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Supply Chain Fears Bolster Medical Manufacturing Tax Break Push

Pandemic-induced concerns about the international supply chain for face masks, pharmaceuticals, and other medical supplies are stoking renewed interest in tax incentives to lure manufacturers back to the U.S.

Lobbyists and advocates see the next pandemic relief package as a potential vehicle for new tax benefits for pharmaceutical and medical manufacturing companies. Negotiations aren’t expected to pick up again until July, but the conversation so far on this issue has focused on recently introduced House bills that could be included in a relief package.

Advocates point to the benefit a tax incentive could have on the economy of Puerto Rico, already a U.S. hub for pharmaceuticals and medical supplies. Supporters also hope the carrot of a tax incentive would preempt a “Buy America” approach to discourage the purchase of medical equipment made overseas, which would be in line with previous trade policy set by the Trump administration.

The push faces some hurdles, including the complicated politics of creating a new tax break for multinational corporations and competition from other sectors looking for targeted relief in the next relief package.

But the issue is on the radar of the Trump administration: Peter Navarro, director of the White House Office of Trade and Manufacturing Policy, told the Washington Examiner in late May that the pandemic highlighted the need to “bring home” the pharmaceutical supply chain. He described it as a national security and economic security issue, in addition to being important for public health.

The White House didn’t respond to multiple requests from Bloomberg Tax to interview Navarro.

The Rich Port

Puerto Rico is poised to benefit the most from any incentive targeted at boosting pharmaceuticals and medical manufacturing.

The island is already a hub for medical manufacturing in the U.S., thanks in part to the legacy of a former business tax incentive, known as Section 936, that sunsetted in 2006.

While other manufacturing largely moved overseas after the tax break expired, Puerto Rico still plays an outsized role in U.S. medical manufacturing. The commonwealth in 2019 accounted for nearly a quarter of U.S. pharmaceutical and medicine manufacturing exports, making it by far the top state or territory in that category of economic output, according to data compiled and published by the Bureau of Labor Statistics in April.

Medical manufacturing, along with tourism, anchor the territory’s struggling economy; according to Puerto Rico’s Department of Economic Development and Commerce, the U.S. commonwealth is home to more than 70 medical device manufacturing plants and 49 FDA-approved pharmaceutical plants that make everything from antibiotics to blood pressure medication.

Lobbying Push

Pharmaceutical lobbyists have stepped up their outreach to Capitol Hill on doing more to help the industry in Puerto Rico, according to disclosures in the Senate’s lobbying database.

Lobbyists for AbbVie Inc., Amgen Inc., Pfizer Inc., and Johnson & Johnson, along with the industry group Alliance for Biopharmaceutical Competitiveness and Innovation, all reported work on issues pertaining to economic activity or federal tax issues with Puerto Rico during the first quarter of 2020.

“We’d love to see U.S. manufacturing policy that includes Puerto Rico, as well as the rest of the country,” Louise Weingrod, vice president of global taxation at Johnson & Johnson, told Bloomberg Tax in a recent interview. “That would help stimulate the economy on the island, which as we all know has suffered many setbacks in recent years.”

The industry also wants to avoid what it sees as a more negative outcome. Health care industry groups are actively lobbying against legislation that would bar the federal government from buying pharmaceuticals or other medical products sourced overseas.

Companies moved their manufacturing to countries like China and India to cut costs and aren’t in a hurry to spend more, and even with tax incentives—and lower labor costs than the mainland U.S.—Puerto Rico might struggle to compete.

How to Do It

Several House lawmakers have recently introduced legislation that would create new incentives to bring medical manufacturing back to the U.S.

An industry source said one approach that appears to being gaining steam is H.R. 6930, sponsored by Rep. Buddy Carter (R-Ga.), that would create a 30% tax incentive for companies that open production plants in high-poverty communities. Carter, in a May statement, said that would reduce the advantage that China and India have when it comes to labor and other costs.

“The COVID-19 pandemic has made it more clear than ever that America cannot continue to rely on foreign entities like China for anything, especially when it comes to lifesaving medications,” Carter said.

Sen. Tim Scott (R-S.C.), who sits on the Senate Finance Committee and is one of the architects of the opportunity zones tax break, has been circulating Senate companion legislation to that bill.

The National Taxpayers Union has advocated for another approach from Rep. Chip Roy (R-Texas) that would allow for the accelerated depreciation of nonresidential real estate for pharmaceutical companies and manufacturers of medical equipment and supplies that relocate facilities back to the U.S. Revenue from sales of land and facilities abroad would be exempted from taxes under the bill (H.R. 6690).

“A logical place to do that would be down in Puerto Rico, but you can do that anywhere,” said Ryan Ellis, a conservative tax lobbyist who has been engaged on the issue. “You want to avoid a tax benefit that you think is going to result in all of these ventilator factories being built in Puerto Rico,” but just creates a tax shelter.

Narrower Approach More Palatable

National Taxpayers Union president Pete Sepp said that while he would prefer a broader approach towards establishing incentives for moving manufacturing back to the U.S., a narrower effort could be more practical.

“Probably Congress would prefer to take the path of least resistance and make it Puerto Rico-specific or territory specific, or even industry-specific,” Sepp said. “Clearly though, looking at the tax side of the equation has a benefit to trade policy and other restrictions.”

But the idea of creating a new tax break for multinational corporations faces political hurdles, especially given the pharmaceutical industry’s history of shifting headquarters to minimize its tax payments.

"[I]t is unclear how tax incentives will improve the resilience of the supply chain when so far they’ve been most effective at providing to an industry that has already handsomely benefited from offshore tax incentives,” a House Democratic aide for a member of the Ways and Means Committee said.

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