Drug Companies: 956 Not Essential But End Of 936 Will Make It Happen…Calderon Gains Powerful GOP Lobbyist…Acevedo Gives Up, Didn’t Agree With Governor’s Vieques Letter To Bush... President Had Already Responded To A Similar Letter

September 20, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Drug Companies: 956 Not Essential But End of 936 Will Make It Happen

Lobbyists for some of the United States’ biggest health products companies say that their firms will continue manufacturing in Puerto Rico whether they get the federal tax exemption they want or not.

They also, though, think that companies based in the States with Puerto Rico manufacturing subsidiaries will get the multibillion dollar tax break as time approaches the December 31, 2005 expiration of their current federal tax credits.

The proposal would permanently exempt 90-100% of the profits that such companies receive from subsidiaries in the territory from the 35% federal corporate income tax. It is championed for the companies by Governor Sila Calderon ("commonwealth party"/no national political party) and would primarily amend Section 956 of the Internal Revenue Code (IRC).

The current federal tax credits are in IRC Sections 936 and 30A. The Sec. 936 credit effectively exempts 40% of the income that manufacturers based in the States attribute to existing Puerto Rican operations. Sec. 30A alternatively gives such companies a tax credit for Puerto Rico wages, capital investments, and local taxes. In 1996, the incentives for manufacturing in Puerto Rico were limited to existing users of the credits, capped as to amount effective this year, and ended effective 2006.

The lobbyists say that their companies have enough of an investment in Puerto Rico that they are not going anywhere. The investments include substantial investments in plants and equipment and having developed efficient operations, including personnel.

Puerto Rico provides several other advantages over other potential locations for manufacturing in the States and foreign countries. Payroll costs are far lower than the States. There are also substantial territorial tax breaks. Compared to foreign locations, Puerto Rico has a highly-educated and trained workforce. Puerto Rico is also a U.S. location, facilitating essential Federal Drug Administration approvals for medicines. It is also relatively close to the home offices of the companies in the States.

The lobbyists’ assertions that their companies will stay in Puerto Rico whether or not they get special federal tax breaks for doing so are borne out by their companies and others investing many hundreds of millions of dollars in new plants and equipment in Puerto Rico during the past year at the same time that the current federal tax benefits are being phased out and as the Calderon 956 proposal has floundered in the Congress.

The lobbyists’ assertions that their companies will remain in Puerto Rico without new tax breaks is also supported by corporate balance sheets that show huge profits. The companies obviously do not need additional major tax cuts to be profitable and can afford the taxes paid by their competitors with plants in the States or foreign countries.

The lobbyists believe that new tax benefits will eventually be granted because of political pressure that the Calderon Administration will generate as the calendar moves closer to 2006. The pressure will include efforts by people of Puerto Rican origin who are voters in the States.

Calderon has launched a multimillion dollar drive to register such voters in States where they can make an impact on the politics. A Calderon strategist and lobbyist says that the drive is a key element of their effort to persuade the Bush Administration to support the proposal even though it is not favored by its Treasury Department officials.

The drug company lobbyists also believe that the pressure on Calderon to exert pressure on federal officials will increase as 2004 approaches. Calderon will be up for re-election that year.

Additionally, the lobbyists recognize that their chances of getting the new tax cuts that will add billions of dollars to the profits of their companies and others will ride on whether Calderon is re-elected in 2004. They believe that they are in an effective partnership with her on the issue.


Governor Calderon’s Washington lobbying team has been enhanced by one of the Republican Party’s top tax and trade lobbyists. M.B. Oglesby has become Vice Chairman of Black, Kelly, Scruggs and Healy, the firmed headed by Calderon’s chief Washington lobbyist, Charles Black.

Oglesby comes to the position from a stint as Chief of Staff to the United States Trade Representative (USTR). Earlier he was President Reagan’s legislative director and Deputy Chief of Staff.

Oglesby, a successful lobbyist, took the top staff job at the USTR office to help President Bush win ‘fast-track’ trade agreement negotiating authority from the Congress. The authority simplifies and expedites congressional action on international trade agreements negotiated by the federal Executive branch, giving the President greater power in trade negotiating.

Oglesby will primarily focus on tax and trade issues at BKSH. The firm, which is paid at least $100,000 a month by the Calderon Administration, already has a top Democratic tax lobbyist in partner Jim Healy, a former member of the staff of the chairman of the House of Representatives Ways and means Committee, the House’s tax and trade policy committee.

Oglesby is highly regarded on Capitol Hill for his lobbying on tax issues as well as on trade issues. For example, he was a key negotiator of Reagan’s major tax cuts.

His skills fit in perfectly with two of Calderon’s top federal objectives. One is the amendment to IRC Section 956. The other is authority for the Commonwealth to negotiate trade agreements with foreign countries.

As a territory of the U.S., Puerto Rico cannot negotiate binding agreements – including trade pacts – with foreign governments. This constitutional impediment applies since the U.S. Government is ultimately responsible for its territories and there commitments.

USTR and other federal agencies, including the State and Treasury Departments, have opposed the territory of Puerto Rico being granted foreign trade negotiating authority because Puerto Rico is a part of the Customs territory of the U.S., that is, a part of the U.S. market. Goods in Puerto Rico can be shipped free of duty and quota to the other parts of the Customs territory of the U.S. If Puerto Rico had more lenient rules for its trade with foreign countries and remained a part of the Customs territory of the U.S., foreign manufacturers could use Puerto Rico as a ‘pass-through’ to get their products into the States without paying U.S.. Customs duties, despite U.S. quotas on the products.


Calderon’s Resident Commissioner in Washington, Anibal Acevedo Vila ("commonwealth party" D) says that he has done all he can to advance the Calderon Administration’s legislative agenda this year. He has confided that he is now essentially sitting back and seeing what happens.

Acevedo was referring to objectives such as the IRC section 956 amendment. He long ago accepted that the amendment probably would not pass – or, even, be seriously considered in -- Congress this year. The proposal has encountered objections from the top two tax law writers in Congress – the Republican chairman of the House Ways and Means Committee and the Democratic Chairman of the Senate Finance Committee. It also is not supported by the Bush Treasury Department.

Other objectives, such as a decrease in the difference between Medicare payments to Puerto Rico hospitals and payments to hospitals in the States, that have not engendered such opposition are faltering because of problems with the larger bills to which the proposals are attached.


Acevedo was surprised and embarrassed by the letter that Calderon sent President Bush this week regarding the U.S. Navy training range on Vieques. The letter asked Bush to reaffirm his commitment (intention?) to end training on the range by May 1, 2003 or begin planning for an unexplained transition related to an end of the training.

It was sent after Calderon repeatedly said she trusted what Bush had said regarding the end of training at the range and that she would not write to ask him to put it in writing although she would like it if he did.

Consistent with that, Acevedo and Calderon’s staff in Washington had discouraged members of Congress from writing Bush to ask for an executive order ending training at the range by May 1, 2003. Members of Congress are being lobbied by Puerto Rican nationalists and others to write Bush asking for such an order.

After Calderon made her letter public, Acevedo, who was handpicked by Calderon for the job, continued to maintain that the letter was not needed.

Lobbyists against the range, however, used Calderon’s letter to encourage members of Congress to write Bush.

Why Calderon changed her stance is unclear. She made the move after it became public that her aides and Acevedo were lobbying against requests to Bush to end Vieques training. She also made the move after her Secretary of State said that a U.S. military attack to remove Saddam Hussein from power in Iraq might require training at the range past May 1, 2003 and if so, Puerto Ricans had the responsibility to accept this. The revelations embarrassed her with a constituency that is largely responsible for her election on a platform of obtaining an immediate end to the training and opposing training through May 1, 2003.

Another possibility is that Calderon sent the letter when she had obtained information that she might receive a positive response. Calderon lobbyist Black, who is very close to Bush and his political adviser, Karl Rove, has been pressing for actions such as a transition process regarding Vieques for some time.

Black says that Calderon sent the letter because of concern that Defense Secretary Donald Rumsfeld created among anti-Navy training activists when he addressed a question about the Calderon Administration’s lack of cooperation in keeping protesters off the range that the Navy would continue to train in Vieques past May 1, 2003.


Calderon's letter to Bush was even more curious because Bush had already responded to a letter like Calderon's from a Calderon ally.

On behalf of Bush, the White House Liaison of the Defense Department reiterated the President's goal of ending Navy and Marine Corps training at the Vieques range May 1, 2003, but point out that the President could not order or assure this because of the new law on the subject. It requires that the Secretary of the Navy, in consultation with the top officers of the Navy and the Marine Corps, determine that the Navy has a replacement for the range providing at least equal training before the range is replaced.

The letter was sent to national Puerto Rican Coalition President Manny Mirabal several weeks ago. It was not made public on the advice of Calderon's closest ally in Congress, Representative Luis Gutierrez (D-IL).

The letter is a major embarrassment for Calderon, because it raises questions of why the letter was covered up and why Calderon made a request of Bush that the law plainly does not enable him to grant. And the chief embarrassment is that the letter's exposes that Calderon's efforts on this issue have lost the guarantee that the training would end May 1, 2003.

Calderon was elected largely by claiming that a law requiring the training to end May 1, 2003 was not enough of an assurance. In her campaign she promised to seek to halt the training immediately. The law at the time had been enacted due to the efforts of her predecessor Pedro Rossello (Statehood party/D). It required the training to end May 1, 2003, presuming Vieques would vote for that in a referendum.

Once elected, Calderon asked the President to add an immediate end to training as an option to the referendum, or to eliminate the referendum entirely. In response, Bush asked Congress to eliminate the referendum. Congress agreed but also, with Bush's acceptance, substituted the requirement of the Navy having a replacement for the Vieques range for the requirement that the training end on the May 1 date.

A White House aide said the letter was sent to Mirabal with the hope that it would be made public and clarify the issue.

The "Washington Update" appears weekly.

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