Experts Expect Governor’s Investment Proposal To Lose/Not Attract Investment To The Commonwealth

March 29, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Experts Expect Governor’s Investment Proposal to Lose/Not Attract Investment to the Commonwealth

Congressional experts believe that the Calderon Administration’s proposals to retain United States-based manufacturers in Puerto Rico and attract new plants would actually encourage some companies to leave the Commonwealth and attract relatively few new operations. The result -- the opposite of the proposals’ intent -- is expected to be especially acute if the territorial administration’s latest proposal is adopted.

The view is reflected in the Joint Committee on Taxation’s estimates of the costs of the proposals. The estimates were developed at the request of Governor Sila Calderon (‘Commonwealth’ party/no national party).

Calderon’s basic proposal would permanently exempt from federal taxation 90% of the profits that companies based in the States or the District of Columbia receive from manufacturing subsidiaries in Puerto Rico and other United States territories that are incorporated as "Controlled Foreign Corporations" (or "CFCs"). Under current law, this would lower their tax rates from 35% to 3.5%.

Companies based in the States or D.C. that have domestic subsidiaries manufacturing in Puerto Rico since 1996 are entitled to either a credit equal to 40% of the tax on their profits from Puerto Rico under U.S. Internal Revenue Code (IRC) Section 936 or a credit for wages and local taxes paid and capital investments made in the islands under IRC Sec. 30A. But these tax breaks are capped as of this year, expire at the end of 2005, and are not available to new operations in Puerto Rico. Calderon’s proposal, which would amend Sec. 956 and other provisions of the IRC, would provide an immediate and permanent alternative.

It would also, however, be expensive. The Joint Tax Committee experts estimated that it would cost $32.1 billion through 2011. $18.3 billion of the cost would be rung up through 2007 -- an even greater problem than the 10-year cost since federal budgets are primarily projected over five years. The costs reflect taxes that the federal government would give up and represent business being conducted in Puerto Rico.

The estimate is also based on an expectation, however, that the proposal would cause plants that would leave Puerto Rico with the expiration of Secs. 936 and 30A to leave as sooner. The estimates assume that the proposal would cause the federal treasury to lose $4.6 billion next year as companies take advantage of the 90% tax exemption to close shop in Puerto Rico. The loss would decrease to almost a half, $2.4 billion, in 2008 before slowly inching up to $3.1 billion in 2011, a decline of a third over the period that would also be reflected in business activity in Puerto Rico.

The Calderon Administration has been obtaining support for the proposal contending that it would only cost about $100 million a year. The local administration based this on an estimate that that Pricewaterhouse Coopers was paid hundreds of thousands of dollars to provide. That estimate calculated a cost of $1.3 billion over 10 years. It figured substantial federal revenue from the minimal 3.5% tax that companies would pay as well as presumed massive new investment.

The Joint Committee estimate, which did not buy these assumptions, jived with a U.S. Department of the Treasury rough estimate of $25 billion to $50 billion over 10 years. The federal projections were so huge that they clearly doomed the proposal. So, Calderon asked to have the cost of four variations of the proposal estimated as well.

The Joint Committee staff report that was released earlier this month also gave figures for two of the variations. One would increase the cost $1 billion through 2011.

The other was embraced by Secretary of Economic Development and Commerce Ramon Cantero Frau and Resident Commissioner Anibal Acevedo Vila (‘Commonwealth’ party/D). It would delete a provision of the proposal that would enable companies to transfer patents, trade names and other "intangible property" on a tax-free basis to the largely tax-exempt CFC’s. A tax-free transfer would especially benefit pharmaceutical firms that are a driving force behind the Calderon proposal. Much of the value of their products are due to the value of intangible property. Operations in Puerto Rico ‘paid’ their parent companies $6 billion last year alone for intangible property (resulting in $600 million in Commonwealth taxes).

Deleting this provision would lower the proposal’s cost $20.8 billion through 2011. The $11.3 billion balance is a more viable number, but it still represents a significant cost -- especially since $8.1 billion of it would be incurred through 2007.

Further, it also assumes that the proposal would not be an effective incentive for investment in Puerto Rico. $2.3 billion of the cost would come next year as plants take advantage of the proposal to close in Puerto Rico earlier than they would now. The cost would then drop rapidly to $600 million a year in 2008 and not increase through 2011. In other words, the total tax cost of federal tax incentives for economic activity in Puerto Rico would soon be much lesser than they would be during the next few years. They would also be much less than they are now when the current tax breaks cost $2.6 billion a year according to the U.S. Treasury. The lesser tax breaks translate into not much, if any, new investment in Puerto Rico.

So, Calderon was left with an original proposal that is too costly, and an alternative that does not provide a catalyst for growth of the Puerto Rican economy. Rather than the ‘win-win’ for the federal treasury and the Puerto Rican economy that she has touted, the proposal looks more like a lose for the federal treasury or a lose for the Puerto Rican economy.

Aides to the two top U.S. House of Representatives sponsors of Calderon’s proposal, Ways and Means Committee Ranking Democrat Charles Rangel (D-NY) and second Ranking Republican Phil Crane (R-IL), have been pressing the Joint Committee for lower cost estimates. They and a Pricewaterhouse expert who came from the Joint Committee staff met last week and this with Joint Committee staff particularly disputing the view that the proposals will cost more in the nearer term than in the longer term. They also suggested that they may offer other ideas to make the proposal viable.

Medicare Legislation for Seniors’ Medicine May Increase Pay for Puerto Rico Hospitals

Legislation to have the Medicare program assume prescription drug costs of senior citizens could also result in the enactment this year of a proposal to have Medicare pay more for hospitalization in Puerto Rico.

Current law results in hospitals in Puerto Rico being paid less than hospitals anywhere else in the nation. It provides a single rate for hospital services everywhere other than Puerto Rico -- in low cost as well as high cost areas -- and Puerto Rico rates that are a blend of 50% of the national rate and 50% of lower, local costs.

Then President Clinton proposed changing the formula in 2000 to be 75% of the national rate and 25% based on local costs. This would provide an additional $25 million or so a year. The proposal was included in a package of Medicare reforms, but it was reportedly blocked by then Senate Majority Leader Trent Lott (R-MS) with whom then gubernatorial candidate Calderon had ties.

The proposal has continued to be championed by Representative Rangel and others, prompted by the Puerto Rico Hospital Association. And it may pass this year in a package of Medicare program changes, most notably prescription drug benefits.

A key lobbyist for the proposal is John Raffaelli, a lobbyist long close to Dr. Richard Machado, a major supporter of the local ‘Commonwealth’ and national Democratic parties who Calderon opposed for mayor of San Juan in 2000. Another is Luis Baco, a Washington, D.C. lawyer who formerly worked for then Governor Pedro Rossello and Resident Commissioner Carlos Romero Barcelo, both statehood party Democrats. The proposal is now also being supported by Congressman Acevedo.

The current 50/50 formula is a Clinton initiative that was enacted in 1997. It replaced a longstanding formula that was 25% of the national rate and 75% based on local costs. The 1997 Clinton initiative increased payments to Puerto Rico hospitals

$44 million in the first year alone, since it was accompanied by a regulation that more generously calculated local costs.

Survey Shows Puerto Ricans Acculturate to Life in the States

A survey done for the Puerto Rico Federal Affairs Administration office in Washington indicates that Puerto Ricans are more acculturated to life in the States than other Latinos.

It reported that 92% of Puerto Ricans resident in the States have blended in.

Puerto Ricans in the States own more computers and have more Internet access than Mexican-Americans, Cuban-Americans, and others. More than three-fifths of Puerto Ricans in the States have life and/or health insurance, a bank account, and a credit card. The numbers are 11-14% higher than for other Latinos.

Although 62% of Puerto Ricans learned Spanish as their first language, half are now more comfortable speaking English.

The survey was done in connection with the Calderon Administration’s plan to spend millions of dollars a year more to assist Puerto Ricans resident in the States, but it seems to contradict the need for aid. It focused on the conditions of Puerto Ricans in central Florida. Calderon is reportedly successfully using her plan to help register Puerto Ricans in the area to vote to get the Bush Administration to moderate positions that she does not like. Bush political strategists are said to have noted that while Jeb Bush handily carried the area in being elected Governor of Florida in 1998, George Bush slightly lost it in 2000 after then Governor Rossello campaigned for then Vice President Al Gore and Puerto Ricans are 52% of Hispanics in central Florida. Bush strategists have said that they are concerned about Governor Bush’s re-election bid this year. They may later be concerned about President Bush’s expected campaign in 2004.

Bush Still for 2003 End to Vieques Range But Document Shows That’s No Longer Law

President Bush this week reportedly reiterated his goal of Navy and Marine Corps training at the Navy range on Vieques ending by May 1, 2003 -- the date that formerly was required by an agreement between the federal and Commonwealth governments during the Clinton and Rossello Administrations. But a federal environmental document demonstrated that the date is no longer a certainty.

After the Clinton and Rossello Administrations agreed on a presidential order that ended the training May 1, 2003 if the residents of Vieques voted for it to end in a federally-approved referendum, the May 1, 2003 deadline was enacted into federal law.

But lobbying by Governor Calderon, Congressman Acevedo, and others for an immediate end led to enactment of a replacement law last fall that would end training only when the Navy Department determines that it can replace the range with another means of providing at least equal training. The determination is to be made by the Secretary of the Navy after considering evaluations that the top officers of the Navy and Marine Corps would also submit to Congress.

While Navy Secretary England has said that he believes the President’s May 2003 goal can be met, a U.S. Fish and Wildlife Service document demonstrated that the date now is a goal rather than a requirement. The notice reflected environmental approval for training through December 2006.

Federal officials confirmed that the notice, which covered a standard time period, did not reflect a plan for training after April 2003. But they also did not suggest that the law on when the range can be closed will not be followed. Key to replacement of the range is a study that the Center for Naval Analysis is to complete soon on potential alternatives.

The report of Bush reiterating his goal came from New York Governor George Pataki (R ), an ally of Calderon who has been catering in his re-election campaign to leaders of Puerto Rican heritage in his State. Similar statements were reportedly made by

Bush Hispanic aides to Manny Mirabal who heads the National Puerto Rican Coalition, an umbrella organization of Puerto Rican groups in the States, and the National Hispanic Leadership Agenda, an umbrella group of national Hispanic groups.

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

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