Cold Water Thrown on Calderon Corporate Tax Exemption Request

February 15, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Two key congressional officials cast serious doubts on Governor Sila Calderon’s request for permanent federal tax exemption for 90% of the profits that companies based in the States transfer from Puerto Rico, but another influential congressman (with close ties to Calderon) raised hopes that the measure will eventually pass

After meeting with Calderon and Economic Development and Commerce Secretary Ramon Cantero Frau in Washington, Bill Thomas (R-CA), the chairman of the House of Representatives Ways and Means Committee, suggested that he is willing to try to help Puerto Rico retain manufacturers but opposes the proposal. His position is critical. His predecessor, former Representative Bill Archer, single-handedly blocked Clinton Administration efforts -- which were supported by all Democrats and a number of Republicans in Congress -- to extend one of the two federal incentives for companies based in the States to do business in Puerto Rico.

That incentive, a tax credit for wages and capital investments in the islands under Section 30A of the Internal Revenue Code (IRC) was limited under a 1996 law limited to existing claimants; caps the amount of credits that a company can take beginning this year; and ends the credit at the end of 2005.

In expressing skepticism about the Calderon proposal, which would amend Section 956 and other sections of the IRC, Thomas said he opposes a new tax subsidy for Puerto Rico. In raising the ‘old’ subsidy, he was understood to refer to the other federal incentive for investing in Puerto Rico, a credit under IRC Section 936. It provides a tax credit for income merely attributed to territories. The 1996 law also sunsetted it after years of strong federal criticism.

A key reason that Congress allowed it to sunset was that it enabled companies to reduce their tax bills by many times more than the wages they pay, although its purpose was to encourage companies from the States to make job-creating investments in U.S. territories. Ways and Means Committee staff, like other tax policy officials in the federal government, see the 956 amendment as a thinly veiled attempt to resurrect Section 936. It "whiffs of a scam in terms of benefit to Puerto Rican development" in the words of one. (Another called it "cash and carry.")

Thomas recognized that Puerto Rico is "stuck with high wages and they’re losing their subsidy," possibly suggesting an extension of the 30A credit for wages, etc. But he also said "a regional solution" is needed, telling Calderon that the issue needs to be considered in the context of trade policies such as the new law providing free access to the U.S. market for products of most Caribbean Basin countries. New international trade agreements prohibit subsides which would create unfair trade competition. The agreements, according to Thomas, have enabled countries like Mexico to compete with Puerto Rico by giving low-wage manufacturers access to U.S. markets as freely as Puerto Rico, when Puerto Rican manufacturers must pay at least U.S. minimum wage.

Thomas’ criticism of the proposal surprised Committee aides, who say that generally a proposal is still being considered until it is formally acted on or passed over by the Committee. But Thomas’ statements did not discourage Calderon who later was reported to have said that Thomas supports the proposal…to the chagrin of his staff.

Meanwhile, a Democratic Senate key staffer on the issue said Finance Committee Chairman Max Baucus (D-MT) and most other members of Congress also do not support the proposal. The official said that many in Congress do not think it is "a good idea" and he could not foresee it passing this year or gaining enough support to pass for "years." At the same time, he said that Calderon has been squandering the opportunity to get Section 30A extended now that Archer is retired in favor of lobbying for Section 956.

His remarks threw cold water on Calderon’s "deadline" for the proposal of "this summer" as well it ever having a chance of passage. However, Calderon said that she has "a commitment" from Senate leaders to pass it.

In her surprising statement, the Governor said she would "accept" the 956 amendment on a one-year basis if it were accompanied by a commitment to enact it into law on a permanent basis next year. The idea of enacting it on a one-year basis was floated last fall by Senator Robert Torricelli (D-NJ), but he decided not to pursue it after Baucus declined to go along, and had reservations about the idea of making it permanent.

Calderon’s optimism about the proposal got some support from an equivocal statement made by one of its two lead House sponsors, Representative Phillip Crane (R-IL). Crane is the second ranking Republican on the Ways and Means Committee, having been pushed aside for the chairmanship by Thomas. (The other lead sponsor is Representative Charles Rangel (D-NY), the top ranking Democrat on the Committee.)

While staying with Calderon in the Governor’s mansion, Crane said he would try to convince House members to accept the proposal in the economic stimulus legislation that was being considered at the time, in the event that the Senate had adopted it. He also acknowledged that the proposal is so lacking in support among members of Congress of both parties that it was not included in any of the stimulus bills. (The Calderon Administration had lobbied hard for inclusion.)

The Bush Administration is still publicly silent on the issue, but Treasury officials have quietly communicated objections to the Ways and Means and Finance Committees. Since the tax committee leaders generally agree with their concerns, they consider the possibility of the amendment to be so "remote," one said, as to not require more public criticism.

The proposal cannot be counted out entirely, however. Calderon, her lobbyists, and lobbyists for pharmaceutical companies that stand to save billions of dollars have prevailed upon some key Members of Congress to sponsor it, including Senator John Breaux (D-LA), in addition to Crane and Rangel. Breaux has often been a bridge between the two national parties in working out tax legislation. The lobbying has also signed on some other senators and dozens of House members because they ‘want to help Puerto Rico’ in some way.

White House Reiterates Commitment to Status Choice

A White House press aide issued a statement noting that President Bush supports the people of Puerto Rico in choosing the island's status themselves, and has designated interim members of the President’s Task Force on Puerto Rico’s Status to review the status options. The statement responded to an assertion by Resident Commissioner Anibal Acevedo Vila (PDP) that the Bush Administration is not interested in the subject.

The Administration has done little of substance on the issue, however. President Bush continued the Clinton executive order that established the Task Force by delaying the deadline for its first report to August 1, 2001. White House Task Force Co-Chair Ruben Barrales filed the report, but it reportedly said little more than that the Task Force was being assembled. A few days earlier he told a statehood rally in Puerto Rico that the President supports Puerto Ricans choosing between statehood and independence.

Later, Barrales’ office also tried to continue the availability of a federal grant of $2.5 million for citizens’ education in Puerto Rico regarding status options and a voters’ choice among them, but it did too little too late to overcome Republican congressional reluctance.

Bush’s FY2003 Budget: Again, No Puerto Rico Initiatives

President Bush’s second budget, like his first, proposed no initiatives for Puerto Rico.

The budget for fiscal year 2003, which begins October 1, called two of the Calderon Administration’s top federal priorities into question. One is the proposed permanent tax exemption for 90% of the profits that companies in the States transfer from Puerto Rico (Section 956).

Section 956's chances were undermined in the budget's proposal for other, massive tax cuts and for spending initiatives that would put the federal budget further into the red. The large tax cuts and deficits -- to which most Democrats object -- will make it harder to add any further costly tax cuts to the budget, especially cuts for major national corporations that aid profitable operations in a few select locations (Puerto Rico and the other U.S. territories).

The tax debate in Congress is expected to be more about whether to make the President’s proposed cuts, rather that what new cuts to add. If it passes a major tax bill in this election year, Congress may well substitute some cuts for the ones Bush proposed, but these will probably come from the cuts that the House and/or Senate Democrats approved in their various economic stimulus bills.

However, the economic stimulus bill appears to have recently died in the Senate due to a partisan deadlock, and never included Calderon’s proposal, in spite of the Governor's aggressive lobbying. According to a key congressional tax official, a sponsor would probably have to identify what cuts in spending or what increases in taxes they suggest to pay for a tax cost that U.S. Treasury officials have informally assessed could be as high as $5 billion a year.

The budget was also a setback for an insular proposal that was included in the stimulus bills. The proposal would continue a special increase in the grant to Puerto Rico and the Virgin Islands of federal excise tax collections on rum brought into the States from the territories or other areas.

The islands have long received a $10.50 per proof gallon of the tax, which is now $13.50 per gallon. A Clinton Administration initiative increased the grant to $13.25 per gallon through last December 31. The House stimulus bills would have continued the increase, worth $58 million a year to Puerto Rico, for two years. Senate Democratic bills would have continued the increase for one year. The President’s budget allows for no further increase. It estimated $235 million in rum tax grants to Puerto Rico, down from $246 million this year and from $334 million in fiscal year 2001.

Another special grant that Puerto Rico receives -- customs fees on foreign goods brought into the islands less the cost of collection -- was estimated to remain at $51 million.

The grant that the islands receive in lieu of Food Stamps was budgeted to increase for inflation, as usual. It would increase from $1.351 billion to $1.377 billion, but it is still far less than Food Stamps would provide. The grant is expected to be reauthorized by the Farm bill, which passed the Senate this week and the House last year.

A final special grant that Puerto Rico is currently receiving -- to build a commuter train linking San Juan, Bayamon, and Guaynabo -- was budgeted for $59.7 million. Congress last year cut a similar request to $40 million despite efforts by Resident Commissioner Acevedo Vila to preserve it. The grant would be the latest installment of discretionary mass transit funds that are also available to localities in the States that the Clinton Administration made to Puerto Rico.

Another major item in the budget for Puerto Rico is education funds: $1.396 billion were proposed for Puerto Rico, an increase of $71 million.

Although Bush proposed changes in the Medicare and Medicaid programs, budget documents do not mention additional funding in the two programs on which the Clinton Administration worked. The Calderon Administration does not appear to have made the increases a high priority in comparison to other issues, such as the tax exemption for profitable companies from the States in Puerto Rico.

Most of the tens of billions of federal dollars spent in Puerto Rico each year are spent under ongoing programs without any further, focused policy decision.

Economic Stimulus Legislation Dies

The apparent death of the economic stimulus legislation that Congress began to work on last year, in response to the economic slowdown due to the terrorist attacks on New York and the recession, called into question two significant initiatives for territories: the rum tax grant and individual grants to territorial taxpayers.

The stimulus bills would have made grants to federal income tax filers in the States whose incomes were too low to have an income tax liability. The Senate Finance Committee version would have extended the grants to territorial taxpayers, provided territorial tax systems gave the IRS the names, tax ID numbers, and addresses of recipients. The grants were to include $300 for individuals, $500 for heads of households, and $600 for joint tax filers. The overall proposal could be resurrected in further tax legislation because of the tens of millions of people that it would benefit.

Finally, Equality in Education Programs for the Disadvantaged

The new Elementary and Secondary Education Act phases in equal funding for Puerto Rico on a par with the States and other territories. For education programs for the disadvantaged, Puerto Rico previously had been funded under a special formula that provided about 72% of the funds that a State would have gotten. The other territories have also been funded specially, but their formula provided about as much as the State formula would have allocated.

Federal education officials have said that Puerto Rico was funded under the less generous formula because (1) equal funding would have meant its funding would exceed that of all but a few States since it has a high percentage (three-fifths) of students from families with incomes below the federal poverty level, (2) it does not pay most federal taxes, and (3) it does not have voting representation in the federal government.

President Clinton, in response to prodding by then Resident Commissioner Carlos Romero-Barcelo (PNP), proposed the equal funding phase-in that was, with a slight modification, enacted into law this year. House Republicans agreed to halve the proposal in 1999 -- increasing Puerto Rico to 85% -- but Senate Republicans ignored the proposal. The shift of the Senate to Democratic control last year enabled three original supporters of the proposal -- Senators Edward Kennedy (D-MA), Christopher Dodd (D-CT), and Representative George Miller (D-CA) -- to insist on Republican acceptance. Kennedy became Chairman of the Senate Health, Education, Labor, and Pensions Committee. Miller, meanwhile, has become the senior Democrat on the House Education and the Workforce Committee. In a curious development, Resident Commissioner Acevedo Vila introduced a bill to provide for the equal funding at about the same time that House and Senate negotiators had already agreed on the equal funding.

Rivera Leaves Democratic Committee

One of the most influential individuals on Puerto Rico matters in the United States resigned from the Democratic National Committee.

Dennis Rivera, a native of Puerto Rico, heads the Service Employees International Union’s largest unit, a 200,000-member ’local’ in New York City. He has used it to become a significant figure in New York and national Democratic politics. He has also gained influence by being a prominent Hispanic supporter of Jesse Jackson’s "Rainbow Coalition."

Rivera is an avowed nationalist and key ally of Governor Sila Calderon. He got New York Governor George Pataki (R) to press the Bush Administration to end military training at the Navy’s Vieques range -- the only range that Navy and Marine Corps units on the East Coast have for full amphibious landing combat training. Pataki’s pleas were a key factor in the Administration deciding that the residents of Vieques should not able to agree to training continuing past April 2003. With his lawyer, Robert F. Kennedy, Jr., Rivera also got top New York Democrats to act to end the training, including Senators Charles Schumer and Hillary Clinton, Representative Charles Rangel, party official Roberto Ramirez, and gubernatorial hopeful Andrew Cuomo. He and Ramirez also prevailed upon Democratic National Chairman Terry McAuliffe to join the campaign.

Rivera has additionally helped Calderon enlist support for permanent federal tax exemption for 90% of the profits that manufacturers based in the States transfer from territories. A major success was winning support from national union leaders. Unions had opposed the similar Section 936 tax credit for profits attributed to Puerto Rico.

A Rivera aide said that a shortage of time was responsible for the resignation, but Rivera has held out the possibility of supporting Pataki for re-election this year and been cool to Cuomo and nomination rival Carl McCall. And Pataki just championed costly -- and controversial — New York budget benefits for members of Rivera’s union.

Republicans Still Spilt on Vieques Training

Republicans continued to take very different positions on Vieques training.

President Bush’s political adviser, Karl Rove, reiterated Bush’s desire that the training end by May 2003, although he recognized that the Secretary of the Navy will make the decision. The new Defense law provides that the Navy Secretary can replace the range after considering the advice of the Chief of Naval Operations and the Commandant of the Marine Corps as to when there is another way of providing training that is at least as good.

On the other hand, Republicans in Congress strongly criticized Navy Secretary Gordon England for not sending the John F. Kennedy Battle Group for training in Vieques prior to leaving for the Afghanistan war. England has also been criticized for declining to commit to future training that could include explosive ordnance if military commanders feel it is essential.

House Government Reform Committee Chairman Dan Burton (IN) and Members Bob Barr (GA), Christopher Shays (CT), and Adam Putnam (FL) wrote England about the Kennedy Group training. "You refused them...extremely valuable training...in spite of the specific request of the Chief of Naval Operations and the Commandant of the Marine Corps, and without having identified a place of equal or superior training...the battle group...won't acquire training...that could help save...lives," the Representatives wrote.

Senators James Inhofe (OK), Jeff Sessions (AL) and Jim Bunning (KY) took an even stronger tone with England at a hearing, focusing on whether explosive ordnance would be used in future training at Vieques if needed. Bunning said that he would not have voted for England’s confirmation if England had declined to answer the question then.

In declining, England said that he did not want to answer a hypothetical question that was sensitive in light of Vieques community opposition and the environment. Military sources suggest that questions regarding the need for environmental permits may be the real reason that the question has not been answered.

England did, however, flatly deny Governor Calderon’s claim that he decided that the Kennedy should not train at Vieques or explosive ordnance in training there in response to her efforts. And senior Navy officers confirmed his account that the fleet commander made the decision not to train in Vieques for reasons of time. The officers also suggested that further training could be expected at Vieques, but that it may not include explosive ordnance because of the progress of the war.

"They said that the next battle group slated for training, the George Washington, would not use explosive ordnance in Vieques because of the bureaucratic steps needed to resume use of explosive ordnance in Vieques. It was unclear if they meant the environmental permitting, Bush Administration approval, or both."


More Calderon Lobbyists and Public Relations Firms in the States Identified

In its first year in office, the Calderon Administration spent more than twice the amount for lobbying and public relations in the States that the previous administration did, according to documents released by Puerto Rico Representative Melinda Romero Donnelly (NPP).

The documents identified some previously unreported firms, including Oldaker & Harris ($130,000) and Ketchum Public Relations ($4.1 million). Oldaker & Harris previously represented the Puerto Rico Senate under President Charles Rodriguez (PNP). Partner Bill Oldaker raises funds for Senator Edward Kennedy (D-MA). Romero also revealed an Office of the Governor contract with Elizabeth Arden beauty salon for $4,000.

The contracts were in addition to million-dollar-a-year previously reported contracts with: BKSH & Associates, the firm of top Republican strategist/lobbyist Charles Black; Democratic lobbying powerhouse PattonBoggs; and Winston & Strawn, the law firm of Calderon’s Washington representative as Mayor of San Juan, Francisco Pavia. The contracts were also in addition to contracts with: public relations giant Ogilvy & Mather; the Roth Group, headed by ex-Representative Toby Roth (R), a proponent of national English language requirements; and Smith Dawson and Andrews, a lobbying firm with which PDP strategist/lobbyist Ramon Luis Lugo is associated.

Cifuentes, Lausell Elected in DNC Despite PDP Opposition

Former Governor Pedro Rossello’s first Secretary of the Governorship, Alvaro Cifuentes, was elected Chair of the Hispanic Caucus of the Democratic National Committee (DNC) and San Juan lawyer Miguel Lausell, who had previously served on the DNC, was renamed to it by Party Chair Terry McAuliffe. Both appointments were made in spite of the expressed opposition of Puerto Rico Senator Eudaldo Baez Galib (PDP), the insular Democratic committee chairman.

Baez tried to block Cifuentes’s election by suggesting -- without providing any substantiation -- that Cifuentes was being investigated. National party leaders rejected the innuendo, however, and party luminaries such as the former Speaker of the California Assembly and Roberto Ramirez of New York nominated Cifuentes. He was elected with opposition from only Baez and his vice chair, Mercedes Otero.

Baez has told national party leaders that his top priority is repeal of the party’s current Platform commitment to work to enable Puerto Ricans to choose a fully-democratic governing arrangement, a proposal of the Gore campaign in 2000 that Cifuentes and Lausell helped adopt. Baez has wanted the party to consider Puerto Rico’s territorial ‘Commonwealth’ arrangement as a permanent, dignified status. Cifuentes, now a Washington, DC lawyer, is a statehood advocate. Lausell is a leading supporter of Puerto Rico becoming a nation with a close association with the United States. Although a member of the PDP, he has been ignored by Governor Sila Calderon.

Baez reacted to Cifuentes’ election by saying that he could have had the position if he had wanted it. Resident Commissioner Anibal Acevedo Vila said that it "demonstrates terribly bad judgment on the part of Terry McAuliffe."

The "Washington Update" is a new feature of the Puerto Rico Herald.
It will appear bi-weekly.

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