Congress’ Section 956 Cost Projection Is 25 Times Higher Than Calderon’s Estimate… Acevedo Repeatedly Errs -- Or Misleads…

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

. .. Congress’ Section 956 Cost Projection Is 25 Times Higher Than Calderon’s Estimate

The congressional estimate of the cost of Governor Calderon’s proposal, to permanently exempt from taxation 90% of the profits that companies based in the States transfer from Puerto Rican operations, is 25 times higher than Calderon’s estimate. The Joint Committee on Taxation estimate is $32.1 billion over 11 years. An estimate that the Calderon Administration paid hundreds of thousands of dollars for was $1.3 billion over 11 years.

The estimate by Congress’ experts is consistent with a rough estimate by the U.S. Treasury’s experts that pegged the cost of Calderon’s proposal to amend Section 956 of the Internal Revenue Code (IRC) at between $25 billion and $50 billion over 10 years.

The official estimates indicating that the proposal would be enormously expensive create another major problem for the proposal. Already, the two top two congressional tax writers, House Ways and Means Committee Chairman Bill Thomas (R-CA) and Senate Finance Committee Chairman Max Baucus (D-MT), have publicly thrown cold water on the proposal (contradicting Calderon’s statements regarding their positions). And U.S. Treasury officials have told Thomas and Baucus of their dislike of the proposal.

Two-thirds of the cost as estimated by the congressional experts, $20.8 billion, is due to the rules that the proposal would establish for transferring the ownership of patents on medicines and other "intangible assets" from U.S. companies and their subsidiaries to the company’s "controlled foreign corporations" in Puerto Rico. The proposed rules would avoid some restrictions that now apply to intangible asset transfers between corporate parents and their non-U.S. subsidiaries. This is a major issue because the ownership of such an asset will determine whether profits are attributable to the taxable parent company or to the mostly-tax exempt Puerto Rican subsidiary.

The Internal Revenue Service and Congress had to act several times under IRC Sec. 936 to prevent companies from avoiding taxes on profits by transferring intangible assets from the States to Puerto Rico that federal officials thought were really due to business in the States. The experience was a contributing factor in the repeal of the tax credit for profits reported from Puerto Rico and other territories.

In announcing the cost estimate, Resident Commissioner Anibal Acevedo Vila (‘Commonwealth’ party/D) suggested that Calderon would abandon the intangible assets transfer of her proposal. Vila said that it had been included at the request of several companies. In fact, when the Calderon Administration learned of the huge price tag of its proposal from Ways and Means Committee Ranking Member Charles Rangel (D-NY) it asked for an estimate of the proposal without the intangible asset transfer provisions.

The Calderon Administration was upset by both estimates and blamed its own estimators, Pricewaterhouse Coopers, as well as congressional officials. In addition to the overall costs, it disputed the finding that most of the cost of the proposal without the intangible asset transfer would come in its first five years, $7.4 billion out of $11.3 billion over 11 years. That suggests that rather than encourage investment in Puerto Rico, the proposal would encourage companies to take investments out of the islands.

Proposal Ignored in Consideration of Economic Stimulus Law

Calderon’s IRC Sec. 956 amendment also received no consideration in the ‘economic stimulus’ legislation, as Congress ended its stalemate on the legislation that was initiated to counteract the economic problems caused by the September 11th terrorist attacks and the recession. Calderon and her lobbyists worked hard for inclusion. But by the time that President Bush signed the compromise into law, only one member of Congress -- Senator Robert Torricelli (D-NJ) -- had suggested inclusion. However, he only proposed enactment of the "permanent" proposal for one year, and dropped the idea altogether when Finance Committee Chairman Baucus declined to support it.

Administration May Propose Using $50 million for Vieques for New Range

The Bush Administration may ask Congress next week to use the $50 million originally intended for the Vieques community for developing an alternative to the Vieques range.

The $50 million was to be used for housing and infrastructure on Vieques if residents voted to permit U.S. Navy and Marine Corps training at the Navy range on the island past May 1, 2003. Since the Calderon Administration prevented the residents from deciding, the Bush Administration is considering spending the funds on an alternative to the range.

The proposal would be made in a supplemental appropriations bill for the current fiscal year.

Forty million dollars have already been appropriated for aid to the Vieques community, but most of it is not expected to be spent since the Calderon Administration has broken the agreement for the use of Vieques until May 1, 2003 entered into between the Commonwealth and federal governments in 2000. Only $11-$16 million of the $40 million has been spent so far, and only $18.5 million may ultimately be spent to aid the community.

Extra Rum Tax Grant Extended Through 2003

The law’s one special provision relating to Puerto Rico restores a temporary increase in the grant to Puerto Rico and the U.S. Virgin Islands of collections in 2002 and 2003 of the federal excise tax on rum refined in the territories or foreign countries.

Resident Commissioner Anibal Acevedo Vila (Commonwealth party/D) of Puerto Rico announced that the increase would mean $40 million a year for Puerto Rico this year and next. But federal officials, including Congress’ Joint Committee on Taxation, had reported several times that the extension would mean $58 million for each year. The Committee expects the funds to be paid in totals of $54 million this calendar year,

$34 million in 2003, and $28 million in 2004. The payments will be spread over three years because of the lag time involved with companies’ paying the tax to the federal government and the federal government then transferring the collections to the territory.

The tax is $13.50 per proof gallon of rum. The basic law on the grants gives the territories $10.50 of the tax. The increase is $2.75 of the $3 per that the federal government has not granted the territories on an open-ended basis.

The increase was first enacted for the two and a half years that ended December 31, 2001 in response President Clinton’s proposal for a five-year increase. The increase was limited to $2.75 of the $3 so the islands would not view the overall revenue transfer as a fiscal autonomy entitlement, as some Puerto Rico ‘Commonwealthers’ have claimed. The administration of Governor Sila Calderon (Commonwealth party) had lobbied claiming that the Commonwealth had a right to the full $3, but the claim was ignored.

Also used to dispute the Commonwealthers’ claim that the money is Puerto Rico revenue is the fact that since the mid-1980s the grant includes taxes on foreign rum as well as on territorial rum. The taxes on foreign rum are given to the Puerto Rico and the Virgin Islands to compensate for increased competition from foreign rum producers attributable to U.S. free trade agreements.

The biggest blow to the Commonwealthers’ claim came in the 1980’s, however, when the federal government unilaterally overrode a provision of the jointly approved Puerto Rican Federal Relations Act that provided for all federal taxes on all Puerto Rican products to be transferred to the islands. The change limited the products to rum and limited the amount of the transfers on rum to $10.50 per gallon.

The initial $2.75 increase was intended to address three needs: loss of insular revenue due to Hurricane Georges; a debt that threatened to push the Virgin Islands into bankruptcy; and the Puerto Rico Conservation Trust’s loss of its main revenue source with the immediate repeal in 1996 of a provision of U.S. Internal Revenue Code Section 936. Former Governor Pedro Rossello (statehood party/D) had agreed to give the Trust one-sixth of the increased rum tax revenue.

While Acevedo claimed that the extension was a bipartisan endorsement of Puerto Rico’s Government, it really was due to desires to help the Virgin Islands and the Trust. The increase was a federal contribution to a tough Virgin Islands fiscal recovery plan. It also responded to a Trust request for five years of grants to capitalize a permanent endowment. If the extension was an endorsement of Puerto Rico’s Government as Acevedo claimed, it also was an endorsement of the Virgin Islands’ Government and followed an endorsement of Puerto Rico’s Government under Rossello.

Acevedo Repeatedly Errs -- or Misleads -- on Federal Matters

Acevedo’s $36 million mistake in reporting of the value of the $116 million rum tax grant was the latest is a series of misstatements that he has made on congressional tax issues. The errors call into question his involvement in -- and, even, familiarity with -- the measures.

When Senate Finance Committee Chairman Max Baucus (D-MT) proposed to extend $300-$600 grants that had been made to taxpayers in the States to payers of local taxes in Puerto Rico and other territories as well as to workers in the States with incomes too low to have paid taxes, Acevedo claimed that the proposal recognized that Puerto Ricans pay Social Security taxes. In fact, Finance Committee staff had discarded that rationale and the Committee’s report on the proposal made clear that the grants would be made because of local income tax payments.

Acevedo also erred in suggesting that House Ways and Means Committee Chairman Bill Thomas (R-CA) was favorably impressed by Calderon’s proposal to amend IRC Sec. 956 to exempt 90% of the profits that companies based in the States earn from manufacturing in Puerto Rico. Thomas told reporters the opposite just days later.

Acevedo has also repeatedly made misstatements on other matters. Some of the most glaring overstated his role in the enactment of the law phasing in equal funding for Puerto Rico in elementary and secondary education programs for the needy. The Members of Congress responsible for getting the proposal enacted into law were Senators Edward Kennedy (D-MA) and Chris Dodd (D-CT) and Representative George Miller (D-CA). And they initially championed the proposal at the request of former President Clinton and Acevedo’s predecessor, Carlos Romero Barcelo (statehood party/D). Further, Acevedo publicly "proposed" the equal funding after the key congressional leaders of both national parties had privately agreed on the equal funding.

Some of Acevedo’s erroneous statements may be due to his limited attention to congressional affairs. He spends most of the average week in Puerto Rico, and some of his time there on purely local issues and politics.

A survey of the House committees on which he serves discloses that he has a very low rate of attendance. For example, he attended only four of the 21 hearings last year of the Resources Committee, which has lead jurisdiction on territorial matters.

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