By Kristin Roberts

MIAMI, Oct 5 (Reuters) - Puerto Rico's relentless push to win business tax incentives from Washington failed last week, leaving the island government to explain the stumble and start considering other ways to promote development, analysts said.

Wall Street analysts and economists in Puerto Rico said the governor's administration never factored the tax incentives into its official revenue projections.

But after Gov. Sila Calderon and the island's representative in Washington, Anibal Acevedo-Vila, so aggressively campaigned to win incentives under section 956 of the U.S. tax code, the administration must show it has a Plan B for development, analysts and the government opposition said.

"For three years they pushed 956 as the pillar of their economic development program," said Manuel Ortiz, campaign manager for Pedro Rossello, who is running as an opposition candidate for governor. "It didn't even get to a Senate vote."

Calderon had called the tax incentives a "life or death" issue for Puerto Rico. It would have given U.S.-controlled foreign corporations an incentive to invest in the mainland the surplus income earned from island operations.

She warned that any failure of the proposal could result in a mass migration of Puerto Ricans to the mainland in search of jobs and a large spike in federal welfare rolls.

The U.S. Senate Finance Committee, however, did not consider it last week in a mark-up session.

"It was not a good day for Puerto Rico," said Zena Polin, an advisor to Puerto Rico's secretary for commerce and economic development.

Analysts said they were not surprised.

"It would have been really positive. It would have been a windfall," said Kenneth Gear, credit analyst at Wall Street firm Standard & Poor's Ratings Service. "But I wonder how much of that life or death comment was posturing for the benefit of the federal government.

"We never viewed it that way," he said.

Moody's Investors Service also never factored any benefit from new tax incentives into its credit rating on the U.S. territory, according to analyst Timothy Blake.

Puerto Rico's top officials, including Department of Economic Development and Commerce Secretary Milton Segarra, met through Thursday and Friday evening to weigh the government's next steps. Segarra could not be reached for comment.

Many economists both in Puerto Rico and the mainland have argued the government should be focused on diversifying the economy, not winning new incentives for U.S. businesses that look, they say, like corporate welfare to Washington.

Miguel Soto-Class, director for the San Juan-based Center for the New Economy, has long contended that Puerto Rico must move into information technology industries and take advantage of its bilingual citizenry. He recently noted that Puerto Rico could have been the international banking and financial center of Latin America, a role Miami has claimed.

The full impact of the loss of federal tax incentives for manufacturers is still unclear. Puerto Rico has benefited from more than 75 years of various federal incentives that lured American businesses to the Commonwealth.

Since tax breaks began phasing out in 1996, Puerto Rico's manufacturing sector, the economy's backbone by design, has lost 30,000 jobs, or 20 percent of its work force. Most of the losses have been in low-wage industries such as textiles.

The big drug companies, such as Eli Lilly and Co. (nyse: LLY - news - people) and Abbott Laboratories Inc. (nyse: LLY - news - people), continue to invest to build and improve facilities along Puerto Rico's western "pharmaceutical corridor."

The government may also consider moving to a broader sales tax from an excise tax to capture more revenue from a wider taxing of purchases, S&P's Gear said.

Copyright 2003, Reuters News Service