Puerto Rico: A Case Study in Tax Incentives and Acceleration to Build a Startup Ecosystem

How Puerto Rico uses taxes and investment to spur startup growth

Puerto Rico is known to most as either a sun-strewn island or a bankrupt paradise but it would like to be known in the future as a startup hub.

Like other US territories and municipalities, such as Miami, Puerto Rico has mixed tax incentives and direct investment to push both startups and investors to move to the island.

Puerto Rico is different, however, because of the sheer power of their incentives. Unlike Florida and other states, which eliminate state taxes but cannot limit the federal tax burden, residents of Puerto Rico do not have to give up their US citizenship but can become eligible to skip most federal tax.

The unique exemption comes from Puerto Rico's status as a territory, and because of the island's need for new capital infusion, the federal government has not addressed the exception and has allowed Puerto Rico to exploit it.

From a startup culture perspective, Puerto Rico has a long way to go but there have been early successes; one such being Parallel 18. For full disclosure, I have bias: I was on the judging panel in Puerto Rico last year that selected the program participants for a South by Southwest presentation earlier this year, and I know the program leaders and have invested in one of the companies before it entered the program.

With all that noted, Parallel 18's statistics show what is possible when governments are willing to directly infuse capital and expertise in companies, while pairing it with more longer-term tax incentives. Each company in the program received $40,000 in cash equity free, as well as assistance, which was a controversial investment of government money when proposed. But, based on the program's own tracking statistics, the participating companies have already generated well over $1mn in direct investment in the Puerto Rican economy, and over 90 full or part-time jobs.

That last point is the most important. For states and municipalities evaluating whether to invest government cash and tax revenues into early-stage companies, the key benefit is they are getting new jobs that are actually created out of the investment. Unlike big companies, which generally "create" jobs by hiring or firing employees and shuffling people between them, startups create jobs that did not previously exist.

This net gain is very empowering for communities, especially in places where high quality, sustainable jobs, such as those in engineering, are key to driving future growth.

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