The island that can save America
Homemade masks. Ventilators from Russia. Critical drugs in scarce supply. As our health care workers scramble to fight the pandemic with insufficient tools, the country has woken at last to the danger of our reliance on foreign-produced drugs and medical equipment.
The Trump administration took an initial step toward rectifying it last week. It awarded a $354 million contract to a Virginia company to make COVID-19 treatments on U.S. soil, leading Peter Navarro, the president’s economic trade advisor, to call it “an historic turning point.”
As we focus on rebuilding our formerly vibrant pharmaceutical manufacturing base, policymakers should remember the place where so much of it was once located: Puerto Rico. That began to change in 1996, when federal tax policy spurred manufacturers to move out of Puerto Rico to foreign countries with cheap labor and low taxes, like China and India.
Puerto Rico can still offer immediate solutions to the current crisis, however, if the administration and Congress use the next relief package to create economic incentives to address two urgent needs at once: re-domesticating pharmaceutical manufacturing and stimulating the Puerto Rican economy.
Before 1996, the tax code gave makers of drugs and medical devices favorable treatment for manufacturing products in U.S. territories, such as Puerto Rico. At that time, Puerto Rico was the American engine of pharmaceutical and medical device manufacturing. Many, if not most, domestic companies had a presence there. In an effort to curb “corporate welfare,” however, the Republican Congress passed and President Clinton signed the Small Business Job Protection Act of 1996, which phased out the tax exemption. The results were predictable.
The manufacturers reduced or eliminated their operations in Puerto Rico, moving them to China, India and Ireland, which welcomed their presence with favorable economic policies. Puerto Rico’s economy slid into a 14-year recession from which it has yet to recover. With Puerto Rico’s bond rating at junk status, Congress passed a special law in 2017 permitting it to file for bankruptcy, where it has remained ever since.
Another law passed in 2017, the Tax Cuts and Jobs Act, further discouraged manufacturing on the island. Under the act, income generated from the Puerto Rican operations of U.S. companies is treated as foreign income and subjected to double taxation. The pharmaceutical and medical device manufacturers that remained began to rethink their decision to stay.
Puerto Rico has been severely tested by two major hurricanes and a series of earthquakes. Now, COVID-19 has aggravated its distress, putting the island on lockdown and keeping away the tourists on which it relies. As with tourism in the rest of the United States, it will require much time to recover in Puerto Rico. There is, however, an opportunity now to revive both the Puerto Rican economy and America’s capacity to manufacture medical products.
While many manufacturers have left the commonwealth, those that remain play a vital role in American’s health care. According to the FDA, one in 10 pharmaceuticals used by U.S. citizens is manufactured in Puerto Rico. The dollar value of pharmaceuticals produced in Puerto Rico, in fact, exceeds the output of any other single state or foreign country.
The U.S. has a dire need to end its reliance on foreign-produced pharmaceuticals and medical supplies, and Puerto Rico has ready solutions. It has the manufacturing infrastructure in place; it has the ability to fire up limited and closed facilities; and it has experienced, cost-effective labor. Now, President Trump and Congress can solve two problems in one stroke. The next relief package should: one, eliminate the foreign tax treatment of manufacturing income generated in Puerto Rico; and two, re-institute the tax incentives for pharmaceutical and medical device manufacturing operations located in Puerto Rico.
These policies will not cost federal and state dollars; instead, they will increase tax revenues as American companies return their operations — and supply chains — back to U.S. soil.
The United States must regain its competitive edge against the foreign jurisdictions that lured American pharmaceutical manufacturers away. In the long-term, that cannot be achieved through government contracts, but through economic incentives that will make manufacturers want to return. By adopting common sense measures that provide those incentives and rely upon market forces, President Trump and Congress can strengthen both the domestic pharmaceutical supply chain and Puerto Rico at once.
Luis G. Rivera Marin, J.D., is Puerto Rico’s former secretary of state. He is currently the general manager of Porzio Life Sciences’ Puerto Rico operations and of counsel to Porzio, Bromberg and Newman, P.C.
Christopher P. Dephillips , J.D., is the vice president and general counsel to Porzio Life Sciences. He also serves as an assemblyman for New Jersey’s 40th District, one of the areas in the country hit hardest by COVID-19.
William J. Hughes, Jr., J.D., M.A., LL.M., is a principal with Porzio, Bromberg and Newman, P.C. He is a former assistant U.S. attorney and Trial Attorney for the United States Department of Justice.