Bush Creates New Chance For Calderon Proposal To Exempt Puerto Rico Profits From Federal Taxation, Georgia Primary Election Seals Fate Of Puerto Rico-Interested House Members

August 23, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.


President Bush has said he will ask the Congress to pass a tax bill this year. Before this, no further tax legislation was expected to be considered until after the new Congress takes office next January.

Bush’s announcement creates another opportunity for Governor Sila Calderon ("commonwealth party"/no national party) to seek approval of her main federal goal: A permanent 90-100 percent tax exemption for profits that manufacturing plants in Puerto Rico transfer to parent companies based in the States.

It also now appears that there may be time for the Congress to pass a tax bill this year. Instead of concluding in early October -- well before this November’s elections -- the Congress is now expected to come back into session after the elections for a session that could last well into December.

The Congress may need to do this because it is not expected to reach agreement before the elections on all of the bills to finance government operations that need to be passed for the fiscal year that begins October 1. Instead, it would pass ‘continuing resolutions’ before the elections on areas of disagreement. Such laws would continue spending at the fiscal year 2002 levels until an agreement can be reached on the bills some time after the elections.

Plants that have been established in Puerto Rico for several years can get either a 40 percent federal tax break or a credit for local wages, plant investments, and taxes through 2005. Existing and new plants can also defer payment of the 35 percent corporate profits tax by not transferring profits to the States.

Calderon’s 90-100 percent tax exemption proposal is not supported by the chairmen of the Congress’ tax committees or the Bush Administration’s Treasury Department, but it does have some prominent supporters. The supporters include the top ranking Democrat on the House of Representatives committee, the Ways and Means Committee, Charles Rangel (D-NY) and Senate Majority Leader Tom Daschle (D-SD).

The support of Rangel and Daschle has not been enough, however, to get the proposal included in previous tax bills this Congress – in spite of great efforts by Calderon and her lobbyists.

The proposal, which would amend Section 956 and other provisions of the federal Internal Revenue Code, will also probably be outside the scope of what Bush will propose. He has said that his package was stimulated by the economic forum that he held in Texas last week and it will include many of the ideas that were discussed that related to individual stock market investments.

But international issues -- which include the Section 956 amendment -- may well be included in congressional consideration of the package even if the issues are not included in the Bush proposal.

There is a general view among tax law writers that the tax rules concerning the international operations of U.S. companies need to be revised. In addition, however, there is great concern about firms based in the States setting up shell parent companies in Caribbean islands that do not tax the companies’ profits. The paper companies shield the profits from federal taxation as well.

Half a dozen bills have been introduced in Congress to block such transactions. This contrasts with the Bush Administration just a year ago opposing efforts to close off-shore tax havens.

The leading House Republican bill would tax companies through 2004 if 80 percent of the shareholders are in the U.S. no matter where the companies are incorporated. The leading Democratic bill would apply such a rule retroactively and indefinitely.

The Bush Administration does not support these proposals, but it is preparing a proposal to prevent companies from shifting assets or contracts to off-shore parent companies.

House Ways and Means Committee Chairman Bill Thomas (R-CA) also does not support the proposals, but he recently introduced a comprehensive international tax reform bill. Pressure from other Republicans, however, has forced Thomas to shelve his bill and agree to consider one with the more limited goal of cracking down on corporate runaways.

Calderon’s proposal – which requires companies based in the States to reincorporate as "foreign" companies in Puerto Rico will seem to contrary to the trend in Congress. But it can also be explained as a justifiable kind of "foreign" reincorporation.

Puerto Rico, after all is not really foreign. More important, Members of Congress want to prevent companies in the States from escaping taxes by merely setting up paper shell companies in a foreign area and the Calderon proposal is ostensibly designed to encourage companies in the States to set up real operations in Puerto Rico rather than move operations to what are really foreign countries.


Puerto Rico issues will be somewhat affected by the results of Georgia’s primary election this week.

Most notably, Representative Bob Barr was defeated by Representative John Linder for the Republican nomination. They were in competition to represent a new district that combined portions of the separate previous districts that they currently represent.

Barr helped establish that the U.S. House of Representatives is unlikely to impose an overwhelming majority requirement for a Puerto Rican choice of United States statehood as the islands’ ultimate political status. He proposed an amendment that would have required a 75% Puerto Rican vote in favor before the territory is put on the path to statehood.

The amendment was to a 1998 bill that would have enabled Puerto Ricans to choose the islands’ ultimate status. Barr offered it when the bill was being considered by the full House. It was defeated by more than a two-to-one margin.

Linder also played a key role in the consideration of the bill. He headed a Republican Conference (caucus) study committee on the bill that helped delay its consideration by the full House and let conservative opposition to it develop. He is a member of the Committee on Rules which establishes procedures for the consideration of major bills.

Linder seemed to be influenced by Puerto Rico’s "commonwealth" party and its lobbyists. The party, then headed by current Resident Commissioner Anibal Acevedo Vila (D), opposes a Puerto Rican choice among the islands’ status options. It fears the choice might be statehood. It also advocates a non-existent and impossible governing arrangement that would give Puerto Rico powers of nationhood along with economic and citizenship benefits of a U.S. status.

The party’s main tactic in trying to block the bill for a choice among Puerto Rico’s real options was to enlist conservative Republicans to oppose a choice because it includes statehood. The party stimulated concerns that:

  • Puerto Rico would be a primarily Democratic state;
  • statehood would hinder the use of English in the United States and prevent English from being made the nation’s official language, since most Puerto Ricans primarily speak Spanish; and
  • increase social program costs because of the needs of the U.S. citizens of Puerto Rico.

While Linder and Barr are both very conservative, they have different styles. Barr is harshly outspoken, Linder makes his points with less acid and bombast.

Former Rep. George "Buddy" Darden was defeated in the Democratic primary. Darden was active in the House’s passage of a bill in 1990 that would have enabled Puerto Ricans to choose the islands’ status as well as in the passage of the 1998 bill. In 1990, he was involved as a House Member. In 1998, he was involved as a lobbyist.

In 1990, Darden worked closely with then Puerto Rico Governor Rafael Hernandez Colon ("commonwealth party"/D) who called for the status choice legislation. Hernandez Colon, still a power in the party, had -- and has -- less unrealistic "commonwealth" proposals than Acevedo and Governor Calderon.

As Darden came to understand the issues, he became an advocate of a choice among Puerto Rico’s real options and more sympathetic towards statehood. He encouraged some of his former House colleagues to vote for the 1998 bill.

Rep. Cynthia McKinney was also defeated in the Democratic primary. McKinney, an outspoken Black Caucus member, has generally supported positions of Puerto Rico’s resident commissioner at the time.

The "Washington Update" appears bi-weekly.

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