U.S. & Dominican Republic Pull The Rug Out From Under Calderon… Congress Adds Rivers To U.S. Forest In Puerto Rico… Bush Nominates Garcia To Be The First Confirmed U.S. Attorney In A Decade

December 6, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Calderon’s Office Uses False Explanation For Her Proposed US Firms’ Tax Exemption

The Washington office of Puerto Rico Governor Sila Calderon ("commonwealth" party/no national party) is using a false explanation of her top federal priority to promote it.

The proposal would permanently exempt from federal taxation between 85% and 100% of the profits that a company based in the States receives from a ‘controlled foreign corporation’ (CFC) subsidiary in the territory. (Whether the exemption is 85%, 90%, or 100% would depend on the way that the income is transferred from the subsidiary. Presumably, most companies will choose the 100% method.)

The Puerto Rico Federal Affairs Administration Internet site, however, says that "the amendments to Section 956 would permit . . . CFCs . . . to send profits back to the US mainland on a tax deferred basis, thus enabling the U.S. Treasury to recapture tax revenues that would have otherwise been lost to foreign investment."

Internal Revenue Code Section 956, however, already defers corporate income taxes on CFC income. The 35% tax is not levied until the income is brought back into the States. Calderon’s proposed amendment, by contrast, would exempt profits from Puerto Rico from taxation even when brought into the States, meaning that the profits would never be taxable. Since the profits would not be taxable, there would be no taxes to defer. There would also be little or no taxes for the U.S. Treasury to capture.

The erroneous explanation is the latest example of deceptive statements by Calderon’s administration in seeking support for the proposal. Generally, the deception is created by vaguer descriptions of the legislation. In fact, the explanations given to members of Congress in urging them to co-sponsor the proposal are so limited that a number have thought that they were again co-sponsoring the proposal by then President Clinton that was supported by then Puerto Rico Governor Pedro Rossello (statehood party/D). Radically different from Calderon’s proposal, this proposal was to extend the current tax credit for U.S. corporate wage and tax payments in Puerto Rico and investments in plants and equipment in the territory.

The vague description that Calderon and her associates has used most says that the proposal would give a tax "preference" for investments in Puerto Rico. It suggests that the tax benefits would be slightly better than for other areas rather than the 180-degree difference between taxability and total tax exemption.

Another deception that Calderon and her lobbyists used in enlisting support for the proposal was that it would cost $1 billion to $1.5 billion over 10 years. This claim was made although a study done for Calderon had calculated the cost at up to $500 million a year. The claim was also contradicted by the Congress’ official estimate of the cost. It calculated that the proposal would reduce federal revenue $32.1 billion over 10 years.

Other deceptions used in urging Members of Congress to co-sponsor the Calderon proposal involve giving them misleading and incomplete information about Puerto Rico’s economy. For example, Members of Congress are told about job losses but not about the employment increases that Calderon and her aides trumpet at home.

Acevedo Now Looks To Senate GOP To Pass Tax Exemption For US Firms

Calderon’s official representative in the Congress, Resident Commissioner Anibal Acevedo Vila, is now seeking to have Senate Republicans champion the governor’s proposal for permanent federal tax exemption for profits that companies based in the States receive from Puerto Rico.

Acevedo, nominally a Democrat, had earlier counted on Democrats to lead approval of the proposal. He shifted his hopes across the party-dividing aisle of the Senate right after Democrats lost the majority of seats in the body. But the shift also came soon after the two Senate Democrats that Calderon had counted on for winning approval of the proposal -- Senate Democratic Leader Tom Daschle (SD) and primary bill sponsor John Breaux (LA) -- distanced themselves from it.

They stopped pushing the proposal after the Democratic Chairman of the Senate Finance Committee, Max Baucus (MT) declined to include it in another bill and said he did not support it. Daschle indicated that his interest was helping Puerto Rico’s economy and not necessarily the proposal. Breaux indicated that he had merely sponsored the proposal to ensure its consideration. And Baucus indicated that he, too, was willing to help Puerto Rico economically although he did not support Calderon’s proposal.

Acevedo, in disclosing that he would now look to Senate Republicans to lead approval of the proposal, also said that he thought it was more consistent with Republican than Democratic philosophy. He further said that it would fit in with national tax cut legislation that Republicans are drafting. (The last item of this week’s UPDATE suggests that Acevedo may be wrong on this point.)

Acevedo said Orrin Hatch (R-UT), co-sponsor of the proposal in the outgoing Congress, had already agreed to help and that incoming Senate Majority Leader Trent Lott (R-MS) and other senators would be approached. Hatch has been a longtime supporter of tax incentives for corporate investment in Puerto Rico. He previously supported extending the corporate tax credit for Puerto Rico wages, investments, and taxes. Lott is Calderon’s most reliable supporter in the Senate.

Senate Republican leadership in favor of Calderon’s proposal is critical since Calderon has failed to win support for it from the leader of the House of Representatives on tax issues, Ways and Means Committee Chairman Bill Thomas, and the Treasury Department. In addition, Calderon has broken relations with the House’s strongest supporter of the bill, Charles Rangel (D-NY), the top ranking Democrat on the Ways and Means Committee, the House’s tax committee.

Acevedo Misleads Puerto Ricans On Medicare Hospital Payments

Resident Commissioner Acevedo misled Puerto Ricans about Medicare payments for hospitalization services in the territory when he spoke to the islands’ Health Care Management Association two weeks ago, an informed Washington source disclosed this week.

Acevedo told the health care providers group that "hospitals on the island receive only a 50% reimbursement from Medicare, as compared to 100% for hospitals in the States." But the source explained that the payments are based 50% on the rates that apply elsewhere in the nation and 50% on local costs – and are not a 50% reimbursement.

Acevedo also said that the federal government "uses a U.S. mainland formula to determine allocations for hospitals in Puerto Rico that does not reflect their real operating costs." As already noted, the rates are based 50% on Puerto Rico costs. Additionally, it is the fact that Puerto Rico costs are used -- rather than higher national costs of factors such as nurses’ wages -- that results in Puerto Rico hospitals being paid less for the same services than hospitals elsewhere in the nation.

Acevedo’s most misleading -- and political -- claim was that ""Without any opposition from the island, Congress approved this formula for the island in 1997." The truth is that The Puerto Rico Hospital Association, then Resident Commissioner Carlos Romero Barcelo (statehood party/D), and then Governor Pedro Rossello (statehood party/D) actually worked to have the law enacted. They did so because it changed the formula for the payments from 75% local costs and 25% national rates.

This change was proposed by then President Clinton, who had been asked by the Hospital Association and Romero to improve the formula. The Clinton Administration also issued a companion regulation that improved the calculation of the local costs. Each change increased the payments $22 million the first year alone – a total of about $250 million more for hospital services for Puerto Ricans so far.

Joining Clinton, the Hospital Association, Romero, and Rossello in working for the enactment of the 1997 law were Representatives Xavier Becerra (D-CA) and Charles Rangel (D-NY) and Senators Bob Graham (D-FL) and Daniel Moynihan (D-NY). They faced initial Republican resistance.

Another politically misleading statement Acevedo made was that "I presented legislation in 2001 to solve unjust disparity." Acevedo did join other Members of the Congress in introducing a formula that would further increase payments to Puerto Rico hospitals in 2001. But the proposal actually was made by President Clinton in 2000, again in response to requests of the Hospital Association and Romero.

The proposal would have changed the formula for Puerto Rico payments to a combination of 75% of the national rates and 25% local costs. Working with Clinton, the Hospital Association, and Romero to pass the proposal were Rossello, Rangel, Moynihan, Graham, and Republican Senator Rick Santorum (R-PA).

Senate Majority Leader Trent Lott (R-MS) blocked the proposal, however. Lott, works closes with Acevedo and his mentor, Governor Calderon, on Puerto Rico issues and was in touch with them at about the time that he refused to go along with the Puerto Rico Medicare increase.

Lott’s blocking of the proposal has cost Puerto Rico hospitals an estimated $75 million so far and may cost the hospitals another $112.5 million even if legislation for a new formula is enacted early next year. This is because the current House of Representatives version of the bill would phase in the new formula over five years beginning in 2004 instead of the immediate change that was proposed by Clinton and is still supported by Senate Democrats.

Since Lott’s opposition, the biggest factor holding up the formula change has been wrangling between Republicans and Democrats on broader Medicare program reforms, particularly a prescription drug benefit under Medicare. A Puerto Rico formula change -- whether immediate or phased in -- has been incorporated into the various major bills to reform the program.

Lott and other Republicans plan to take up the legislation early next year. The federal budget deficit is a new issue questioning passage, however. Since Clinton initially proposed the legislation, the federal budget surplus has vanished and a new deficit has exploded. The prescription drug benefit alone could cost $300 billion over 10 years.

Republicans And Business Debate What Taxes To Cut

As the Bush Administration seeks to decide on a package of tax cuts to stimulate the economy, Republican leaders and big companies are differing on whether the emphasis of the package should be on tax cuts for businesses or consumers. The ultimate decision, which may come within weeks, will have implications for workers in Puerto Rico as well as for Governor Calderon’s proposal that profits that companies based in the States receive from U.S. territories like Puerto Rico be permanently exempted from the taxes on profits from everywhere else in the world.

While many businesses want corporate tax cuts, credits, and deductions, a number of corporate leaders are joining political leaders in suggesting that the relief primarily go to lower and middle-income workers. The theory is that additional money to these taxpayers would result in more consumer spending for goods and services. This, in turn, would help the economy and business more than tax cuts.

The incoming chairman of the Senate Finance Committee, Charles Grassley (R-IA) is said to be in this camp. He is also concerned that direct tax cuts for big businesses and upper-income earners will open Republicans to the charge that they favor the wealthy minority over the majority of Americans.

Another advocate of this approach is the Business Roundtable, an organization of big companies. Its top recommendation is a holiday from Social Security and Medicare taxes for low and middle-income workers. This is an idea that is also promoted by Democratic presidential hopefuls Representative Dick Gephardt (D-MO) and John Kerry (D-MA).

The Roundtable’s president argues that tax cuts are not needed to spur investment in factories and equipment since the slowdown in the economy has limited plants to working at less than full capacity. Instead, he says, it is more important to facilitate consumer demand. Lower income individuals are considered more likely to spend additional income due to tax cuts than upper income individuals. Upper income persons are considered more likely to invest such funds.

Not all big companies agree, however. The National Association of Manufacturers is lobbying for major tax reductions on capital investments.

Bush Administration officials are also discussing where to put the emphasis of tax cuts. Treasury Secretary Paul O’Neill is said to favor carefully targeted tax relief for industries facing real financial problems. The president’s chief economic adviser, Lawrence Lindsey, had suggested the need to help individual taxpayers as well as companies.

President Bush also wants to make last year’s 10-year tax cuts permanent. Included is the ‘estate’ tax, the tax on inheritances. It would apply to assets in the States left to Puerto Ricans.

White House aides are additionally considering accelerating some of the cuts rather than phasing them in as provided in last year’s law. Grassley has suggested speeding up tax cuts for families with children and two incomes and cuts for low-income workers. None of these cuts would apply to Puerto Ricans.

As previously reported in UPDATE, Bush Administration officials are also thinking about how to balance this package with their idea of a later proposal to more substantially reform the federal tax system.

Also working against massive tax cuts for big businesses is concern that companies are already avoiding the corporate income tax to too great a degree. Democrats may counter a Bush tax plan with proposals to curb perceived corporate tax abuses. Kerry, who visits Puerto Rico this weekend in connection with a retreat for national Democratic party officials, has suggested eliminating: tax code provisions that enable businesses to avoid taxes by setting up companies in low tax jurisdictions outside of the States; "corporate welfare;" and corporate tax shelters.

The elimination of the federal budget surplus and the new -- and big -- federal deficit will also limit the tax cuts. The Congressional Budget Office reported this week that making last year’s tax cuts permanent, as President Bush wants, and extending tax provisions that are due to expire would delay the budget from being balanced from 2006 to 2009. Other tax cuts would make the deficit situation even worse. So, too, would spending such as on a $300 billion over 10 years Medicare prescription drug benefit.

For Puerto Rico, the most likely net result of all of the above is that –

  1. Low and middle-income workers are likely to have their income boosted by not having to pay as much in Social Security and Medicare taxes.
  2. These individuals would not benefit from other individual tax cuts because Puerto Ricans do not file federal tax returns on Puerto Rico income.
  3. Governor Calderon’s proposal that profits that companies based in the States receive from subsidiaries in Puerto Rico be exempted from taxation will not fit in with the most likely national tax cut legislation.

The "Washington Update" appears weekly.

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