When the Editorial Board of the Wall Street Journal called Puerto Rico “second-class,” they were hinting at the reason for President Donald Trump’s refusal to waive the Jones Act restrictions on maritime transportation for hurricane relief after Hurricane Maria devastated the island. A few days later, facing public outrage, President Trump granted a waiver for 10 days. In contrast, the Trump administration granted similar waivers to Texas and Florida immediately after Hurricanes Harvey and Irma crashed into those states. All told, it took President Trump eight days to grant a waiver to Puerto Rico.
The Wall Street Journal Editorial Board is right. The Jones Act waiver incident, far from being an exception, offers a window into the history of U.S.’s inconsistent treatment of the Caribbean island it calls its commonwealth.
On Wednesday, September 20, Hurricane Maria, a Category 4 hurricane with sustained winds of 155 mph, made a landfall in Puerto Rico. All reports indicated that this was a potentially catastrophic storm. FEMA and local authorities were unprepared for the scale of destruction.
The electrical and telecommunications grids went down, and the island’s airports and ports were left inoperable. More than half of the island’s households lacked running, potable water, thousands of homes were destroyed, and over ten thousand people were living in shelters. Most hospitals were inoperable. Flooding and the ensuing contamination will endanger the lives of tens of thousands in the weeks and months to come.
The magnitude of this catastrophe was predictable days prior to the storm and evident shortly after. The USNS Comfort hospital ship was sent to aid relief efforts for Hurricanes Katrina and Rita immediately after the storms. But it took the U.S. military six days to order the deployment the Comfort to assist Puerto Rico. Ten days after the storm the Comfort was still in Hampton, Virginia, and expected to arrive in Puerto Rico thirteen days after the storm’s landfall on the island.
National leaders called for troops to be sent to assist Puerto Rico. After public outcry, the Trump administration sent Army Lt. Gen. Jeff Buchanan to coordinate a military response to the crisis. It took eight days to send Gen. Buchanan. His first public assessment of the situation made clear the magnitude of the crisis: there are not enough troops, helicopters, and vehicles to assist the hurricane-ravaged island, and he called the damage “the worst I’ve ever seen.”
A history of “second class” treatment
The Jones-Shafroth Act of 1917 extended statutory citizenship to residents of the U.S. territory of Puerto Rico. It also created a local government. But it maintained U.S. control over fiscal and economic matters and granted triple tax exempt bonds. That is, it made Puerto Rico bonds earnings exempt from federal and local taxes to make them attractive to investors in municipal capital markets. Under this act, the U.S retained authority over currency, defense, immigration, and other conventional domains of federal jurisdiction—including disaster relief!
The (maritime) Jones Act is far from the only policy that has contributed to the second-class treatment of Puerto Rico. The Revenue Act of 1921 exempted from U.S. taxation all corporations that received at least 80% of their income from U.S. possessions if at least 50% came from active business. Income was taxable on repatriation but liquidated distributions were tax-free. These federal tax incentives were intended to foster industrial development in Puerto Rico through the expansion of operations of American corporations. And federal tax exemption did affect economic development, fostering the post-World War II expansion of labor-intensive manufacturing.
The Nationality Act of 1940 extended birthright citizenship and constitutional protections to Puerto Rico, which meant that, for citizenship purposes, being born in Puerto Rico became tantamount to being born in the United States.
These territorial laws were intended to strengthen U.S. permanence in Puerto Rico and in many cases purposely intended to keep the “second-class” status of the territories. For example, granting citizenship to Puerto Ricans was not intended as a step toward the incorporation of Puerto Rico as a territory or toward statehood, let alone toward autonomy or independence.
In 1970s, the island economy relied on processing oil imports from Arab countries and then shipping them to the United States. When President Nixon declared an embargo of oil from Arab countries in 1973, the oil refinery industry collapsed, and with it, Puerto Rico’s economy. In 1976, Section 936 of the Internal Revenue Code was created to support the island’s economic recovery by exempting American companies from federal taxes on income earned in Puerto Rico.
Section 936 worked. By the early 1990s, pharmaceutical and high-tech manufacturing had become the indisputable economic anchors of the island’s economy. But the companies favored by Section 936 were reaping billions of dollars in profits exempted from federal taxes. A pro-statehood administration in Puerto Rico saw the law as an impediment to a change in status. President Bill Clinton, who had tried for years to close a perceived tax loophole, finally found a willing local ally to eliminate Section 936.
As part of the Small Business Job Protection Act of 1996, Congress approved a 10-year phase-out of Sec. 936 tax credit. Presumably, closing the loophole would have provided funding for business development in the United States. But in reality, multinational corporations repatriate only a small fraction of their profits, meaning that while Puerto Rico lost, the U.S. didn’t gain investment capital either.
As a result, Puerto Rico lost new investments in the pharma and high-tech industries as companies withdrew deposits from local banks, and Puerto Rico’s economy entered into a steady decline. The program ended completely in December 2005. Puerto Rico’s most recent economic crisis began shortly after. Acrimonious local politics prevented the development of a cohesive alternative economic development strategy to counter the loss of federal tax incentives, and by the end of 2007 the Great Recession further pushed the economy into a protracted recession.
Puerto Rico was in the midst of a prolonged recession and a public debt crisis prior to Hurricane Maria. Borrowing through triple-tax-exempted municipal bonds in capital markets became a pillar of the post-war economic development. Public borrowing made feasible the development of public corporations that provided the country with electricity, water, roads, communications, public buildings, and all types of economic infrastructure. But when the recession hit and many of these public corporations could not service debt payments and maintain operations, Puerto Rico was not able—according to U.S. law—to declare bankruptcy to protect public corporations from creditors.
The U.S. neglect of its territory connects to the debt crisis. In 1984, Congress adopted Section 903(1) of the Bankruptcy Code and introduced a new definition of “State” that excluded Puerto Rico’s municipalities from legal recourse to municipal bankruptcy. To this day, no one has provided a consistent and credible explanation as to why Puerto Rico’s exclusion was enacted as part of the law. Yet, exclusion of Puerto Rico from declaring bankruptcy led directly to the enactment of PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act of 2016.
The Affordable Care Act (ACA) of 2010 also had clear adverse implications for Puerto Rico. As part of Congressional negotiations, instead of extending ACA to Puerto Rico, Puerto Rico receives a block grant for the first six years and thereafter depends on ongoing appropriations to sustain Medicaid. Puerto Ricans pay Medicare taxes and those federal benefits are not in question, but the Medicaid formula for Puerto Rico caps reimbursement at 50 percent. The ACA funds expired this year, and Congress approved a stopgap measure of $300 million supplement instead of the estimated $900 million needed for the year. Until recently, the Commonwealth government borrowed to cover the cost for Medicaid and other programmatic services. With mounting debt, borrowing is no longer an option.
With Puerto Rico crippled by public debt exceeding seventy billion and pension obligations estimated close to fifty billion, Congress had to act to provide a legal mechanism to restructure the island’s debt. PROMESA established the Financial Oversight and Management Board (FOMB) to oversee Puerto Rico’s finances and budgets, and provides for a court-supervised debt restructuring. PROMESA also provided for a stay in debt service of almost a year to allow the oversight board to examine options and possibly negotiate with creditors.
For many, PROMESA offered a way out of the debt crisis and the promise of economic prosperity. But PROMESA generated a strong populist opposition from the very beginning. Over time, massive demonstrations against the policies of the oversight board and the populist approach of Governor Rosselló led to less favorable public opinion about PROMESA. The FOMB is generally perceived in Puerto Rico as a colonial “junta.”
Puerto Rico’s future
It is too early to know the long-term impact of Hurricane Maria’s devastation of the country, the extent of the ongoing loss of life and property, and the depth of frustration with FEMA and local authorities’ responses to the storm.
Yet it is clear that when troops are not sent right away to help American citizens in need, or when corporate interests are put ahead of emergency relief efforts such as the waiver of the Jones Act, Puerto Ricans on the island and the diaspora feel a sense of neglect and insensitivity—a sense of grievance backed by the actions of the federal government for the last century. The Wall Street Journal editorial “Second-Class Puerto Rico” resonates with citizens who have lived a history of mixed policies—Jones Act, Section 936, Medicaid, PROMESA—that at times are beneficial and at times hurt the island and its dependent economy. Over time these policies have changed with the concerns of the U.S. government, which often ignore the direct or unintended consequences of these policies on Puerto Rico and its U.S. citizens.
Puerto Rico will need federal emergency assistance to begin its recovery. As the experience of prior storms and natural disasters suggest, Congress will enact a legislative package to assist Puerto Rico. To begin with, it is important to waive federal matching requirements for FEMA for disaster-related public assistance programs. In the case of Puerto Rico, the whole island was affected by the storm. Unlike mainland states after similar disasters, there is no sector of the Puerto Rican economy intact to generate the tax revenues to provide matching funds.
Other legislative components should include addressing and resolving concerns over the Jones Act, a Community Development Block Grant for Disaster Recovery (CDBG-DR), and Medicaid. Puerto Rico’s recovery is likely to take years; a ten-day temporary waiver of the Jones Act is insufficient. Legislation pending in Congress calls for complete and permanent exemption of Puerto Rico, though some members of Congress call for a defined period of one-year minimum waiver.
When Hurricane Sandy devastated New York, a CDBG-DR provided $16 billion to repair and restore the areas affected by the storm. Funding was used to rebuild communities’ infrastructure, housing, businesses, and to implement coastal resiliency programs. Regarding, Medicaid, Puerto Rico should be treated as a state, including the elimination of the ceiling on reimbursement.
Further down the line, Washington needs to help Puerto Rico restore its energy infrastructure with a modern grid. The island’s energy infrastructure was weak and antiquated to begin with and needs to be more storm-resistant. Alternative sources of energy that support essential services, such as water distribution, hospitals, first responders, communications, and other essential services, need to be encouraged.
After a century of Puerto Rican U.S. citizenship, it is clear that the main goal of the Jones-Shafroth Act of augmenting a “bond” with Puerto Rico (and Puerto Ricans) by granting citizenship has been achieved. But the question is, “Is American citizenship worth the same for Puerto Ricans as it is for other Americans?” For too long, Congress has looked the other way while its inconsistent policies continue to harm Puerto Rico. It is high time for members of Congress to pay attention and act before the humanitarian crisis facing 3.4 million American citizens reaches a point of no return.
Edwin Meléndez is a Professor of Urban Affairs and Planning at Hunter College and the Director of the Center for Puerto Rican Studies. He is the author or editor of ten books including Latinos in a Changing Society (Praeger, 2007) and Communities and Workforce Development (Upjohn Institute: 2004).
