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William J. Hughes, Jr. (Photo: Facebook).

Opinion: Puerto Rico recovery presents opportunities for New Jersey

By William J. Hughes Jr., August 30 2021 2:39 pm

OPINION

With hurricane Ida dominating the news today, the impact of another hurricane has yet to be resolved.  Hurricane Maria’s devastating effects upon Puerto Rico are still felt as the fourth anniversary approaches.  Its Category 4 winds left nearly 3,000 dead and decimated homes, offices, and infrastructure, including the island’s electrical grid. But Maria laid bare much more than thousands of roofless structures: it exposed years of failed U.S. policies towards, and lost opportunities in, Puerto Rico.  Although some may blame insurance companies for stymying Puerto Rico’s recovery, it is the federal government’s failure to develop and implement a strategy to end years of neglect and relegation to second-class status that has actually hampered meaningful recovery. The shame of it is that Puerto Rico’s resources and potential can provide significant opportunities for all in the United States, but particularly for us in New Jersey.

The federal tax benefits which attracted pharmaceutical manufacturers to Puerto Rico between 1976 and 1994 expired in 2006, but instead of moving back to the U.S. mainland, many manufacturers shifted their operations to countries which offered significant tax benefits, such as Ireland, China and India.  Puerto Rico’s economy tanked, and the Commonwealth fell into such debt that it effectively declared bankruptcy just months before Maria under a new law allowing territories to restructure their financial obligations.  As its tax revenues shrank and residents left the island when many manufacturing facilities shuttered and reduced operations, Puerto Rico’s infrastructure crumbled.

Despite the severe economic downturn before Maria, Puerto Rico still manufactured more drugs than any other state or foreign country, manufacturing 8% of all pharmaceuticals purchased by all Americans. In fact, the FDA declared a critical drug shortage throughout the entire country because of the severe damage Maria caused to Puerto Rico’s electrical grid.  Rather than implementing a comprehensive restoration strategy for Puerto Rico, the federal government continued to treat the Commonwealth as an afterthought, making recovery exponentially more difficult.

Less than three months after Maria, the Trump Administration and Congress passed the Tax Cuts and Jobs Act, which treated Puerto Rico as a foreign jurisdiction for tax purposes, despite the fact that it is a U.S. Territory.  This law punished Puerto Rico in the same manner as China, India and Ireland.  To make matters worse, although Congress authorized nearly $20 billion in aid to repair Maria’s damage to Puerto Rico, the Trump Administration held up the majority of these funds for nearly three years, finally releasing some $11 billion about a month before the November 2020 elections.  And while Puerto Rico converted much of its energy generation to natural gas from diesel (at the suggestion of Congress), the federal government rejected a limited Jones Act waiver to allow the Commonwealth to buy natural gas from the United States instead of foreign countries.  Paradoxically, the Jones Act – a law intended to promote national security – is being used to protect the financial interests of the American maritime industry while denying American citizens the ability to purchase American-made petroleum products, and thus these Americans must now rely upon foreign countries, like Russia, to generate their energy because there are no Jones Act eligible Liquefied Natural Gas carriers in the U.S. Maritime Fleet.  This will represent a loss of up to $2 billion a year in the U.S. economy and will force Puerto Rico to pay nearly $100 million a year more for natural gas once Puerto Rico fully converts to natural gas energy generation.

 

Although the most recent episodes occurred under the Trump Administration, the treatment of the people of Puerto Rico as second-class citizens is a distinctly bi-partisan phenomenon.  The Biden administration has shown no willingness to provide a limited waiver to the Jones Act to allow the Commonwealth to purchase American-produced natural gas, and in fact, opposition to the limited waiver comes from both sides of the aisle.  Although Sen. Menendez has offered a thoughtful proposal to change Puerto Rico’s treatment as a foreign jurisdiction, the Biden Administration and others in Congress have yet to move.  And while Democrats point to Medicare as their crown-jewel policy achievement, Puerto Rico is treated differently under national Medicare and Medicaid programs and receives substantially less benefits, historically up to 40% less,  than the rest of the county, under Democratic and Republican administrations alike.  This has affected Puerto Rico as bad – if not worse – than Maria as its health care system falters.

So let’s not try to re-write decades of bi-partisan neglect to blame the insurance industry for all of Puerto Rico’s recovery woes.  Its problems run much, much deeper.  This is not to say that there are no problems with some insurance companies failing to honor their commitments, as it is evident that there are serious issues that have impacted these vulnerable Americans.  This includes the insolvency of two of Puerto Rico’s main insurance local insurance carriers.  Repairing homes, however, will not fix Puerto Rico’s impoverished economy if there are no jobs that attract skilled workers and command a living wage.  Rather, if we are to meaningfully assist Puerto Rico in its long-term recovery, we have to confront the larger historical issues which multiplied the damage Maria inflicted upon Puerto Rico, and in a sense, still do.  Fortunately , there are some immediate steps that will help Puerto Rico, the United States, and particularly New Jersey.

The COVID-19 pandemic exposed America’s vulnerability to its dependence upon foreign manufacturing of pharmaceuticals and medical devices.  This has spurred efforts to create incentives for Life Sciences manufacturers to re-establish manufacturing operations back in the United States and strengthen the supply chain, including  promising proposals by Sen. Menendez and Congressman Frank Pallone.  In response, the White House recently released a report on revitalizing American manufacturing and strengthening supply chains.  New Jersey and Puerto Rico are perfect partners in this rebuilding process.

Puerto Rico has the infrastructure and experienced workforce to re-establish Life Sciences manufacturing, and the economic incentives already in place.  New Jersey is home to 14 of the 20 largest pharmaceutical companies in the world.  Making New Jersey an integral component in the Life Sciences supply chain for goods manufactured in Puerto Rico is a natural fit.  In Southern New Jersey, the Atlantic City International Airport is a large and vastly underutilized airport, next to highways, and has plenty of land to establish warehousing to base drug and medical device distribution.  Puerto Rico’s Aguadilla airport is nearly identical.  This is a perfect partnership, and to fund this expansion, Puerto Rico may already have a solution.

Puerto Rico enacted a series of initiatives beginning in 2012 that drastically lowered the tax rate for certain companies and individuals that moved to the Commonwealth, between 0% and 4% with no federal tax.  Thousands of businesses, high-net worth individuals and investors have relocated to the Puerto Rico to take advantage of these tax incentives.  Hence, private sector funding may already be there.  New Jersey should create incentives that would allow for Puerto Rico investment in New Jersey’s Life Sciences infrastructure while protecting their low-tax status.  New Jersey would lose nothing while gaining investment and economic expansion.

Following Sen. Menendez’s and Congressman Pallone’s lead, the New Jersey Legislature, along with Governor Murphy, should convene with their counterparts in Puerto Rico and representatives of the Life Science industries located in New Jersey to develop a comprehensive strategy to create incentives to locate new, and expand existing, manufacturing facilities in Puerto Rico that utilize a supply chain that comes through New Jersey.  Investment from Puerto Rico to create the supply chain infrastructure in New Jersey, which would otherwise benefit from the tax structure in Puerto Rico, should be treated similarly here, thereby tapping into a potential vast funding source.

In this manner, America could re-establish its Life Sciences manufacturing dominance; Puerto Rico could rebuild its economy; and, New Jersey could create jobs, spur investment and become the backbone of the Life Sciences supply chain.  Moreover, it could lay the framework for future collaborations that would benefit both New Jersey and the Commonwealth.  It’s a win-win situation that meaningfully assists in Puerto Rico’s recovery and that treats the Commonwealth as it should: as an equal.

 

 

William J. Hughes, Jr.is a principal of Porzio Bromberg & Newman, P.C., with offices in Puerto Rico (Condado and Hato Rey), New Jersey (Morristown, Ocean City, Trenton and Princeton), New York (New York City) and Massachusetts (Westborough).  The Firm’s subsidiary, Porzio Life Sciences, offers compliance consulting services and software to the pharmaceutical and medical device industry throughout the globe, and Hughes represented the Commonwealth of Puerto Rico regarding its Jones Act waiver application.    The views expressed in this piece are those of the author and do not necessarily reflect the views of Porzio Bromberg & Newman, P.C. and its family of companies.

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