Democrats Attack "Permanent Tax Exemption For Profitable Territorial Subsidiaries Bill"… Navy: Spending Will Be Shifted From Puerto Rico To States

October 18, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.


Puerto Rico Governor Sila Calderon’s proposal, that profits that companies based in the States receive from the territory be permanently exempted from the federal income taxation, ran into more problems with Democrats in Congress this week.

    • House of Representatives Minority Leader Dick Gephardt (D-MO) reportedly termed the proposal a "loophole" in calling for the elimination of "corporate welfare."
    • Representative Peter Deutsch (D-FL) delivered an extensive critique of the proposal in a statement for the Congressional Record.
    • And, in a dramatic retreat, an aide to Senate Finance Committee Member John Breaux (D-LA) -- the chief Senate sponsor of the bill -- said Breaux is merely considering the proposal.

Last week, a spokesman for Senate Majority Leader Tom Daschle distanced him from it after he was criticized for promoting it in columns written by an official in the administrations of President Bush’s father and Ronald Reagan. Daschle, the aide says, recognizes the opposition to the Calderon proposal, but wants to help Puerto Rico economically, and will seek a way of doing so with Finance Committee Chair Max Baucus (D-MT). Daschle’s public willingness to defer to Baucus is a major setback for the proposal since Baucus earlier publicly said he does not support the proposal and privately rejected a Daschle request that it be approved.

On the House side, Deutsch labeled the proposal the "Permanent Tax Exemption for Profitable Territorial Subsidiaries Bill" in his critique, pointing out that:

  • The purpose of the proposal is to make it much more profitable for companies to do business in Puerto Rico than anywhere else -- including the States.
  • The first beneficiaries would be companies in Puerto Rico that are already paying federal income taxes.
  • "Most of the billions of dollars a year in corporate savings . . . would go to pharmaceutical companies that are already so profitable in Puerto Rico that they plan to stay and are expanding even though temporary reductions in the tax for income from territories end in a few years!"
  • "Even more outrageous, these money-makers would get the tax subsidy without having to invest one dollar or create one job in the islands!"
  • The proposal would create an incentive for plants to move to Puerto Rico that would be far greater than the special federal benefits for investments in needy urban and rural areas and Native American reservations.
  • The cost to the federal treasury would be $4.6 billion the first year alone.
  • The proposal "is a thinly-veiled effort to resurrect the 100% credit cut in 1993.
  • The proposal would not "accomplish the desirable goal of keeping [low-profit margin] labor-intensive manufacturers who are already in the islands from moving to lower-wage, less-regulated foreign areas."
  • The proposal would also be bad for Puerto Rico because it would be costly federal economic development assistance that would not stimulate permanent economic development.
  • "Perhaps most insidiously, the proposal would also erect a major impediment to democracy in Puerto Rico" because it proposes tax treatment that would be discontinued if Puerto Rico became a sovereign nation or a State.

Deutsch said that he would do all he could to prevent passage of the proposal.

The developments this week have raised the prospects for a proposal like one of the two expiring tax credits that companies based in the States can take against their income from Puerto Rico. This credit, under Section 30A of the Internal Revenue Code (IRC), reduces the federal taxes for wages and local taxes paid in Puerto Rico and capital investments there. The other credit, which is similar to Calderon’s proposal, simply reduces the tax on income from Puerto Rico. It is provided under IRC Sec. 936.

The Sec. 936 credit became one of the most criticized ‘corporate welfare’ provisions of the code while it reduced taxes by 100% -- as Calderon’s new proposal would. The 30A credit was a reform enacted by a Democratic Congress in 1993 in response to a proposal by President Clinton. The 1993 legislation cut the 936 credit to 40%.

After continuing criticism of the reduced 936, Congress followed the lead of then House Budget Committee Chairman John Kasich (R-OH) in 1996 to phase it out totally. After losing a battle with Kasich over the issue -- and bitter that then Governor Pedro Rossello (statehood party/D) gave up the fight -- then House Ways and Means Committee Chairman Bill Archer (R-TX) added the 30A phase-out to the 936 termination. Efforts to retain the 30A credit were handicapped by efforts by Calderon’s "commonwealth’ party to retain the 936 credit instead. Both credits were limited to existing users, users were limited as of this year to the amount of the credit they had taken before, and the credits were sunsetted as of the end of 2005.


The Commander-in-Chief of the Navy’s Atlantic Fleet gave the latest indication of U.S. military spending cutbacks in Puerto Rico as fallout from Governor Calderon’s actions to prevent training at the only range that east cost U.S. Navy and Marine Corps forces have for practicing combat amphibious invasions.

Admiral Robert Natter, who oversees Navy operations throughout the east coast including Puerto Rico, told an audience in Florida this week that he is shifting spending that the Navy would have done in Puerto Rico to Florida and other Southern States because of the Calderon Administration’s policies regarding the Vieques range. The Navy is working on plans to replace Vieques training with training on the ocean, by computer simulation, and bases on the Atlantic and Gulf

"I intend to take a lot of investment that we had heretofore earmarked and utilized for bases in Puerto Rico ... (and) translate that investment into this State and the
other States," Natter told community leaders in Pensacola, Florida. The Pensacola

Naval Air Station will be one of the bases that will take over activity previously conducted at the Roosevelt Roads Naval Station in Ceiba, Puerto Rico. Navy planes and ships will use it as a base. Key West Naval Air Station will reportedly be another Florida base used to replace Roosevelt Roads support of training exercises. Key West will be used for supplies, repairs and shore leave for crew members.

Natter’s words this week echoed statements that he and other officials have made in the past. The top Navy officer, Chief of Naval Operations Vernon Clark, has told the House Armed Services Committee that cutbacks at Roosevelt Roads would be a consequence of ending training at Vieques.

A congressional research office has already studied the feasibility of such cutbacks enabling Army operations at Fort Buchanan in San Juan to be moved to Roosevelt Roads. That combined with the movement of the Army’s Southern Command headquarters from Fort Buchanan to Texas makes Fort Buchanan a prime target for closure during the next round of national military base closures. As Washington Update revealed last week, Congress has already rescinded the appropriation of nearly $31 million for long-sought improvements at Fort Buchanan.

Natter was quoted as saying, "I don't intend to sink because we have to leave Vieques. We're going to be deploying combat-ready forces."

Natter was a key negotiator of an agreement reached in 2000 between the federal government and the Commonwealth government headed by then Governor Rossello that required training at the Vieques range to end May 1, 2003 if the residents of Vieques voted for that in a federally-authorized referendum. Calderon was a leader of the opposition to the agreement and was, in part, elected based on a promise that she could get the training ended immediately.

One of Calderon’s primary objections to the agreement was that the residents of Vieques could not vote for an immediate end to training. Training ending by May 1, 2003 was an essential part of the agreement for Natter and other Navy officials.

Calderon broke the agreement by refusing to recognize it, holding a referendum in which the residents could vote for an immediate end to training, refusing to provide needed police protection against break-ins onto the range, and suing to force an end to training.

Calderon’s request that there not be a federal referendum without an option of ending the training immediately resulted in the Bush Administration asking the Congress to repeal the authorization for the referendum, although not for Calderon’s reason of ending the training immediately. Instead, the Bush Administration objected to the concept of a local community making the final decision on whether a military activity could be conducted. President Clinton had agreed to the idea because the U.S. citizens of Puerto Rico do not have voting representation in the federal government.

The Bush Administration’s opposition to the referendum and Calderon’s attacks on the agreement prompted the Congress to repeal the requirement that training at the range end May 1, 2003. A law enacted last year said that the range could be replaced when the Secretary of the Navy determines that the Navy and Marine Corps can provide training at least equal in quality to the training that the Vieques range affords.

The Bush Administration and the Navy are working to replace the Vieques range by May 1, 2003 despite the change in the law.

Training in Florida has already begun to replace training on Vieques. The 2000 agreement limited the training at Vieques to non-explosive ordnance. Practice with explosive bombs was moved to Eglin Air Force Base, near Pensacola. Two ranges in central Florida may also be used for bombing practice. In addition, the navy is considering practicing amphibious landings at Eglin.

When weather does not permit training at the Gulf Coast Florida locations, training will reportedly be conducted at a Navy-Air Force range in North Carolina and Marine Corps bases in South Carolina and Georgia.

None of these locations can provide all of the training that Vieques affords. Vieques is the only location that the Navy has identified to date where practices can be conducted using all of the tactics used in amphibious invasions – amphibious landings, bombing, and gunfire from ships offshore. For example, while Eglin can be used for bombing and amphibious landing practices, it cannot be used for naval gunfire.

A key element of the replacement plan still be developed, therefore, is expected to be technology that will permit naval gunfire practices at sea. Technology currently being tested would include computer simulation that will project an image of a target – including on the ocean – and bouys that will transmit data on accuracy of the gunfire.

The "Washington Update" appears weekly.

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