenditures
for medical assistance that the federal government will pay, referred
to as the federal matching percentage. The matching percentage varies
by state, depending in part on the state's per capita income in
relation to the national average, and ranges from 50 to no more than 83
percent of Medicaid expenditures.[Footnote 98] For fiscal year 2005,
the highest federal matching percentage was 77.
The federal share of expenditures in the insular areas is limited to a
50 percent matching rate, and in contrast to the states, federal
Medicaid spending for the insular areas is subject to statutory
caps.[Footnote 99] For fiscal year 1999 and beyond, the spending caps
are increased annually by the percentage increase in the medical-care
component of the CPI for all urban consumers.
Eligibility:
In the states, Medicaid requires coverage of certain categories of low-
income individuals, including children, pregnant women, and aged and
disabled individuals. For example, federal law requires coverage of
pregnant women and children up to age 6 in families with incomes up to
133 percent of the FPL, and children age 6 through age 18 in families
with incomes up to 100 percent of the FPL. However, insular areas are
not required to meet all Medicaid eligibility requirements, and in
light of the statutory limits on federal funding, CMS does not hold
these areas accountable for covering all Medicaid benefit requirements.
For example, Puerto Rico and the U.S. Virgin Islands have implemented
eligibility criteria that are more restrictive than federal standards.
They determine Medicaid eligibility based on locally established
poverty levels, which, at less than the federal poverty level, are more
restrictive in terms of enrollment. According to officials in these
areas, restricting eligibility allows them to target Medicaid services
to fewer, albeit needier, individuals. Puerto Rico's locally
established poverty level, called the Commonwealth poverty level (CPL)
is currently $8,220 per year for a family of four and has not changed
since 1998. In contrast, American Samoa, whose median household income
is less than half that of the United States, neither uses specific
categories to determine eligibility nor links eligibility to income
levels that reflect local conditions. Instead, it considers every
resident with an income at or below the federal poverty level--the
majority of the population--as eligible for Medicaid.
Services and Administration:
Medicaid also requires states to cover certain services in their
Medicaid programs.[Footnote 100] Mandatory services include inpatient
and outpatient hospital care; physician services; nursing home care;
lab and x-ray services; immunizations and other early and periodic
screening, diagnostic, and treatment (EPSDT) services for children
under age 21; family planning services; health center and rural health-
clinic services; and nurse midwife and nurse-practitioner services.
Services that are optional include outpatient prescription drugs,
institutional care for persons with mental retardation, personal care,
and dental and vision care for adults. With certain exceptions, states'
Medicaid programs must allow recipients freedom of choice among health-
care providers participating in Medicaid. Also, overall administrative
expenditures for states are not limited, and states receive a 50
percent federal match for most types of administrative
expenditures.[Footnote 101]
Despite federal requirements for mandatory coverage of certain
services, the Medicaid programs in the insular areas do not cover all
mandatory services. For example, while Puerto Rico has skilled nursing
facilities and home health services, its Medicaid program does not
include them in its benefit package. Similarly, other mandatory
Medicaid services, such as nurse midwife services, are also not covered
by Puerto Rico's Medicaid program.[Footnote 102] However, Puerto Rico
and the other insular areas have all chosen to add optional benefits
under the statute, such as outpatient prescription drug coverage. In
addition, as is the case with all the insular areas, Puerto Rico is
exempt from freedom of choice requirements that apply to states'
Medicaid programs. Also, federal spending for administrative
expenditures in Puerto Rico and the other insular areas are subject to
their respective Medicaid caps.
State Children's Health Insurance Program:
The State Children's Health Insurance Program (SCHIP) was enacted in
1997 as Title XXI of the Social Security Act to provide health care
coverage to low-income, uninsured children living in families whose
incomes exceed the states' eligibility limits for Medicaid.[Footnote
103] In general, states and insular areas may design their SCHIP
programs in one of three ways--by expanding their Medicaid programs,
developing separate child health programs that function independently
of Medicaid, or combining these two approaches. As of April 2005, 17
states and insular areas opted to expand their Medicaid programs, 18
states opted to develop separate programs, and 21 states had
combination programs. An SCHIP Medicaid expansion must follow Medicaid
rules, including enrollment structure and benefits. A state that
chooses a separate program has greater flexibility in designing its
SCHIP program and may introduce limited cost-sharing or offer different
benefit packages. While Puerto Rico expanded its Medicaid program to
cover additional children, none of the other insular areas has
developed a unique SCHIP program to extend health insurance coverage to
additional children as is done in the states.[Footnote 104] Instead,
the insular areas, besides Puerto Rico, primarily use SCHIP funds to
pay for services provided to Medicaid-eligible children once the
Medicaid cap has been reached.
Table 36: Estimated SCHIP Enrollment and Federal Allotments, Fiscal
Year 2004:
Enrollment[A];
Total for the states, Puerto Rico, and the other insular areas: 4.1
million;
Puerto Rico: 78,785;
Puerto Rico as percent of total: 1.9.
Federal allotments;
Total for the states, Puerto Rico, and the other insular areas: $3.175
billion;
Puerto Rico: $30.3 million;
Puerto Rico as percent of total: 1.0.
Source: GAO analysis of CMS and Puerto Rico data.
[A] The SCHIP enrollment figure represents the number of enrollees in
terms of person years. The total number of individuals served by SCHIP
in 2004 was 6.1 million, some of whom were enrolled in the program for
less than the full year. A similar number for total individuals served
by the SCHIP program in Puerto Rico was not available.
[End of table]
In contrast to Medicaid, where federal funding to states is open-ended,
the SCHIP statute provides for an annual allotment for each state,
Puerto Rico, and the other insular areas for fiscal years 1998 through
2007. The insular areas, including Puerto Rico, receive a total of 0.25
percent of the annual nationwide SCHIP appropriation,[Footnote 105]
which is allotted among them based on set percentages.[Footnote 106]
The SCHIP statute also provides for an enhanced federal matching rate
that exceeds the rates established by Medicaid. The SCHIP enhanced
match is equal to each state's and insular area's Medicaid matching
rate plus 30 percent of the difference between the Medicaid match and
100 percent, not to exceed a federal share of 85 percent. Thus, states
that receive the minimum 50 percent Medicaid match, receive a 65
percent match under SCHIP. Similarly, because the Medicaid match rate
for all insular areas is set at 50 percent, they also receive a 65
percent match rate under SCHIP.
As with the Medicaid program, eligibility for SCHIP in Puerto Rico is
tied to its CPL. In 1998, Puerto Rico implemented its SCHIP program for
children under age 19 with family incomes between 100 and 200 percent
of the CPL. As a Medicaid expansion, Puerto Rico's SCHIP program covers
the same benefits and services as provided under its Medicaid program,
which are similar, but not the same, as those provided in the states.
For states and insular areas, SCHIP administrative expenses are limited
to 10 percent of available expenditures.
Health Grants:
The states and insular areas also receive health-related grants from a
number of agencies within the Department of Health and Human Services
(HHS), including the Centers for Disease Control and Prevention (CDC),
the Health Resources and Services Administration (HRSA), the National
Institutes of Health (NIH), and the Substance Abuse and Mental Health
Services Administration (SAMHSA). These four agencies represent the
largest sources of health-related HHS grant funds apart from Medicare,
Medicaid, and SCHIP.[Footnote 107] Grants from these agencies may be
used to fund a variety of services and activities, including
immunization programs, bioterrorism preparedness programs, community
health centers, programs for individuals with HIV or AIDS, maternal and
child health grants, scientific medical research, and substance abuse
prevention and treatment. Grants from CDC, HRSA, and SAMHSA tend to
fund direct health service programs and are often awarded to public
health agencies, while NIH grants fund scientific medical research and
are generally awarded to universities.
Table 37: Population and Estimated Grant Awards from Four Health and
Human Service Agencies, Fiscal Year 2004:
Dollars in millions.
Population[A];
Total for the states, Puerto Rico, and the other insular areas: 285.6;
Puerto Rico: 3.8;
Puerto Rico as percent of total: 1.3.
Total awards from four HHS agencies;
Total for the states, Puerto Rico, and the other insular areas:
$33,550.4;
Puerto Rico: $272.5;
Puerto Rico as percent of total: 0.8.
Center for Disease Control and Prevention (CDC);
Total for the states, Puerto Rico, and the other insular areas:
4,480.5;
Puerto Rico: 47.5;
Puerto Rico as percent of total: 1.1.
Health Resources and Services Administration (HRSA);
Total for the states, Puerto Rico, and the other insular areas:
5,857.6;
Puerto Rico: 131.8;
Puerto Rico as percent of total: 2.2.
National Institutes of Health (NIH);
Total for the states, Puerto Rico, and the other insular areas:
20,336.1;
Puerto Rico: 59.7;
Puerto Rico as percent of total: 0.3.
Substance Abuse and Mental Health Services Administration (SAMHSA);
Total for the states, Puerto Rico, and the other insular areas:
2,876.2;
Puerto Rico: 33.5;
Puerto Rico as percent of total: 1.2.
Source: GAO analysis of HHS Tracking Accountability in Government
Grants System data.
[A] Population figures are based on the 2000 census and include the
states and insular areas.
[End of table]
In general, the process Puerto Rico and the other insular areas must
follow to apply for federal grants are the same as in the states.
However, differences exist in how some grant awards are calculated. For
example, Puerto Rico and the other insular areas are treated
differently from the states for two of SAMHSA's grants: The Community
Mental Health Block Grant and the substance abuse prevention and
treatment block grant. These grants are allocated among the states
based on a set formula with a minimum amount for each state. In
contrast, Puerto Rico and the other insular areas receive 1.5 percent
of the total appropriation in block grant funds. The funds are divided
among each insular area according to its share of the total insular
area population.[Footnote 108] However, Puerto Rico is treated as a
state for certain other grants, such as the bioterrorism grants from
HRSA and CDC.
Income Assistance Programs:
Aid to the Aged, Blind, or Disabled:
The Social Security Amendments of 1972[Footnote 109] created
Supplemental Security Income (SSI), a cash payment entitlement program
that replaced grant programs providing economic assistance to low-
income adults who are aged, blind, or disabled in the states.
Eligibility for SSI was extended to CNMI, effective 1978. The SSI
program does not include Puerto Rico, American Samoa, Guam, or the U.S.
Virgin Islands.
Instead, for adults in these groups, these insular areas have continued
to operate their grant programs that existed before SSI was created.
Puerto Rico, for example, operates an adult assistance program--Aid to
the Aged, Blind, or Disabled (AABD). The federal government provides a
grant in the form of a 75 percent match of state funds for payments for
AABD recipients--subject to a cap on Puerto Rico's combined payments
for Temporary Assistance for Needy Families (TANF--see below), AABD,
and foster care and related payments--and a 50 percent match for
administrative expenses. In contrast to SSI, which has federally
determined cash benefits, Puerto Rico determines its own benefit
amounts for AABD. In fiscal year 2003, the federal government provided
$21 million in benefits to 41,567 AABD recipients. Puerto Rico provided
a monthly benefit of $64 for one person. In contrast, the monthly SSI
benefit rate for one person not living independently was $368 in
January 2003.
Temporary Assistance for Needy Families:
The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 (PRWORA) repealed the Aid to Families with Dependent Children, Job
Opportunities and Basic Skills Training, and Emergency Assistance
programs and created TANF.[Footnote 110] The purposes of TANF are to
increase state flexibility in operating a program to (1) help needy
families care for children at home; (2) end dependence of needy parents
upon government benefits by promoting job preparation, work, and
marriage; (3) reduce out-of-wedlock pregnancies; and (4) encourage
formation and maintenance of two-parent families. TANF has a 5-year
time limit on federal cash assistance for most families and requires
states to impose federally established work and other program
requirements on most adults receiving aid. Otherwise, states and
insular areas have broad flexibility to design their own eligibility
rules and the types of services provided.
The insular areas participating in TANF are subject to the same
requirements as the states, although these insular areas are not
eligible to receive all of the five TANF grants. The states and Puerto
Rico, Guam, and the U.S. Virgin Islands operate TANF programs.[Footnote
111] American Samoa does not participate in TANF, and CNMI is not
eligible because it was not included in PRWORA. Federal funding for
Puerto Rico, Guam, the U.S. Virgin Islands, and American Samoa is
capped for TANF, AABD, foster care and adoption assistance, and
independent living programs. The federal government provides a basic
TANF block grant to cover benefits, administrative expenses, and
services targeted to needy families in the states and insular areas.
The amount of the grant reflects expenditures in pre-TANF programs. To
receive this grant, states and insular areas must provide at least 75
percent of the amount of state funds they spent on programs replaced by
TANF in fiscal year 1994. Like the states, Puerto Rico, Guam, and the
U.S. Virgin Islands can receive additional TANF bonuses for high
performance and a reduction in out-of-wedlock births. Furthermore, a
special provision allows the insular areas to receive funding above
their federal TANF grant if certain conditions are met. Puerto Rico did
not qualify to receive such funding in fiscal year 2003.[Footnote 112]
The insular areas are not eligible to receive contingency funds or
supplemental grants for population increases that states may qualify to
receive. Table 38 compares selected TANF program data on Puerto Rico to
national data for fiscal year 2003.
Table 38: Comparison of Selected Data on TANF Program in Puerto Rico to
TANF Program in the States, Fiscal Year 2003:
Total federal expenditure;
The states, Puerto Rico, and the other insular areas: $16.25
billion[A];
Puerto Rico: $38.38 million.
State expenditures at 75 percent rate;
The states, Puerto Rico, and the other insular areas: $10.35
billion[A];
Puerto Rico: $21.19 million.
Total number of recipients (as of March 2003);
The states, Puerto Rico, and the other insular areas: 4.96 million[B];
Puerto Rico: 54,544.
Monthly TANF benefits for a family of three;
The states, Puerto Rico, and the other insular areas: Ranges from $170
to $923, depending on state;
Puerto Rico: $160.
Sources: U.S. Department of Health & Human Services, Congressional
Research Service: TANF Cash Benefits As of January 1, 2004, Puerto Rico
fiscal year 2003 State Plan.
[A] Includes only the states, not Puerto Rico or the other insular
areas.
[B] Includes the states, Guam, the U.S. Virgin Islands, and Puerto
Rico.
[End of table]
Programs for the Care of Children:
Child Care and Development Fund:
PRWORA increased the amount of federal funding for child-care subsidies
for low-income families, with the expectation that the newly
implemented work requirements for welfare recipients--many of whom are
single mothers--would create a greater demand for child-care services
as recipients went to work or participated in training or education.
Funding is provided through two funding streams: one discretionary and
one mandatory. These two streams constitute the Child Care and
Development Fund (CCDF).
All states and all insular areas are eligible to receive CCDF funds.
All states and insular areas can receive funds under the discretionary
portion of CCDF, but only the states can receive funds under the
mandatory portion of the grant. Funding amounts for the discretionary
portion of CCDF are determined in the annual appropriations process,
while funding amounts for the mandatory portion are directly
appropriated by the welfare reform law. CCDF gives states and insular
areas greater flexibility to design their child-care policies than
previous federal child-care policy.
Table 39: Child Care and Development Fund Expenditures and Children
Served, Fiscal Year 2003:
Expenditures;
States, Puerto Rico, and the other insular areas: $7.25 billion[A];
Puerto Rico: $57.15 million[B].
Number of children served;
States, Puerto Rico, and the other insular areas: 1.75 million[C];
Puerto Rico: 25,917[D].
Source: U.S. Department of Health & Human Services.
[A] Includes mandatory, matching, and discretionary CCDF funds for the
states, Puerto Rico, and the other insular areas.
[B] Includes only discretionary funds.
[C] Average number of children served per month for the states,
American Samoa, and Guam.
[D] Total number of children served for entire year.
[End of table]
Foster Care and Adoption Assistance Funds:
Title IV-E of the Social Security Act authorizes the foster care and
adoption assistance programs.[Footnote 113] These programs provide
federal funds to help offset child welfare costs related to providing
(1) safe, appropriate substitute care for children who need temporary
placement outside their homes because of abuse and neglect, and (2)
subsidies to families or individuals adopting children who meet certain
eligibility requirements. The states and Puerto Rico participate in
these programs and receive federal funds for their administration.
Table 40 shows the total child welfare population and data for Puerto
Rico for fiscal year 2001.
Table 40: Estimated Child Welfare Population, Fiscal Year 2001:
Children in foster care;
Total for the states and Puerto Rico: 542,000;
Puerto Rico: 8,476;
Puerto Rico as percent of total: 1.6%.
Children waiting to be adopted[A];
Total for the states and Puerto Rico: 126,000;
Puerto Rico: 418;
Puerto Rico as percent of total: 0.3%.
Children adopted;
Total for the states and Puerto Rico: 50,000;
Puerto Rico: 257;
Puerto Rico as percent of total: 0.5%.
Source: Adoption and Foster Care Analysis and Reporting System,
preliminary estimates for fiscal year 2001 (as of March 2003), as
reported in U.S. Department of Health and Human Services,
Administration for Children and Families, Administration on Children,
Youth, and Families, Children's Bureau, Child Welfare Outcomes 2001:
Annual Report to Congress.
[A] Waiting children are children who have a goal of adoption or whose
parents' parental rights have been terminated.
[End of table]
For Puerto Rico, foster care and adoption assistance are two of several
public assistance programs that are subject to a federal funding cap,
under the 1996 federal welfare law that created the TANF block
grant.[Footnote 114] The total payment to Puerto Rico for all of these
programs--adult assistance, TANF, foster care, adoption assistance, and
independent living--cannot exceed $107,255,000.
Federal funds are set at the applicable Medicaid matching rate. In
fiscal year 2003, the matching rate, which ranged from 50 to 83 percent
nationwide, was 50 percent for Puerto Rico. States and insular areas
may also claim funds at a rate of 50 percent for administrative costs
and at a rate of 75 percent for training costs. In 2003, Puerto Rico
did not claim either.
Table 41: Estimated Federal Foster Care and Adoption Assistance
Funding, Fiscal Year 2003:
Adoption Assistance Payments;
Federal share for the states and Puerto Rico: $1.17 billion;
Federal share for Puerto Rico: $373,000;
Puerto Rico as percent of total: 3.2.
Foster Care Payments;
Federal share for the states and Puerto Rico: $1.69 billion;
Federal share for Puerto Rico: $14 million;
Puerto Rico as percent of total: 0.008.
Source: Title IV-E State Claims for Expenditures for fiscal year 2003
(as of May 2004) for Adoption and Foster Care. U.S. Department of
Health and Human Services, Administration for Children and Families,
Administration on Children, Youth, and Families, Children's Bureau.
Note: According to HHS, for both foster care and adoption, Puerto
Rico's claims for the 4th quarter of fiscal year 2003 were estimated
using the average of the previous three quarters.
[End of table]
Housing Programs:
Public Housing Program:
The public housing program was authorized by the United States Housing
Act of 1937 to provide decent, safe, and affordable housing for low-
income families through public housing authorities (PHA).[Footnote 115]
Through this program, eligible families are able to rent units in
single-family or multifamily public housing properties, such as high-
rise apartments. Families are generally required to pay 30 percent of
their monthly adjusted household income in rent.
Administration and Funding:
Public housing is owned and operated by approximately 3,200 PHAs
nationwide. Each PHA is responsible for operating and maintaining its
public housing inventory and managing the selection of residents.
Public housing can be developed through the construction of units on a
site owned by a PHA, development of units on a developer-owned site
that is sold to the PHA after completion, or through units that the PHA
purchases. The Department of Housing and Urban Development (HUD) has
not provided new funding for public housing development since fiscal
year 1994. However, PHAs can use capital and HOPE VI funding (see
below) for development.
HUD provides annual formula-based subsides to PHAs to operate and
maintain public housing. These subsidies, which consist of operating
and capital (formerly modernization) funds, supplement rent paid by
tenants.
Public Housing in Puerto Rico and Other Insular Areas:
Operating subsidies for PHAs in the states, Puerto Rico, the U.S.
Virgin Islands, and Guam are generally calculated by subtracting
estimated rental income from the allowable utility and nonutility
expense levels.[Footnote 116] However, these expenses for Puerto Rico,
the U.S. Virgin Islands, Guam, and Alaska were initially determined
using a slightly different methodology than that used in most of the
states. A HUD public housing fund regulation changed the way operating
subsidies are calculated for Puerto Rico, the U.S. Virgin Islands,
Guam, and Alaska--these PHAs will no longer receive funding for
operating costs outside of the general operating fund formula.
The capital fund grant formula is generally applied in the same way to
PHAs in the states, Puerto Rico, and the other insular areas.
Regulations governing the administration of public housing also apply
to PHAs in the states, Puerto Rico, and the other insular areas.
Eligibility rules are the same for all residents, regardless of where
they live.
The Puerto Rico Public Housing Administration (PRPHA) administered all
56,524 units of public housing in Puerto Rico in fiscal year 2005.
PRPHA ranked third among all PHAs in the amount of annual operating
fund subsidy received in fiscal year 2002 (see table 42), and second in
the number of public housing units (see table 43). HUD's Caribbean
field office is responsible for overseeing PRPHA's administration of
these units.
Table 42: Estimated Amount and Percent of Total Operating Subsidy
Received by the Five Largest Public Housing Authorities, Fiscal Year
2002:
Public housing authority: New York City Housing Authority;
Operating subsidy (millions): $752;
Percent of total operating subsidy: 22.
Public housing authority: Chicago Housing Authority;
Operating subsidy (millions): 182;
Percent of total operating subsidy: 5.
Public housing authority: Philadelphia Housing Authority;
Operating subsidy (millions): 102;
Percent of total operating subsidy: 3.
Public housing authority: Puerto Rico Public Housing Administration;
Operating subsidy (millions): 96;
Percent of total operating subsidy: 3.
Public housing authority: Housing Authority of Baltimore City;
Operating subsidy (millions): 61;
Percent of total operating subsidy: 2.
Public housing authority: National;
Operating subsidy (millions): $3,495;
Percent of total operating subsidy: 100.
Source: HUD.
[End of table]
Table 43: Total Number and Percent of Public Housing Units for the Five
Largest Public Housing Authorities, Fiscal Year 2005:
Public housing authority: New York City Housing Authority;
Number of public housing units: 161,389;
Percent of total units: 13.
Public housing authority: Puerto Rico Public Housing Administration;
Number of public housing units: 56,524;
Percent of total units: 5.
Public housing authority: Chicago Housing Authority;
Number of public housing units: 28,925;
Percent of total units: 2.
Public housing authority: Philadelphia Housing Authority;
Number of public housing units: 16,027;
Percent of total units: 1.
Public housing authority: Housing Authority of Baltimore City;
Number of public housing units: 14,554;
Percent of total units: 1.
Public housing authority: National;
Number of public housing units: 1,200,000;
Percent of total units: 100.
Source: HUD.
[End of table]
In fiscal year 2004, PRPHA received approximately $148 million in
capital fund grants (approximately 6 percent of that year's
appropriation for the capital fund).
Housing Choice Voucher Program:
The Housing Choice Voucher Program is HUD's largest housing assistance
program. Authorized by the Housing and Community Development Act of
1974 as the Rental Certificate Program, it assists extremely low-to low-
income families in obtaining decent, safe, and sanitary rental
housing.[Footnote 117]
Through this program, eligible families rent privately owned units that
they would otherwise not be able to afford. Families pay a portion of
the rent (generally 30 percent of their monthly income, less
deductions), and the local PHA pays the remainder directly to the
property owners.
Program Administration and Funding:
Expiring increments of Section 8 housing voucher assistance are
automatically renewed by HUD. Other vouchers are available either on an
as-needed, noncompetitive basis or through competitive Notices of
Funding Availability (NOFA).
HUD is responsible for developing policies, regulations, and guidance
for the program, allocating funds, providing technical assistance, and
monitoring PHAs' compliance with program requirements. PHAs are
responsible for determining eligibility, maintaining waiting lists,
selecting families for admission, inspecting program units for
compliance with housing quality standards, and making housing
assistance payments to property owners. Property owners must be willing
to participate in the program and are responsible for screening and
selecting tenants, collecting tenants' share of the rent, and
maintaining the property in compliance with the program's housing
quality standards. Families with vouchers are responsible for choosing
the house or apartment that they want to rent.
Housing Choice Vouchers in Puerto Rico and the Other Insular Areas:
Like Puerto Rico, Guam, CNMI, and the U.S. Virgin Islands are eligible
for Housing Choice Vouchers. HUD's Caribbean field office is
responsible for overseeing PHAs' administration of Housing Choice
Vouchers in Puerto Rico. The formula that HUD uses to determine the
number of vouchers in a given area does not make any exceptions for
Puerto Rico or the eligible insular areas. The regulations governing
the administration of the voucher program apply to PHAs in the states,
Puerto Rico, and the eligible insular areas. Eligibility rules are the
same for all residents, regardless of where they live.
In fiscal year 2003, PHAs in Puerto Rico received approximately $139
million in funding from HUD to administer the voucher program, which
was approximately 1.1 percent of total budget outlays for the voucher
program for the fiscal year. Seventy-seven PHAs administered
approximately 29,000 vouchers in Puerto Rico, or 1.4 percent of total
available vouchers. California and New York have the largest number of
vouchers, CNMI and the U.S. Virgin Islands have the smallest number of
vouchers, and Puerto Rico ranks 33RD among all the states and insular
areas that have vouchers (see table 44).
Table 44: Number of Housing Choice Vouchers and Estimated Budget
Authority in Puerto Rico and Selected States and Insular Areas, Fiscal
Year 2003:
State: California;
Number of housing choice vouchers: 294,701;
Estimated budget authority: $2.4 billion.
State: New York;
Number of housing choice vouchers: 201,558;
Estimated budget authority: $1.3 billion.
State: Puerto Rico;
Number of housing choice vouchers: 28,654;
Estimated budget authority: $139 million.
State: U.S. Virgin Islands;
Number of housing choice vouchers: 1,029;
Estimated budget authority: $7 million.
State: CNMI;
Number of housing choice vouchers: 215;
Estimated budget authority: $1.8 million.
State: National;
Number of housing choice vouchers: 2,054,905;
Estimated budget authority: $12,827,326,159.
Source: HUD.
[End of table]
Community Development Block Grant Program:
HUD's Community Development Block Grant Program (CDBG) is the largest
source of federal assistance for state and local governments' community
development and neighborhood revitalization activities. These programs
include "entitlement grants"--which award grants to qualified units of
general local government to provide decent housing and a sustainable
living environment and to expand economic opportunities for low-and
moderate-income individuals--and state-administered CDBG, which awards
grants to states which in turn make grants to nonentitlement units of
general local government to carry out similar developmental activities.
Program Administration and Funding:
Under the entitlement communities program, HUD determines the amount of
each grant by a statutory formula that uses several objective measures
of community needs, including the extent of poverty, population,
housing overcrowding, age of housing, and population growth lag
relative to other metropolitan areas. To receive its annual grant, a
grantee must develop and submit to HUD a consolidated plan,
certifications, and application for funding. The development goals
outlined in the plan serve as the criteria against which HUD will
evaluate a jurisdiction's performance and future eligibility for
funding.
The state-administered CDBG program is designed to provide funding to
nonentitlement areas, which do not receive CDBG funding as part of the
entitlement grant program. HUD distributes funds to each state based on
a statutory formula that takes into account population, poverty,
incidence of overcrowded housing, and age of housing. Participating
states award grants to eligible localities to carry out community
development activities. Each state annually develops funding priorities
and criteria for selecting projects. HUD ensures participating states'
compliance with federal laws, regulations, and policies.
CDBG in Puerto Rico and the Other Insular Areas:
For purposes of determining CDBG grants, Puerto Rico is considered a
state. Thus, the laws and regulations governing the application for,
and distribution and use of, CDBG funds apply to Puerto Rico and the
states. HUD's Caribbean field office is responsible for overseeing the
use of CDBG funds in Puerto Rico.
Each fiscal year, the insular areas may apply for $7 million of CDBG
funding. Grant amounts are based on population.
Table 45 provides information on the total CDBG funding for fiscal
years 2001 through 2004, and the percentage of those funds that were
used by eligible cities and states to fund housing initiatives.
Table 45: Estimated Disbursement of CDBG Funds for Housing, Fiscal
Years 2001-2004:
Dollars in billions.
Total CDBG funding, fiscal year 2001;
Entitlement program: $3.5;
Nonentitlement/state-administered program: $1.2;
Total disbursements (both programs): $4.7.
Percent of total funding used for housing initiatives, fiscal year
2001;
Entitlement program: 29.4;
Nonentitlement/state-administered program: 15.1;
Total disbursements (both programs): [Empty].
Total CDBG funding, fiscal year 2002;
Entitlement program: $3.8;
Nonentitlement/state-administered program: $1.3;
Total disbursements (both programs): $5.1.
Percent of total funding used for housing initiatives, fiscal year
2002;
Entitlement program: 27.1;
Nonentitlement/state-administered program: 15.1;
Total disbursements (both programs): [Empty].
Total CDBG funding, fiscal year 2003;
Entitlement program: $3.4;
Nonentitlement/state-administered program: $1.3;
Total disbursements (both programs): $4.7.
Percent of total funding used for housing initiatives, fiscal year
2003;
Entitlement program: 27.5;
Nonentitlement/state-administered program: 14.9;
Total disbursements (both programs): [Empty].
Total CDBG funding, fiscal year 2004;
Entitlement program: $3.5;
Nonentitlement/state-administered program: $1.4;
Total disbursements (both programs): $4.9.
Percent of total funding used for housing initiatives, fiscal year
2004;
Entitlement program: 27.0;
Nonentitlement/state-administered program: 16.4;
Total disbursements (both programs): [Empty].
Source: HUD.
[End of table]
In fiscal year 2004, Puerto Rico received approximately $130 million in
total CDBG funding--3 percent of total funding for the year.
Collectively, Guam, the U.S. Virgin Islands, American Samoa, and CNMI
received about $6.96 million in fiscal year 2004. Table 45 provides
information on how areas in Puerto Rico receiving CDBG funds in fiscal
year 2004 used some of their CDBG funds for housing-related
initiatives.
HOPE VI Program:
Originally known as the Urban Revitalization Demonstration, the HOPE VI
Program was developed as a result of recommendations by the National
Commission on Severely Distressed Public Housing. In its August 10,
1992, report to Congress, the commission recommended revitalization in
three general areas: physical improvements, management improvements,
and social and community services to address resident needs.
On the basis of this recommendation, in October 1992, Congress
appropriated $300 million for the Urban Revitalization Demonstration,
also known as HOPE VI, as part of the Independent Agencies
Appropriations Act of 1993.[Footnote 118] The program is designed to
replace severely distressed public housing with mixed-income housing
and to provide housing vouchers to enable some of the original public
housing residents to rent apartments in the private market. The program
was authorized through annual appropriations until fiscal year 1999
when it was separately authorized as part of the Quality Housing and
Work Responsibility Act of 1998.[Footnote 119] In fiscal years 2004,
2005, and 2006 Congress appropriated $150 million, $144 million, and
$100 million, respectively, for the HOPE VI program.
Program Administration and Funding:
Any PHA that has severely distressed public housing units is eligible
to apply for a HOPE VI revitalization or demolition grant. HOPE VI
revitalization grants fund capital costs of major rehabilitation, new
construction, and other physical improvements;
demolition of severely distressed public housing;
acquisition of sites for off-site construction;
and community and supportive service programs for residents, including
those relocated as a result of revitalization efforts. HOPE VI
demolition grants fund the demolition of severely distressed public
housing and relocation of residents as a result of the demolition.
HUD's requirements for HOPE VI grants are laid out in each fiscal
year's grant agreement and NOFA, which announces the availability of
funds and contains application requirements, threshold requirements,
rating factors,[Footnote 120] and information on the application
selection process. HUD has used the same procedure each year to screen,
review, and rank grant applications: when grant applications are
received, they are screened to determine whether they meet the
eligibility and threshold requirements in the NOFA. Next, reviewers
rate applications on the basis of the rating factors described in the
NOFA and rank them. Generally, a group of applications representing
twice the amount of funds available is sent to a final review panel.
The final review panel assigns a final score and recommends for
selection the highest rated applications, subject to the amount of
available funding.
HOPE VI in Puerto Rico and the Other Insular Areas:
HUD NOFA requirements and guidelines are generally applied to the PHAs
in the states, Puerto Rico, and the other insular areas in the same
way. HUD's Office of Public Housing Investments at HUD headquarters is
responsible for monitoring the implementation of HOPE VI grants and
revitalization plans.
HOPE VI Grants:
Between fiscal years 1993 and 2003, PRPHA received one HOPE VI
revitalization grant, of $50 million. In that same decade, HUD made a
total of 217 revitalization grants worth approximately $5.5 billion to
118 PHAs in 34 states, the District of Columbia, and Puerto
Rico.[Footnote 121]
Between fiscal years 1996 and 2003, Puerto Rico did not receive a HOPE
VI demolition grant. During the same period, the U.S. Virgin Islands
received four such grants, totaling approximately $5 million. In that
same period, HUD made 287 demolition grants worth $395 million to 125
PHAs in 34 states, the District of Columbia, and the U.S. Virgin
Islands.
HOME Investment Partnerships Program:
The HOME Investment Partnerships Program is a federal formula block
grant to state and local governments designed to create affordable
housing for low-income households. The program provides funds to states
and localities to build, buy, and rehabilitate affordable housing for
rent or homeownership. Also, funds can be given to low-income people to
help pay their rent. At least 90 percent of HOME funds used for rental
housing and rental assistance must be used for families whose income is
below 60 percent of the median income in their area;
in rental projects with five or more assisted units, at least 20
percent of the units must be occupied by families with incomes that do
not exceed 50 percent of the median income. Homeownership assistance
must benefit families below 80 percent of the median income in their
area.
Program Administration and Funding:
Program funds are allocated to state and local governments based on a
formula that considers the relative inadequacy of each jurisdiction's
housing supply, incidence of poverty, fiscal distress, and other
factors. Shortly after HOME funds become available each year, HUD
informs eligible jurisdictions of the amounts allocated for them. HUD
establishes trust funds for each grantee, providing a line of credit
that the jurisdiction may draw upon as needed.
The participating jurisdiction is responsible for managing the day-to-
day operations of its HOME program, ensuring that funds are used
according to program requirements and written agreements and taking
appropriate actions when performance problems arise.
HOME in Puerto Rico and the Other Insular Areas:
For purposes of determining grants under the program, Puerto Rico is
considered a state.[Footnote 122] Thus, the laws and regulations
governing the application for, and distribution and use of, HOME funds
apply to Puerto Rico as they do to the states. HUD's Caribbean field
office is responsible for overseeing the use of HOME funds in Puerto
Rico. HUD regulations cap the amount of funding Puerto Rico and its
localities can receive under HOME.
The initial HOME allocation amount for each of the insular areas is
based on its population and occupied rental units compared to all the
insular areas. HUD may reduce an insular area's allocation based on its
performance in using HOME funds. The Honolulu field office is
responsible for overseeing the use of HOME funds in Guam, American
Samoa, and CNMI. HUD's Caribbean office is responsible of overseeing
the use of HOME funds in the U.S. Virgin Islands.
For fiscal year 2005, Puerto Rico and the other insular areas received
HOME grants totaling $37,349,848, approximately 2 percent of total HOME
funding for the year (see table 46).
Table 46: Estimated Amount of HOME Grants for Puerto Rico and the Other
Insular Areas, Fiscal Year 2005:
Puerto Rico: state;
Total grant amount: $17.8 million.
Puerto Rico: local (27 localities);
Total grant amount: 15.9 million.
Total for Puerto Rico;
Total grant amount: $33.7 million.
Guam;
Total grant amount: 1.4 million.
U.S. Virgin Islands;
Total grant amount: 1.2 million.
CNMI;
Total grant amount: 642,000.
American Samoa;
Total grant amount: 338,000.
Total for Insular Areas;
Total grant amount: $37.3 million.
Source: HUD.
[End of table]
Project-based Section 8 Program:
The Housing and Community Development Act of 1974[Footnote 123] amended
the U.S. Housing Act of 1937 to create project-based Section 8, under
which a variety of programs provide rental housing assistance payments
to private landlords on behalf of eligible families.[Footnote 124] The
objective of the program is to provide decent, safe, and sanitary
housing to families that have extremely low-to low-incomes.
Project-based Section 8 subsidies are linked to specific multifamily
properties, wherein all the units may be subsidized by the program. The
subsidy can be used in properties with subsidized mortgages or mortgage
insurance under various multifamily housing programs or in properties
that have been privately financed.[Footnote 125]
Through rent subsidies, payments to private landlords cover the
difference between what the family is required to pay (generally 30
percent of adjusted income) and the actual rent for the property.
Because the subsidy is linked to the unit, tenants lose the subsidy if
they move.
Program Administration and Funding:
HUD has primary responsibility for contract administration but has
assigned portions of these responsibilities to project-based contract
administrators, generally state housing finance agencies or PHAs.
Private owners enter into individual housing assistance payment
contracts for each of their properties receiving assistance.
Congress appropriates the amount of project-based Section 8 funding
available to HUD each fiscal year. Funding for project-based Section 8
is currently available only as contract renewals for properties with
existing contracts. While no new funding is available, families that
are not receiving assistance may apply for subsidies on properties with
existing project-based rental assistance contracts.
Project-based Section 8 in Puerto Rico:
In 2000, HUD began transferring the administration of eligible project-
based Section 8 contracts in Puerto Rico from HUD field offices to the
Puerto Rico Housing Finance Corporation, a contract administrator.
HUD's Atlanta field office is responsible for overseeing the
corporation's oversight of project-based Section 8 contracts in Puerto
Rico.
Regulations governing the administration of the program apply to
property owners and contract administrators in the particular state or
insular area (the Guam administrator also oversees CNMI). Eligibility
rules are the same for residents in all areas. As of 2004, Puerto Rico,
Guam, and the U.S. Virgin Islands all had project-based Section 8
properties.
In fiscal year 2005, the Puerto Rico Housing Finance Cooperation
administered about 180 project-based Section 8 contracts covering more
than 19,000 units.
Section 203(b) Single Family Mortgage Insurance Program:
The Federal Housing Administration (FHA) Section 203(b) mortgage
insurance program promotes homeownership for families with low to
moderate incomes by providing mortgage insurance for the purchase or
refinancing of a principal residence. The program provides mortgage
insurance to protect lenders, such as mortgage companies, banks, and
savings and loan associations, against the risk of default on loans to
qualified buyers. The insurance allows homebuyers to finance
approximately 97 percent of the home's cost through their
mortgage.[Footnote 126]
The Section 203(b) Single-Family Mortgage Insurance Program in Puerto
Rico and the Other Insular Areas:
Individuals in the states, Puerto Rico, Guam, and the U.S. Virgin
Islands are eligible for the program. HUD insures 203(b) mortgages and
oversees the selling of homes where families with Section 203(b)
insurance cannot meet their payments.[Footnote 127]
Section 214 of the National Housing Act[Footnote 128] provides that
Section 203(b) mortgage limits for Alaska, Guam, Hawaii, and the U.S.
Virgin Islands may be adjusted up to 150 percent of the mortgage
ceilings set for those areas. This provision, however, does not apply
to Puerto Rico or the other insular areas.
For fiscal year 2006, HUD commitments to guarantee single-family loans
cannot exceed a loan principal of $185 billion for the Section 203(b)
program. In fiscal year 2004, 8,269 residents of Puerto Rico received a
Section 203(b) loan. As of April 2005, halfway through fiscal year
2005, 4,162 residents had received such a loan.
[End of section]
Appendix VIII:
Table: U.S. Gross Domestic Product Deflator and Puerto Rican Gross
Product Deflator, 1980-2005:
U.S. GDP: Deflator: 1980: (2005=100);
Puerto Rico: Gross Product Deflator: 1980: (2005=100).
1980;
U.S. GDP: Deflator: 46.788;
Puerto Rico: Gross Product Deflator: 36.358.
1981;
U.S. GDP: Deflator: 51.306;
Puerto Rico: Gross Product Deflator: 39.729.
1982;
U.S. GDP: Deflator: 55.262;
Puerto Rico: Gross Product Deflator: 42.402.
1983;
U.S. GDP: Deflator: 57.990;
Puerto Rico: Gross Product Deflator: 44.746.
1984;
U.S. GDP: Deflator: 60.138;
Puerto Rico: Gross Product Deflator: 46.853.
1985;
U.S. GDP: Deflator: 62.234;
Puerto Rico: Gross Product Deflator: 48.117.
1986;
U.S. GDP: Deflator: 63.762;
Puerto Rico: Gross Product Deflator: 49.631.
1987;
U.S. GDP: Deflator: 65.322;
Puerto Rico: Gross Product Deflator: 51.001.
1988;
U.S. GDP: Deflator: 67.264;
Puerto Rico: Gross Product Deflator: 52.805.
1989;
U.S. GDP: Deflator: 69.863;
Puerto Rico: Gross Product Deflator: 54.648.
1990;
U.S. GDP: Deflator: 72.405;
Puerto Rico: Gross Product Deflator: 57.743.
1991;
U.S. GDP: Deflator: 75.228;
Puerto Rico: Gross Product Deflator: 60.403.
1992;
U.S. GDP: Deflator: 77.357;
Puerto Rico: Gross Product Deflator: 62.260.
1993;
U.S. GDP: Deflator: 79.083;
Puerto Rico: Gross Product Deflator: 63.919.
1994;
U.S. GDP: Deflator: 80.811;
Puerto Rico: Gross Product Deflator: 66.078.
1995;
U.S. GDP: Deflator: 82.560;
Puerto Rico: Gross Product Deflator: 68.225.
1996;
U.S. GDP: Deflator: 84.175;
Puerto Rico: Gross Product Deflator: 70.490.
1997;
U.S. GDP: Deflator: 85.680;
Puerto Rico: Gross Product Deflator: 72.623.
1998;
U.S. GDP: Deflator: 86.824;
Puerto Rico: Gross Product Deflator: 76.363.
1999;
U.S. GDP: Deflator: 87.915;
Puerto Rico: Gross Product Deflator: 80.011.
2000;
U.S. GDP: Deflator: 89.492;
Puerto Rico: Gross Product Deflator: 84.080.
2001;
U.S. GDP: Deflator: 91.562;
Puerto Rico: Gross Product Deflator: 88.083.
2002;
U.S. GDP: Deflator: 93.534;
Puerto Rico: Gross Product Deflator: 90.440.
2003;
U.S. GDP: Deflator: 95.248;
Puerto Rico: Gross Product Deflator: 93.284.
2004;
U.S. GDP: Deflator: 97.393;
Puerto Rico: Gross Product Deflator: 96.326.
2005;
U.S. GDP: Deflator: 100;
Puerto Rico: Gross Product Deflator: 100.
Source: Bureau of Economic Analysis and the Puerto Rico Planning Board.
Note: The U.S. series has been adjusted to reflect the Puerto Rican
fiscal year.
[End of table]
[End of section]
Appendix IX Agency Comments:
Commonwealth Of Puerto Rico:
Anibal Acevedo Vila:
Governor:
May 15, 2006:
Mr. James R. White:
Director, Tax Issues:
Government Accountability Office:
441 G Street, N.W.,
Washington, D.C. 20548:
Dear Mr. White:
We appreciate the opportunity that the Government Accountability Office
(GAO) has given to the Government of the Commonwealth of Puerto Rico to
review and comment on its report to the Senate Finance Committee on
Puerto Rico's economy and the impact of U.S. federal tax policy. The
leadership of the Senate Finance Committee requested this report to
determine the need for new incentives to generate private investment in
Puerto Rico. Its conclusions demonstrate the critical role that sound
federal tax incentives can have on, job creation in Puerto Rico.
It is important to highlight the disproportionate manufacturing job
loss in. Puerto Rico over the last 1.0 years. Congress in 1996
departed, from long-established Federal tax policy and. phased out the
possessions tax credit for U,S, investment in Puerto Rico, In the ten.
years following enactment of legislation phasing out the possessions
tax credit, Puerto Rico has lost over 48,000 manufacturing jobs or 30.2
percent of its manufacturing workforce --far greater than the 18.2
percent decline in, manufacturing employment in. the rest of the United
States.
The GAO report confirms this dramatic job loss in Puerto Rico and.
shows that manufacturing value added has stagnated. since 1997
following enactment of legislation repealing the possessions tax credit
in October 1.996. However, the report does not attempt to project: what
the current level of manufacturing employment and value added in.
Puerto Rico would. have been, had the credit not been repealed, nor
does it attempt to quantify the impact of the repeal of the possession
tax credit on the Puerto Rico economy or take account of the economic
linkages that exist between. the manufacturing sector and other sectors
of the Puerto Rican economy. As the report shows, manufacturing value
added in Puerto Rico had been growing at a robust rate prior to the
repeal of the credit - a very different picture from the stagnation in
high paying manufacturing jobs that has followed since 1996.
From the adoption of "Operation Bootstrap" in 1948 until the early
1970s, Puerto Rico's GNP per capita was converging with that of the
rest of the United States; however, per capita income remains at one-
third of the U.S. level, and the lack of growth in manufacturing since
1997 has been a major obstacle to further convergence.
Through aggressive efforts to attract new companies in cutting edge
industries such as bioengineering, the Commonwealth government has been
able to mitigate job losses. The pharmaceutical and bio industries have
grown in Puerto Rico since 1997, but this has not been sufficient to
allow the overall manufacturing sector to grow. As the report makes
clear, if Puerto Rico is to narrow the gap in per capita income with
the rest of the United States, it needs to encourage additional
investment.
Since the beginning of its association with the United States in 1898,
Puerto Rico has been granted taxing jurisdiction, or fiscal autonomy,
with respect to Puerto Rican residents and corporations. Beginning with
the Revenue Act of 1921, federal tax policy has mitigated U.S. taxation
of income earned in Puerto Rico (and certain other U.S. possessions) by
U.S. corporate investors. The purpose of the possessions tax credit,
which expired for tax years beginning after 2005, was to promote
employment-creating investment in Puerto Rico and the possessions. The
credit served to offset U.S. imposed regulatory costs on companies
doing business in Puerto Rico and encouraged the creation of high-wage
local employment opportunities comparable to those on the mainland.
This successful policy, though modified in its particulars from time to
time, has produced great results. Since the establishment of "Operation
Bootstrap" in 1948, Puerto Rico has developed from one of the poorest
islands in the Caribbean --comparable at that time to Haiti --into a
modern industrial society with the highest standard of living in all of
Latin America. As part of this transformation, Puerto Rico has become
the 12th largest merchandise export market for the United States,
generating and supporting over 280,000 jobs on the U.S. mainland.
With the repeal of the possessions credit, future job growth in Puerto
Rico largely will depend on investments made through foreign
subsidiaries of U.S. companies, so-called controlled foreign
corporations ("CFCs"). Puerto Rico must compete for U.S. investment
with many low tax jurisdictions such as Mexico, Malaysia, Ireland, and
Singapore. U.S. companies investing in these countries are not subject
to U.S. minimum wage, environmental, health and safety, shipping, and
other federal regulatory requirements that typically are more rigorous
than those imposed by competitor countries. With the repeal of the
possessions credit, Puerto Rico must compete with foreign countries for
U.S. investment without any U.S. tax advantage. Worse, the United
States imposes higher taxes or) income from, manufacturing in Puerto
Rico than in the 50 states, because the manufacturing deduction (Code
section. 199) does not apply to possessions manufacturing. In summary,
without a Federal tax policy that recognizes these realities, Puerto
Rico's economic development will face difficult challenges in the years
to come.
On behalf of the Commonwealth. Government I would like to express my
appreciation. for the herd work that you and your staff have put into
this report. I am confident that it will be useful to the Congress in
evaluating options for promoting investment and jobs in Puerto Rico.
Sincerely,
Signed by:
Anibal Acevedo Vila:
[End of section]
Appendix X: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110, whitej@gao.gov:
Acknowledgments:
Strategic Issues:
Jim Wozny, Assistant Director Tara Carter, Senior Analyst-in-Charge
Jennifer Gravelle, Senior Analyst Latesha Love, Senior Analyst Elwood
White, Senior Analyst Tina Younger, Senior Analyst Laura Nielsen,
Analyst:
Applied Research and Methods:
Mitch Karpman, Assistant Director Ed Nannenhorn, Senior Economist Jim
Ungvarsky, Senior Analyst Susan Baker, Data Analyst:
General Counsel:
Cheryl Peterson, Senior Attorney:
Health Care:
Gerardine Brennan, Senior Analyst Margaret Weber, Senior Analyst:
Education, Workforce, and Income Security:
Carolyn Taylor, Assistant Director Carolyn Blocker, Senior Analyst
Nagla'a El-Hodiri, Senior Analyst Joy Gambino, Senior Analyst Anne
Welch, Senior Analyst:
Financial Markets and Community Investment:
Cory Roman, Senior Analyst:
(450287):
FOOTNOTES
[1] In this report, GAO refers to the three major U.S. territories, the
U.S. Virgin Islands, American Samoa, and Guam, and the two
Commonwealths, the Commonwealth of Puerto Rico and the Commonwealth of
the Northern Mariana Islands (CNMI), as "the insular areas."
[2] The Small Business Job Protection Act of 1996, Pub. L. No. 104-188
(1996), repealed the credit fully for tax years beginning after
December 31, 2005, following a 10-year phaseout period.
[3] In this report, GAO refers to the 50 states and the District of
Columbia as "the states."
[4] Pub. L. No. 94-455 (1976).
[5] The Internal Revenue Code (IRC) has included each of the insular
areas in its definition of U.S. "possessions" for the purposes of the
tax credits governed by Sections 936 and 30A of the IRC. Following the
IRC and Internal Revenue Service (IRS) forms and publications, GAO uses
the terms "possessions corporations" and "possessions income" to refer
to corporations and income covered by these credits. GAO also uses the
term "possessions tax credit" as shorthand to cover both the Puerto
Rico and possessions tax credit and the Puerto Rico economic activity
credit, which were claimed by possessions corporations operating in
Puerto Rico during different periods covered by this report.
[6] All dollar figures in the trend analyses from chs. 3 and 4 of this
report are adjusted for inflation to reflect the value of a dollar as
of 2005. The data that we report from the U.S. Census Bureau (Census)
and other sources for 2002 in chs. 5 and 6 were left in 2002 dollars to
make it easier for readers to use our results in conjunction with
Census's publications.
[7] The Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66
(1993), limited the credit for tax years beginning after December 31,
1993. Those corporations whose tax years begin before January 1 may
still claim the credit during the 2006 calendar year. For example, a
corporation whose latest tax year began December 1, 2005 may claim the
credit on income earned through November 30, 2006.
[8] GAO, Tax Policy: Puerto Rican Economic Trends, GAO/GGD-97-101
(Washington, D.C.: May 14, 1997).
[9] Capital expenditures (i.e., spending on buildings and equipment) is
a significant component of investment.
[10] GDP can also be measured as the total value of goods and services
produced within a country's borders.
[11] We did not include the federal corporate tax in our comparison
because the location where that tax is collected is may not be closely
related to where the burden of the tax falls.
[12] In the report all references to the Puerto Rican deflator refer to
the Puerto Rican implicit gross product deflator.
[13] Census used the Standard Industrial Classification (SIC) up until
the 1997 Census and used the North American Industrial Classification
System (NAICS) for the 2002 Census. This change should not affect the
basic message of any of the figures in this report.
[14] Data on personal income and on federal taxes paid in the other
insular areas are not available. Taxes paid by residents of the other
insular areas to their own governments in 2002 amounted to $2,451 per
capita--slightly higher than the $2,310 per capita that residents of
Puerto Rico paid to the Commonwealth and municipal governments.
[15] The five states with the highest combined tax burden were the
District of Columbia, Minnesota, Delaware, Connecticut, and New Jersey.
Those with the lowest were Montana, South Carolina, Alabama, West
Virginia, and Mississippi.
[16] These five insular areas are the subject of this report. The nine
smaller U.S. territories that are not included in our report's
definition of insular areas, because they are not included in the scope
of this report, are Navassa Island in the Caribbean Sea, and Baker
Island, Howland Island, Kingman Reef, Jarvis Island, Johnston Atoll,
Midway Atoll, Palmyra Atoll, and Wake Island in the Pacific Ocean.
[17] A person born in American Samoa is considered to be a national of
the United States who although not a citizen owes permanent allegiance
to the United States. 8 U.S.C. § 1101(a)(21), (22) (2000). While U.S.
nationals are not entitled to all the benefits for which only citizens
qualify they are not aliens and therefore cannot be expelled or
deported.
[18] Memorandum of the President, 57 Fed. Reg. 57, 093 (Nov. 30, 1992).
[19] Residents pay local income taxes while contributing to the U.S.
national Medicare and Social Security systems.
[20] L.P.R.A. Const. Art. I § 1 (2004).
[21] Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66
(1993).
[22] Small Business Job Protection Act of 1996, Pub. L. No. 104-188
(1996).
[23] GAO, Tax Policy: Puerto Rican Economic Trends, GAO/GGD-97-101
(Washington, D.C.: May 14, 1997).
[24] Foreign direct investment is the investment of foreign assets
directly into domestic structures, equipment, and organizations. It
does not include foreign investment into stock markets. For Puerto
Rico, foreign assets are United States assets as well as assets from
foreign countries. In Puerto Rico, for the purpose of calculating
foreign direct investment, a domestic company is a company incorporated
in Puerto Rico.
[25] Ingresos Por Concepto de Patentes Municipales, Ano Fiscal 2001-
2002 (Puerto Rico: 2002).
[26] We did not include the federal corporate tax in our comparison
because the location where that tax is collected may not be closely
related to where the burden of the tax falls.
[27] Generally, residents of an insular area cannot claim the earned
income tax credit or the child tax credit. An exception is that bona
fide residents of Puerto Rico with three or more children who pay
social security taxes may be eligible for the child tax credit.
[28] 26 U.S.C. § 3101 et seq. (2004).
[29] 26 U.S.C. § 3301 et seq. (2004).
[30] Section 936 is the section of the Internal Revenue Code that
describes the credit. Because Section 936 refers to the Commonwealths
and territories as "possessions," we refer to them in this manner in
this section of the report. Under Section 936, it was possible for a
domestic corporation owned by individuals to qualify for the credit.
[31] A possessions corporation that is an existing credit claimant for
Guam, American Samoa, or CNMI is not subject to the income cap.
[32] A possessions corporation that is an existing credit claimant for
Guam, American Samoa, or CNMI is not subject to the income cap.
[33] Most interest income is exempt from the withholding tax.
[34] The subpart F rules generally "attempt to prevent" (or negate the
tax advantage from) deflection of certain types of moveable income,
either from the United States or from a high-tax foreign country, into
another jurisdiction that is a tax haven or that has a preferential tax
regime for certain types of income. In this report we refer to the
passive income earned by CFCs, subject to these rules, as "subpart F
income." If the CFC's subpart F income, which may include dividends,
interest, royalties, rents, and annuities, does not exceed the lesser
of 5 percent of gross income or $1 million, this income currently
income by the U.S. shareholder.
[35] Generally, a related corporation is any corporation which
controls, or is controlled by, the CFC, or the corporation and the CFC
are controlled by the same person, through ownership of more than 50
percent of the stock.
[36] Pub. L. No. 108-357 (2004).
[37] A drawback is the refund of all or part of customs duties, or
domestic tax paid on imported merchandise that was subsequently either
exported or manufactured into a different article and then reexported.
[38] These incentives and the flexibility that corporate groups have
had in identifying the geographic sources of their income are discussed
in more detail in ch. 4.
[39] The Planning Board has contracted with several consultants to
complete a diagnostic analysis of all of their national income and
product account methodologies, including those for the deflator. The
Board is also negotiating a memorandum of agreement with the U.S.
Bureau of Economic Analysis (BEA) for the latter's assistance in this
effort.
[40] Bosworth and Collins, "Economic Growth in Puerto Rico."
[41] Puerto Rico's Planning Board stopped compiling data on U.S. and
foreign direct investment in the Commonwealth in the early 1990s after
the Commonwealth government devolved the property tax to the
municipalities. Changes in the location and storage technology for
property tax records that accompanied this change in responsibility for
the tax made it difficult for the Board to continue its investment
estimation, which relied heavily on these property tax records.
[42] For the purpose of this section, real numbers were calculated
using the Puerto Rican GNP deflator.
[43] Census does not report capital spending for other sectors. Between
the 1997 and 2002 reports, Census switched from using the Standard
Industrial Classification (SIC) system to the North American Industrial
Classification System (NAICS) in order to place businesses into
particular industrial categories. As a result, the scope of the
industries covered in the 2002 census is not strictly comparable to the
scopes for the earlier reports. However, those technical changes should
not be a significant factor in the changes in investment depicted in
fig. 16.
[44] Bosworth and Collins, The Economy of Puerto Rico: Restoring
Growth.
[45] Grubert and Slemrod developed a theoretical model and then tested
it empirically using corporate tax data for 1987. They concluded that
"a large fraction of U.S. investment in Puerto Rico is due to the
income shifting opportunities." Harry Grubert and Joel Slemrod, "The
Effect of Taxes on Investment and Income Shifting to Puerto Rico," The
Review of Economics and Statistics, vol. 80, no. 3 (August 1998), pp.
365-373. More recently, Bosworth and Collins also conclude that income
shifting has been significant. Bosworth and Collins, "Economic Growth
in Puerto Rico" in The Economy of Puerto Rico: Restoring Growth, ed.
Susan M. Collins, Barry P. Bosworth, and Miguel Soto-Class (Washington,
D.C.: The Brookings Institution, 2006).
[46] If the U.S. gross product deflator is used instead of the Puerto
Rican one to adjust the value-added figures, the Puerto Rican ratio
would be about three times as high as the U.S. ratio, but it would have
grown by 89 percent between 1997 and 2002.
[47] Most of the results of that research effort are reported in ch. 5.
App. III provides a description of the methodology for that analysis.
[48] An analysis of Census data indicates that employment rates have
been lower in Puerto Rico than in the United States across gender and
education level. Steven J. Davis and Luis Rivera-Batiz, "The Climate
for Business Development and Employment Growth in Puerto Rico," in
Collins, Bosworth, and Soto-Class, The Economy of Puerto Rico:
Restoring Growth. Several other chapters in the book also consider the
labor force participation issue.
[49] During the 1980s and 1990s the number of men migrating to the
United States is estimated to be slightly larger than the number of
women. Most migrants to the United States were estimated to be in their
twenties. For age groups older than 45, Census estimated that more
individuals migrated to Puerto Rico from the mainland than migrated
from the island to the United States.
[50] Maria Enchautegui and Richard B. Freeman, "Why Don't More Puerto
Rican Men Work? The Rich Uncle (Sam) Hypothesis," in Collins, Bosworth,
and Soto-Class, The Economy of Puerto Rico: Restoring Growth.
[51] The 47.3 percent labor force participation rate reported in the
Census for 1990 in Puerto Rico was close to the 45.5 percent reported
by the Puerto Rico Planning Board for fiscal year 1990. Census found a
40.7 percent participation rate in 2000, while the Planning Board
reported a 46.2 rate for fiscal year 2000. Census has reported much
higher unemployment rates in 1990 and 2000 (20.4 and 19.2 percent) than
have been reported by the Planning Board for those years.
[52] Davis and Rivera-Batiz, "The Climate for Business Development and
Growth in Puerto Rico."
[53] BLS data for the first two months of 2006 indicate a further drop
in manufacturing employment. However, these data are not seasonally
adjusted.
[54] Matthew Christenson, "Evaluating Components of International
Migration: Migration Between Puerto Rico and the United States,"
Population Division Working Paper no. 64 (Washington, D.C.: U.S. Census
Bureau, January 2002), www.census.gov/population/www/techpap.html.
[55] The Census income data do not include the value of in-kind
government transfer payments.
[56] U.S. Census Bureau, "QT-P32. Income Distribution in 1999 of
Households and Families: 2000" (United States and Puerto Rico), http:/
/factfinder.census.gov.
[57] This growth in value added and stability in employment was true in
absolute terms, as well as in terms of the percentage shares shown in
fig. 27.
[58] These consequences include the loss of any foreign tax credit or
deduction with respect to any possessions tax credit or other foreign
tax imposed on accumulated earnings of the corporation. Reincorporation
also causes adjustments to the alternative minimum tax and could cause
the recapture of certain losses.
[59] By "affiliated corporate group," we mean a parent corporation and
all of its subsidiary corporations.
[60] The full population of possessions corporations that operated in
Puerto Rico in at least one of those years was 656. Table 14 in app. IV
shows the attributes of the full population of possessions
corporations, while table 15 shows those of the subset that we examined
in detail.
[61] If the possessions subsidiary reincorporates as a foreign
corporation, it is treated as having sold any marketing or
manufacturing intangibles in exchange for payments contingent upon
productivity, use, or disposition of such property. These payments
would be treated as ordinary income. If the subsidiary transfers the
property while it is still a possessions corporation, the payments are
included as U.S.-source ordinary income. If the possessions election
has terminated, the payments would be considered foreign-source
ordinary income. Source rules are important for domestic corporations
to determine whether a foreign tax credit is available to offset U.S.
income taxes and for a foreign corporation to determine whether the
income is subject to U.S. income taxation.
[62] No other expenses, such as employee compensation, interest, taxes,
or depreciation, are deducted to arrive at gross profits. Although the
following discussion relates to the gross profits of the various types
of businesses, the trends are very similar for the total incomes and
net incomes of these businesses. Data on the latter two measures of
income are presented in table 15 in app. IV. The data in figure 33 and
in tables 15 through 18, all of which contain U.S. tax data, are
inflation-adjusted with the U.S. GDP deflator.
[63] There were only three years (1997, 1999, and 2001) for which we
had federal tax returns for both possessions corporations and CFCs.
There were only two years (1999 and 2001) for which we had both federal
and Puerto Rican returns for possessions corporations, CFCs, and other
types of corporations.
[64] These estimates cover all of the CFCs included in our lower bound
estimates and then add in estimated amounts for the multinational CFCs.
The latter estimates are made by multiplying the amount of tax paid to
Puerto Rico by each CFC (which is reported on their federal tax return)
by the average ratio of Puerto Rico gross profits over taxes paid to
Puerto Rico by CFCs for which we did have Puerto Rican tax returns.
[65] Tax experts, including those in IRS, suggested that one potential
explanation for this use of LLCs is that the "special allocation rules"
under partnership tax law allow corporate groups more flexibility in
allocating income and expenses within a group. At least one case was
identified where manufacturing operations in Puerto Rico were held in a
partnership owned by two partners--one was a possessions corporation,
the other was a CFC. This partnership allocated the profits from old
product lines that qualified for the possessions tax credit to the
possessions corporation;
it passed profits from new product lines that did not qualify for the
credit to the CFC.
[66] These differences can be seen by comparing the data in tables 15
and 16 in app. IV.
[67] That increase is based on a lower-bound estimate for CFCs. We did
not attempt to estimate the Puerto Rican assets of any multinational
CFCs for which we did not have Puerto Rican tax returns because we
considered the relationship between assets and taxes paid to be weaker
than the relationships between income and taxes paid that we had used
to estimate the Puerto Rican income of these CFCs.
[68] These findings are based on a special research project that we
completed with the cooperation of Census and IRS. App. III includes a
description of our methodology and tables in app. V provide as much
detail on the results of this project as Census and IRS disclosure
rules permit.
[69] The corporations in that category include only those for which IRS
had no record of any requirement for them to file as U.S. corporations.
The category also includes a very small number of foreign-owned
corporations that we could not report on separately due to Census
nondisclosure rules;
it may also include a very small number of CFCs for which we could not
determine a place of incorporation. See app. III for more detail on our
criteria for placing businesses into each of our categories.
[70] We use the term "taxes" as shorthand to cover both taxes and some
nontax revenues, such as licenses and lotteries, that are collected by
state and local government. These nontax revenues constitute a
relatively small share of the total revenues reported in this chapter
and they are included, along with other tax revenues, in the "other"
category in figs. 48 and 49.
[71] We exclude federal corporate income tax payments from our
comparisons because the available data assign all of the tax that a
corporation pays to the jurisdiction where it files its federal return.
In many cases, much of the income on which a corporation is taxed is
earned outside of the jurisdiction from which it files its return.
[72] The five states whose residents paid the least total taxes were
Montana, South Carolina, Alabama, West Virginia, and Mississippi.
[73] The five highest tax states were the District of Columbia,
Minnesota, Delaware, Connecticut, and New Jersey.
[74] The taxes being compared in this section exclude the federal
corporate income tax, which is difficult to allocate by location.
[75] The municipal gross receipts tax is included in the "sales and
excise" category.
[76] In fig. 48 federal excise taxes are represented as a zero, rather
than the net positive amount transferred to the Commonwealth.
[77] Puerto Rico's Government Development Bank provided us detailed
information on specific Puerto Rican government debt issues and we
assigned those issues to the private or public use categories in a
manner that was consistent with how the U.S. Census of Governments
categorizes state and local government debt.
[78] These payments do not include outlays made to individuals through
refundable credits in the federal tax code, such as the child tax
credit and the earned income tax credit. IRS does not report the
refundable portion of the child tax credit by state;
it does report the refundable portion of the earned income tax credit,
but it combines the amounts earned in Puerto Rico and the other insular
areas. For tax year 2001, the per capita amount for those areas was
$3.1, while the nationwide average amount per capita was $102.8.
Generally, residents of an insular area cannot claim the earned income
tax credit or the child tax credit.
[79] 26 U.S.C. 7652 provides that federal alcohol excise taxes
collected on rum produced in Puerto Rico and the U.S. Virgin Islands
and imported into the United States, after deducting administrative
expenses, are "covered over" or paid into the treasuries of Puerto Rico
and the U.S. Virgin Islands.
[80] A government entitlement program provides benefits to all that
meet certain eligibility criteria.
[81] For additional information on the health care financing programs
in these areas, see GAO, U.S. Insular Areas: Multiple Factors Affect
Federal Health Care Funding, GAO-06-75 (Washington, D.C.: Oct. 14,
2005).
[82] The system contains no data for insurance companies, credit
unions, mutual funds, or pension funds.
[83] For the CFC side of the comparison we included only those CFCs for
which we had Puerto Rican tax returns, or that appeared to have
operations only in Puerto Rico.
[84] Grubert and Slemrod defined net operating rate of return as the
ratio of operating income (net income, plus interest paid, and less
interest received) over operating assets (inventories, plus gross
depreciable and depletable assets, and land). We computed a gross
operating rate of return by substituting gross profits for operating
income.
[85] We followed a similar procedure for an additional set of 84 EINs
that were not in Census's original EINs, but that we identified in IRS
data as businesses with income earned in Puerto Rico.
[86] For the Census groupings we did not need to establish a connection
to Puerto Rico with our tax data because Census established those
connections through their surveys.
[87] Census includes these nonprofits in their "corporations" category.
For industries where Census suppressed separate figures for these
nonprofits, we could not move them from the corporations category to
the "other entities" category.
[88] Pub. L. No. 107-110.
[89] The consumer price index is a measure of the average change in
prices over time in a given market basket of goods.
[90] Pub. L. No. 101-147.
[91] Pub. L. No. 88-525.
[92] There is also a school breakfast program, which is not included in
this description.
[93] For 2005, the FPL in the 48 contiguous states and the District of
Columbia was $19,350 for a family of four.
[94] The consumer price index is a measure of the average change in
prices over time in a given market basket of goods.
[95] Pub. L. No. 92-433.
[96] Social Security benefits are paid to workers who meet requirements
for age and for the time they have worked in "covered employment," that
is, jobs through which they have paid Social Security taxes. Typically,
workers must contribute for a total of 40 quarters (or 10 years in
total) to qualify, though the requirements are different if they become
disabled or die. Benefits are also paid to qualified spouses and
certain divorced spouses of workers who have met the covered employment
requirement or who are disabled. Social Security covers about 96
percent of all U.S. workers;
the vast majority of the rest are state, local, and federal government
employees.
[97] Puerto Rico is the only insular area for which hospitals are paid
using a PPS. The other insular area hospitals are paid based on their
costs.
[98] The District of Columbia has a higher matching percentage than
what would be calculated under the statutory formula. This higher
matching rate, which is currently 70 percent, was authorized by the
Balanced Budget Act of 1997, Pub. L. No. 105-33 § 4725(b)(1), 111 Stat.
251, codified at 42 U.S.C. § 1396d(b)(3).
[99] Puerto Rico was originally included in the legislation that
created Medicaid and was granted a 55 percent federal matching rate.
Effective in 1967, its federal matching rate was lowered to 50 percent.
[100] The Deficit Reduction Act of 2005 allows states to establish
"benchmark benefit packages" for certain eligible populations that
would not include all of the services previously classified as
mandatory. See Pub. L. No. 109-171 § 6044;
120 Stat. 4, 88-92. This section of the law will take effect on March
31, 2006.
[101] Certain administrative expenditures are eligible for higher
federal matching rates. For example, there is a 75 percent federal
match for quality review of hospital services and the operation of
Medicaid management information systems.
[102] According to Puerto Rico government officials, some EPSDT
services for children are effectively limited by the federal spending
cap.
[103] Pub. L. No. 105-33 § 4901, 111 Stat. 251, 552-570.
[104] Guam also used SCHIP funds to pay for coverage to children whose
coverage was previously paid for by the local government. Although none
of the insular areas besides Puerto Rico have not expanded coverage to
include additional children, CMS considers insular area SCHIP programs
Medicaid expansions.
[105] In addition to the 0.25 percent allotment, each of the insular
areas receives supplemental SCHIP payments through fiscal year 2007.
For fiscal years 1998 to 2002, the insular areas and Puerto Rico also
received redistribution funds, which are SCHIP funds not spent by
states within the prior 3-year period. The insular areas are eligible
for 1.05 percent of the total available redistribution funds, which are
allocated among them according to the percentages each receives of the
initial annual allotment. The amounts listed in table 20 include these
supplemental funds.
[106] SCHIP funds are allotted in the following proportions: Puerto
Rico--91.6 percent;
Guam--3.5 percent;
the U.S. Virgin Islands--2.6 percent;
American Samoa--1.2 percent;
and CNMI--1.1 percent.
[107] Other HHS agencies provide smaller awards that were not
considered in this analysis.
[108] For both of these block grants, each insular area will receive a
minimum amount of $50,000, even if its share of the 1.5% would be less
than $50,000.
[109] Pub. L. No. 92-603.
[110] Pub. L. No. 104-193.
[111] Puerto Rico implemented its TANF program on July 1, 1997.
[112] Under section 1108(b) of the Social Security Act, additional
federal matching grant funds (up to the capped amount) are available to
an insular area if its expenditures exceed the capped amount of its
TANF block grant and its required state expenditure. The total
expenditure requirement is $99.7 million.
[113] Pub. L. No. 96-272.
[114] Pub. L. No. 104-193.
[115] Pub. L. No. 75-412.
[116] No information was available on public housing in CNMI and
American Samoa.
[117] Pub. L. No. 93-383.
[118] Pub. L. No. 102-389.
[119] Pub. L. No. 105-276.
[120] A threshold requirement is a requirement that an applicant must
meet to be eligible for a HOPE VI revitalization grant. Threshold
requirements may include the following: (1) the PHA must have met all
performance requirements under any of its existing HOPE VI grants to
apply for additional grants, (2) the PHA must submit certification by
an engineer or architect that the project is severely distressed, and
(3) the PHA must verify compliance with applicable fair housing civil
rights laws. A rating factor is a category used to evaluate specific
aspects of the application, such as funding need. For each factor, HUD
can award points, which are used to evaluate PHAs' applications for
revitalization grants.
[121] No information was available on HOPE VI funding in American
Samoa, Guam, and CNMI.
[122] For purposes of the American Dream Downpayment Initiative--a
subprogram under HOME that provides downpayment and closing cost
assistance to low-income families.
[123] Pub. L. No. 93-383.
[124] Project-based Section 8 refers to the following programs: New
Construction/Substantial Rehabilitation, Loan Management Set-Aside,
Property Disposition, Moderate Rehabilitation, and Preservation.
[125] Examples include programs under HUD's sections 221(d)(3) or
221(d)(4), Section 202, and Section 236 programs, and the Department of
Agriculture's Section 515 program.
[126] Another HUD program, the Section 203(k) program, enables
homebuyers and homeowners to finance the purchase (or refinancing) and
rehabilitation of a house that is at least a year old through a single
mortgage.
[127] When this occurs, the lender forecloses on the home: HUD pays the
lender what is owed, takes ownership of the home, and attempts to sell
the home at its market value.
[128] 12 U.S.C. 1715d.
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