By The Star Staff
The Department of Economic Development and Commerce of Puerto Rico (DDEC by its Spanish acronym) on Tuesday released the study “Evaluation of the Performance of Economic Incentives,” consisting of an analysis of the performance and impact of the different programs covered under the Puerto Rico Incentives Code (Law 60-2019).
“This study reflects the results of the return on investment of incentives. Although the agency had conducted other studies, it had never compiled and created a database as robust as this analysis, which used state and municipal tax returns, payroll reports, annual reports, and beneficiary data,” DDEC Secretary Manuel Cidre Miranda said. “This type of effort becomes an essential instrument for making public policy decisions and monitoring and supervising incentives.”
In the study of the different incentive programs conducted by the firm Abexus Analytics, tax revenues generated a total of $3.2 billion, while those generated by incentivized foreign corporations in the manufacturing industry reached $2.3 billion. The latter figure represents a positive and significant return on investment (ROI), in contrast to domestic entities, whose results were neutral, according to the study. Regarding resident investors (Law 22) and the export of services (Law 20), both incentives positively impacted the return on investment formula, the study found.
In addition to attracting individuals who generate a fiscal impact, the study showed that, under what is known as Law 22, the income paid in 2020 was $130 million, while an increase in collections was experienced for 2022 when $144 million was reported in that line, and the contribution in consumption taxes was double for that period with $24.5 million.
The services export program showed notable results, meanwhile, as the services sector was strengthened and employment and salary figures improved.
“In 2020, more than 11,562 jobs were reported, which increased to 22,192 jobs in 2022,” emphasized Carlos Fontán, director of the Business Incentives Office in Puerto Rico.
The sectors that the report says should re-evaluate their approach are the creative industries and agriculture, which had negative investment returns. In the tourism sector, incentives have led to developing hospitality and entertainment infrastructure, but their historical ROI is neutral, the study found.
Cidre said DDEC will be carefully analyzing the report’s results to determine how to continue strengthening those programs that reflect positive performance and potentially reformulate those that are not performing as expected.
“Although the incentives have had positive impacts in specific areas, it is a fact that there is room to improve their design and application to ensure alignment with the strategic objectives of economic development,” he said.
Using granular administrative information and analyzing data collected through a broad interagency effort, the report addresses a systemic evaluation and comprehensive analysis of incentive programs while considering multiple pieces of incentive legislation from previous years.
DDEC Deputy Secretary Humberto Mercader stressed that “this report sets a new standard in analysis criteria for creating an increasingly useful and complete intelligence tool.”
“It is an important step toward nourishing public discussion about this important pillar of economic development and base the conversation on data that allows us to improve and expand our stimulus efforts for the economy,” he said.
In addition to the extensive collection of data through documents provided through the collaboration of agencies such as the Treasury Department, the Tourism Company, the Agriculture Department and the Municipal Revenue Collections Center, among others, there was a real opportunity cost analysis, which served to accurately estimate the cost of those incentives that grant preferential tax rates. As part of that analysis, a perspective was incorporated from the point of view of international companies to compare Puerto Rico with the countries with which it competes. This type of analysis avoids biases and estimates that do not consider the economic behaviors of the beneficiaries of the incentives, the DDEC secretary noted.
“When studying incentives, for DDEC it is critical not only to look at the return on investment, but also other aspects that are less discussed but are very important, such as their effect on business retention and the economic stability that can represent in the long term,” Cidre stressed. “That is why on this occasion, opportunity cost was contemplated to model what the response of companies would be to different tax burden scenarios.”
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