Economy and Crime Spur New Puerto Rican Exodus
NYT, 8 Feb 2014
Part 2 of 2
‘Live Here Just to Survive?’
“Between making less money and not knowing when someone will jump you, that pushed the quality of life very low,” Alexis Sotomayor said. “To live here just to survive? No, thanks.”
For Ms. Velazquez, the tenured professor who lives in Mayagüez, and her husband, who works for the Air Force Reserve, the mental calculations were similar. She is 50, she said. The last thing she wanted to do was give up her job as an economics professor, move her two teenage children and uproot her 76-year-old mother, who speaks no English and has never left the island.
But she has grown so disillusioned with the University of Puerto Rico Mayagüez — one of the crown jewels of the island’s higher-education system, where she has worked for nearly three decades — that she no longer views it as a viable option for her children. In the face of continuing economic stress, the University of Puerto Rico has suffered the loss of a steady stream of valued professors and funding for important research projects. Even tenured professors have left, Ms. Velazquez said.
“The most important thing for me is my children’s education, and the second is my quality of life,” she said. “You see all of these fees and taxes going up, but the streets are terrible.”
This summer she will try to rent out her house rather than selling it and take a loss, and will move to Fairfax County, Va., where her husband will work for the federal government and her children will attend a top public high school. As an economist with a law degree, she is hoping to find some kind of job.
“I thought I could do anything in Puerto Rico,” she said. “Now that is gone.”
The frustrations of Mr. Sotomayor and Ms. Velazquez speak to the depth of the island’s economic problems.
The origins of the crisis, though, stretch back more than a decade. Tax incentives have long been a draw for corporations seeking to do business in Puerto Rico, and the island in turn has benefited from its ability to offer such breaks, in large part structuring its economy around them.
Tax laws were once abundantly generous, which fueled the spread of factories that made textiles and pharmaceuticals, among other things. That came to a crash in 2006, after the 10-year phaseout of a subsidy that provided American firms operating in Puerto Rico with tax-free income. Changes to the global economy and the worldwide recession exacerbated the situation. Since 1996, factory jobs on the island spiraled from 160,000 to 75,000.
Little was done to try to revamp the island’s economic framework. Instead, deficits climbed and pensions spun out of control. In 2006, the government shut down for two weeks because it lacked the cash to meet expenses. The governor moved to raise taxes. In 2010, the next governor reduced taxes and laid off 33,000 government workers. But Puerto Rico’s governors began borrowing even more heavily to get out of the economic logjam.
“It was cheap and easy to borrow,” said Mike Soto, the president of the Puerto Rican Center for a New Economy. “It got to the point where we tapped out what we can borrow.”
Painful Corrections
Last year, Mr. García Padilla, the first governor from the countryside, took over. With the island’s economy a shambles, and credit agencies threatening a downgrade to junk status, he had no choice but to take swift action.
Economists have given him credit for acting to remedy problems that have festered for decades. In one year, he moved to overhaul three major pensions, including for teachers, that were on a pace to run out of money soon. Two of them are still pending final court approval. He reduced the deficit by 70 percent. And he is holding the four main debt-laden government-run companies more accountable and insisting on more transparency.
Vowing not to lay off any more workers, he raised taxes sharply to provide much-needed revenue and moved aggressively to promote incentives to entice wealthy investors, like the hedge fund billionaire John Paulson, who has invested in an exclusive beach resort and condo complex. A number of businesses have left the island, scared away by the groaning economy and the high cost of electricity. But others have arrived or expanded, like Eli Lilly, Seaborne Airlines and Cooper Vision.
Four days before the junk status decision, Mr. García Padilla announced that he would present a balanced budget for next year, one year ahead of his own schedule. But his job just got harder. Analysts said the credit downgrades would make it harder to improve the economy. The governor ordered agencies to cut budgets by 2 percent.
“I’ve done everything I can to avoid a downgrade,” Mr. García Padilla said in an interview, calling the move “unjust.” “Maybe I can’t detain the winds right now, but I can build the windmills. I am an incurable optimist.”
But not everyone is applauding. His tax increases have hit some businesses hard, which could pose a further drag on the economy. Among the many taxes he initiated, the governor raised the corporate tax rate to a maximum of 39 percent. Last year, the economy continued on a slide. “The new administration has a bookkeeping mentality as opposed to an economic development mentality,” said Pedro Pierluisi, Puerto Rico’s nonvoting representative in Congress and a political opponent of the governor. “Here you find Puerto Rico with an underlying economic problem charging its corporations — its job creators — 39 percent. Hello!”
Perhaps the most maligned is the new lucrative gross receipts tax, which some owners of small- and medium-size businesses say threatens to put them out of business. Because of the way the tax is structured, it affects companies with less than a 5 percent net profit margin. This means that many food-related companies, like supermarkets, and new businesses, are hit hardest. The smaller the margin, the higher the tax.
Some stores are paying an effective tax rate of 130 percent, said Manuel Reyes Alfonso, the vice president of a trade association that represents the food industry. If the tax is not revised, some will be forced to shut down and others will have to raise prices, he said.
“It is absurd,” said Mr. Reyes Alfonso. “It’s like selling the car to buy gas.”
In response, the governor is forming a committee to take a second look at the new taxes and the island’s complicated tax code. Waivers to the tax are available, but Mr. Reyes Alfonso said they were difficult to obtain.
As he sipped coffee in the bakery section of one of his stores, José Revuelta, the president of SuperMax grocery stores in Puerto Rico, said he managed to expand during the recession. But now, with the gross receipts and corporate tax cutting into his business, he is holding back on capital investments, raises and bonuses. He said he wanted reassurance that the tax hikes would be temporary.
“I can understand doing this on a short-term basis,” he said. “But there needs to be a plan.”
Not many are confident that a long-term plan exists to lift the island from such a sustained crash. But it cannot get much worse, they say.
“Sometimes you have to hit rock bottom to restore yourself,” said Mr. Soto, of the Center for a New Economy. “I’m hoping that’s what’s happening.”
http://www.nytimes.com/2014/02/09/us...n-exodus.html?