Another consideration: Should Puerto Rico become a state, the exemption would likely end. Given the territory's late-2012 nonbinding referendum on statehood showed 61% of Puerto Ricans support the idea, that might not be as far-fetched as it seems. And tax policy frequently shifts -- so this policy may come to an end the moment a different administration takes the reins in San Juan or if this proves politically unpalatable for other reasons.
For example, while lowering its corporate tax rate a la Ireland isn't in the cards legally today, this wasn't always the case. To combat unemployment and poverty on the island in the 1960s, the federal government used various tax incentives to lure U.S. manufacturing operations there. In 1976, Congress added a tax credit that effectively exempted profits U.S. companies attributed to Puerto Rico.
The combination of a tax credit, incentives, the proximity to the U.S. and available industrial sites prompted many U.S. companies to flock to the island. However, a 1993 law cut the full exemption to 40%, and a 1996 law phased out the tax break over a 10-year period. By 2006, many multinationals in Puerto Rico shuttered their operations.
Whether San Juan gets a big return on this move is anyone's guess -- and we wonder why, if they want to truly compete, they don't just enact a flatter, simpler taxes across the board. But either way, attempting to recruit business to the island is clearly a sensible aim and taxes are powerful incentives. In that sense, the proposal seems headed for the right target.This article was written by an independent contributor, separate from TheStreet's regular news coverage.