When Washington switched off the tax break

For decades, Section 936 of the United States Internal Revenue Code allowed mainland corporations to shield from federal tax the income they generated in Puerto Rico. It is easy to overlook now, but that single provision fueled a real manufacturing boom on the island — especially pharmaceuticals — from the 1970s to the 1990s. Factories opened. Jobs arrived. Government revenue grew with them.

Congress began dismantling it in 1996, voting a ten-year schedule that eliminated it completely in 2006. A decade sounds like plenty of margin, and in a way it was, but the phase-out coincided with a sustained fall in manufacturing jobs and slower public revenue through the 2000s, as the incentive that had drawn those factories to the island quietly disappeared.

As that revenue base eroded, the government of Puerto Rico did what governments under fiscal pressure tend to do: it borrowed more to cover operating deficits, year after year, instead of closing the growing gap between what it spent and what it collected. That dynamic — shrinking revenue, more debt to cover the difference — is often cited as one of the root causes of the debt crisis that would dominate the following decade.

It is a quieter story than the downgrades and bankruptcies that came after, and it rarely gets the same attention. But the end of Section 936 in 2006 sits right at the beginning of the chain this blog follows from here: a federal tax decision, taken gradually and with a decade of warning, that still helped set the terms of a collapse nobody was imagining in 1996.

It also serves as a reminder that the debt crisis was never only a story of reckless local borrowing. It began, in large part, with a federal policy choice made in Washington, switched off on Washington's calendar, over which the government of Puerto Rico itself had almost no voice, even as the island would spend the next two decades absorbing the consequences.

Sources: Crisis de la deuda del gobierno de Puerto Rico. Freeze 2026-08-22.