"Commonwealth" Proposal Critic Elected House Gop Leader… Major Changes In U.S. Tax System Could Affect Puerto Rico… Deutsch Opposes Calderon’s Corporate Tax Exemption Plan

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

. ..

Representative John Doolittle (CA) was elected Secretary of the Republican Conference (caucus) of the U.S. House of Representatives.

The office is the sixth-ranking position in the leadership of the House’s Republican majority. But Doolittle’s power in part will come from being known as one of the closest friends of the new House Majority Leader, Tom DeLay (TX). ?

Two years ago, Doolittle sponsored the proposal of now Governor Calderon and Resident Commissioner Anibal Acevedo Vila ("commonwealth" party/D) for Puerto Rico’s future political status as a bill in the Congress. His purpose was to enable the proposal to get formal congressional, consideration.

The proposal calls for the Commonwealth to be recognized as a nation in a permanent association with the United States. Under the arrangement, the U.S. would continue to grant citizenship to persons born in Puerto Rico and all assistance now granted the islands’ residents. The Commonwealth would be able to determine the application of federal laws and enter into agreements with foreign nations.

The House committee on territorial status issues, Resources, held a hearing on the proposal in October 2000. During the hearing, the proposal was judged to be impossible by the Clinton Administration, a top official of the preceding Bush Administration, and Democrats and Republicans on the Committee. Officials from the White House and the Justice and State Departments said it was an incompatible combination of aspects of different statuses and elements were unconstitutional and illogical. A similar assessment came from former Attorney General Richard Thornburgh.

Doolittle and other Members of Congress also rejected the proposal.

Also known as "The Hammer," DeLay is a dominant force in the House and a major leader of the conservative wing of the Republican Party. He was a key supporter of the bill that the House passed in 1998 that would have enabled the people of Puerto Rico to choose whether the territory would become a State of the United States or a nation.

Another supporter of the bill, Rep. Steny Hoyer (MD) was elected to the number two position in the leadership of the House’s Democrats, Minority Whip. Hoyer also was a key figure in the passage of the only law ever enacted that authorized the people of Puerto Rico to determine their preference for the islands’ status.

Enacted in October 2000, the law appropriated $2.5 million for public education in Puerto Rico on the Commonwealth’s status options and for a choice among those options by the territory’s voters. The funds were not used because Governor Sila Calderon ("commonwealth" party/no national party) did not want Puerto Ricans to choose among options approved by the federal government, presumably because officials have said (in the hearing on the Doolittle bill and on other occasions) that the proposal is not -- and cannot be -- an option.

Calderon and Acevedo, however, have reason to be very encouraged by the election of Robert Menendez (NJ) as chair of the House Democratic Caucus may be the biggest gain. Menendez is a strong advocate for their goals because of his close relationship with one of their most reliable spokesmen in the Congress, Rep. Luis Gutierrez (D-IL).

Gutierrez is of Puerto Rican heritage and is passionately opposed to Puerto Rico becoming a State. He also raises much of his campaign funds from Puerto Rico "commonwealth" party sources, including companies based in the States that enjoy extraordinary tax subsidies in Puerto Rico. The Chicagoan helped Menendez in his first campaign for Congress with voters of Puerto Rican origin. He also backs Menendez in supporting tough policies against Cuba. By contrast, the most senior House member of Puerto Rican origin, Jose Serrano (D-NY) is favors trade with Cuba and is a strong critic of Puerto Rico’s undemocratic status.

Gutierrez is Acevedo’s mentor in the House, and enlists Menendez’s support as needed. Menendez’s clout will increase even more in the third-ranking position in the leadership of House Democrats and because he is regarded as a spokesman for Hispanics in the House and throughout the country by many Democratic leaders. They, like Republican leaders, are very concerned about gaining support from the rapidly increasing numbers of Hispanic voters.


As WASHINGTON UPDATE reported two weeks ago, the Bush Administration is developing a plan for a major change of the U.S. tax system that could have far-reaching implications for Puerto Rico.

The change would replace the federal income tax with a national sales tax or, at least, much of the federal government’s reliance on income taxes for revenue.

As in the case of America’s other territories, most federal taxes, including most income taxes, have not been extended to Puerto Rico. Replacing the income tax with a sales tax or replacing much of the federal budget’s reliance on income taxes with sales taxes could extend most federal taxation to Puerto Rico and the other territories.

The income taxes primarily at issue are taxes on the income of corporations and individuals. Between these, the income tax on corporations is the most likely to be replaced or drastically changed. This means that one of Puerto Rico’s major federal and overall issues -- tax exemptions or reductions on profits that companies based in the States receive from the islands -- could be obviated. If the reform goes further in replacing individual income taxes, an even greater issue in Puerto Rico’s economy and political status debate could be eliminated.

The plan is being developed with great confidentiality in the Treasury Department. The timetable calls for giving President Bush options early next year. The effort is a priority of Treasury Secretary Paul O’Neill. It is considered "serious" by income Senate Finance Committee Chairman Charles Grassley (R-IA).

Not decided yet is whether Bush should seek approval in the next Congress -- probably in 2004 after 2003 tax proposals are acted on (see next story) -- or make the plan a centerpiece of his 2004 re-election campaign.

The increasing ability of companies to minimize income is one of the reasons for the effort. So, the idea is to replace the tax on income with a "value-added" tax. This would be a tax on purchases (or "consumption").

Consideration is being given to having the tax apply to consumer as well as corporate purchases. In this regard, the thought is to at least replace the current "progressive" income tax, which taxes higher incomes progressively more than lower ones, with a flat rate tax. It is generally thought that the rate of a value-added tax would be too high if it is to raise enough revenue to totally replace individual income taxes.

In addition to income from wages, the plan would eliminate or reduce taxes on savings and investments, that is, taxes on interest, dividends, and gains in the value of investments when sold.

Economists differ on whether a value-added tax would be good for the economy. But Bush White House economic advisers are in the camp that thinks it would be good. The elimination of taxes on savings and investments, they believe, would increase investing more than taxing sales would decrease purchases.

Value-added taxes are common throughout the world, and are used by all other developed Western nations. In Europe, they co-exist along with lowered income tax rates.

Whether the plan will eventually be adopted by Bush -- and Congress – is very uncertain. But it could dramatically affect Puerto Rico issues if it is.


Representative Peter Deutsch (D-FL) wrote House Ways and Means Committee Chairman Thomas and Ranking Democrat Chares Rangel (D-NY) to oppose Governor Calderon's proposal that profits that companies based in the States receive from subsidiaries in Puerto Rico be exempted from taxation.

The letter is the latest contradiction to the claim of Calderon's chief economic advisor, Economic Development and Commerce Secretary Ramon Cantero Frau, this week that no one in Congress has opposed the plan. Thomas is another public critic of the proposal. So, too, is his current Senate counterpart, Finance Committee Chairman Baucus. While Rangel has been a prime sponsor of the bill, he suggested that he may not push it as hard in the future, and the next ranking Democrat on the Committee, Fortney "Pete" Stark (CA), has also spoken out against the proposal.

Deutsch suggested that the proposal is unwarranted "corporate welfare" and that "a large share of the benefits will not accrue to the residents of Puerto Rico, but rather to the wealthy companies who receive it." He also expressed concern that the proposal would worsen the federal deficit and that many companies would have their profits exempted from taxation "without creating a single new job" in Puerto Rico.

The Florida representative wrote the letter in lieu of speaking on the House floor on the issue, as UPDATE previously reported he had done.


Congressional Republican leaders and aides to President Bush are refining their plans for one of their major objectives for the new Congress: enacting tax cuts next year.

The chief economic adviser to Puerto Rico Governor Sila Calderon ("commonwealth" party/no national party) this week suggested that the expected legislation would result in the approval of Calderon’s proposal that profits that companies in the States receive from subsidiaries in the territory be exempted from taxation.

There has been no indication of that in Washington, but the close relationships that Calderon lobbyists have with incoming Senate Majority Leader Trent Lott (R-MS) and Senator John Breaux (D-LA) mean that the proposal could get further consideration even though it has been opposed by: the chairman of the House of Representatives tax writing committee, Bill Thomas (R-CA) of the Ways and Means Committee; the top Democrat on the Senate committee, Finance, Max Baucus (MT); and officials of the Treasury Department. Lott, who shares Calderon’s opposition to statehood for Puerto Rico, will have substantial clout, and Breaux, the Senate sponsor of Calderon’s proposal, may wind up being in a position provide Republicans with an essential swing vote for a tax bill.

Calderon’s proposed amendment of Section 956 of the federal tax code could also be helped by the ascension of Don Nickles (R-OK) to the chairmanship of the Senate Budget Committee. Nickles is expected to push the committee for tax cuts. His predecessor, Kent Conrad (D-ND), has been more concerned about the federal government’s budget deficit and has been a critic of the Sec. 956 amendment’s predecessor proposal, tax code Section 936. In addition, the current top Republican on the committee, Pete Domenici (NM) was also more concerned about the deficit than tax cuts.

Because of deficit concerns the Republican-White House tax cut plans are all but certain to exclude top objectives of the Bush and Congressional GOP tax agenda. The deficit is $200 billion this year, and determinations to enact a Medicare prescription drug benefit that will cost at least $300 billion over 10 years and more spending for military and domestic security will increase the deficit even before tax cuts.

Instead, the current plans call for two packages of more modest cuts. The first would make the 2001, 10-year, $1.35 trillion tax cuts permanent after 2010. The second package would include several other cuts.

Included would be: an increase in the temporary tax deduction that businesses can take for new investments in plants and equipment; rebates of Social Security and other payroll taxes; increasing the contribution limits for individual retirement accounts to $5,000 and "401(k)" retirement accounts to $15,000; an increase from $600 to $1,000 per year in the tax credit that parents can take for each child; and moving up to next year income tax rates that are now scheduled to take effect in 2004. The latter three measures would cost an estimated $111 billion over 10 years.

Most controversial bills require 60 votes for passage in the 100 member Senate. There will be no more than 52 Republicans in the new Senate [51 already elected and another only if Senator Mary Landrieu (D-LA) loses her runoff election at the beginning of next month.] To avoid having to try to get the support of Breaux and other some other Democrats to give a package 60 votes, Republicans would like to include the tax cuts (and the Medicare prescription benefit) in a budget "reconciliation" bill next spring. Such a bill, which makes changes in laws necessary to meet budget goals, would only require 50 votes in the Senate (with Vice President Cheney breaking a tie).

The "Washington Update" appears weekly.

Self-Determination Legislation | Puerto Rico Herald Home
Newsstand | Puerto Rico | U.S. Government | Archives
Search | Mailing List | Contact Us | Feedback