Small firms in Puerto Rico

The literature regarding tax incentives is extensive, but debate persists, mainly because of conflicting results. Nevertheless, when limiting the analysis to smaller areas (i.e., Puerto Rico), incentives seem to be effective. In terms of tax incentives as a development strategy, the goal in Puerto Rico has always been to make the U.S. territory attractive to U.S. capital. Thus, the goal has been achieved by subsidizing the cost of capital by means of tax exemptions. Initially, this vision was somewhat successful, allowing Puerto Rico to escape bottom-of-the-barrel socio-economic conditions for which it was known as the "poorhouse of the Caribbean." Although no longer the poorhouse of the Caribbean, Puerto Rico is now at the bottom of the barrel once again, but now as the poorhouse of the United States. Tax incentive legislation in Puerto Rico dates back to the late 1800s. However, the focus of this paper is the Economic Incentives for the Development of Puerto Rico Act (Act 73 of May 28, 2008). Following Puerto Rico’s Industrial Development Company (PRIDCO), Act 73 was a combination of aggressive tax incentives for attracting business. As in previous legislations, tax credits were linked to the physical location of operations with a longer duration of credits linked to a location outside of the Capital City-Metropolitan Area. However, the explicit narrative of Act 73 was to attract business not just from the U.S. but any (local, continental or foreign) business. The government of Puerto Rico introduced a new Act targeting small and medium size businesses in 2014 and data collection under act 73 ended in 2012. We used the dataset from PRIDCO that captures all firms locating in Puerto Rico by 2012. Descriptive statistics show that small firms (50 workers or less) constitute more than 80% of the firms in the dataset. While controlling for transportation costs, we implement a Probit model and our results indicate that small firms under Act 73 are more likely to be local, located in targeted areas and less likely to be owned by women.