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The Bond Buyer

Tax And Economic Implications Of Statehood

December 28, 2000
Copyright © 2000 American Banker, Inc. All Rights Reserved.

In the closing days of his presidency, Bill Clinton has issued an executive order that calls for the formation of a task force to examine the political status of Puerto Rico , and to implement changes. The order details the scope, function, and overall goal of the task force, which will issue its report no later than May 1, 2001.

What this means for the commonwealth, which enjoys triple tax exemption on its bond sales and special tax breaks for corporations, remains to be seen.

"The status of Puerto Rico is not related to economic issues, but to political issues," said Carlos Colon, executive vice president of Government Development Bank for Puerto Rico . "The economy of every other state in the union is strong, and they don't have the triple tax exemption. Why would Puerto Rico be any different if it became a state?"

When Hawaii and Alaska -- both former commonwealths that had the triple tax exemption -- became states, their outstanding debt was grandfathered, and all successively issued debt was taxed at the same level as every other state's. The residents and corporations of Hawaii and Alaska were immediately subject to federal income tax. In the eventuality that Puerto Rico does become a state, the infusion of federal income tax may impact its economy. But it would probably not affect the outstanding debt of the commonwealth, its agencies, and public corporations that currently total over $20 billion.

"Imposing federal tax would affect the economy if the commonwealth has to reduce its tax rate to offset the new tax burden on its citizens. If that happens, it will be a principal and immediate credit issue to be analyzed and monitored," said Timothy Blake, a senior analyst for Moody's Investor Service, "although it remains in question whether the federal tax would be implemented all at once or if it would be phased-in."

The executive order and the task force will examine what the people of Puerto Rico want, in terms of becoming a state or remaining a commonwealth, as well as detailing to all parties involved the feasibility and ramifications of either choice.

The task force shall include designees of each member of the president's cabinet and the co-chairs of the President's Interagency Group on Puerto Rico . And it shall be co-chaired by the attorney general's designee and a co-chair the Interagency Group. It shall also provide advice and recommendations to assist the Executive Office of the President in fulfilling its responsibilities under Public Law 106-346 to transfer funding to the Puerto Rico Elections Commission for public education.

"The executive order will only define the issues. Any movement toward defining the different political choices in a clear and objective way, I favor," Colon said. "The people of Puerto Rico are divided between the status quo and statehood , and both of those are tied to keeping and improving relations with the United States. A very small minority favors independence."

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