Two Senators, Two Strikes…Snow Involved With P.R. Pharmaceutical Firm… Fate Of Calderon Ally Lott Uncertain Due To Remark… U.S. & P.R Reach Chile Trade Deals

December 13, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

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Puerto Rico Governor Sila Calderon ("commonwealth" party/no national party) and her representative in the Congress, Resident Commissioner Anibal Acevedo Vila ("commonwealth"/D), tried -- and apparently failed -- to sell two important U.S. senators on her proposal to permanently exempt profits that companies based in the States receive from subsidiaries in the territory.

The senators are John Kerry and Jon Corzine, both Democrats. Kerry is particularly important because he serves on the tax law-writing Finance Committee and is considered among the top prospects for his party’s presidential nomination. Corzine is particularly important because he represents New Jersey, a state where many of the companies that would share in an immediate multi-billion dollar windfall from the proposal are headquartered and were many people of Puerto Rican heritage live.

Visiting Puerto Rico, Corizne met with Calderon, Acevedo, and Calderon’s chief aide on the issue, Economic Development and Commerce Secretary Ramon Cantero Frau. Afterwards, he publicly explained in some detail a commitment to support measures to help Puerto Rico economically but he carefully avoiding leaving any impression that he would support Calderon’s amendment to Internal Revenue Code Section 956. The proposal is not supported by most key federal officials.

Corzine noted the interest New Jersey shares with Puerto Rico in the health of the pharmaceutical industry. (Drug companies in Puerto Rico are making so much money that they are expanding in the territory.) He also said he would support legislation that would "make a difference for Puerto Rico." (Pharmaceuticals and some other companies would not have to hire one worker or invest $1 to reap billions of dollars in tax savings from Calderon’s proposal.) Further, he noted the economic plight of all of the States and territories. (Calderon’s proposal is designed to make Puerto Rico more attractive than the States for manufacturing. It nominally would apply to the U.S.’ other territories but is not expected to benefit them or companies in these islands.) Corzine additionally stated a specific commitment to help Puerto Rico with infrastructure funding.

His unwillingness to commit to push the controversial proposal, the commitments that he did make, and his statements on returning to the States that measures to help consumers rather than major tax cuts for big businesses were needed to stimulate the economy, made Calderon’s failure apparent.

Kerry went to Puerto Rico for a $75,000 fundraiser for his prospective presidential campaign that was promoted by chief amendment lobbyist Cantero. In his case, Calderon skipped the meeting, leaving it to aides Acevedo and Cantero. They were reportedly testy with the senator -- who has called for measures to cut "corporate welfare" and prevent companies from setting up operations outside of the States to avoid federal taxes. (The original Sec. 936 tax credit, which the Sec. 956 amendment would effectively recreate, has been criticized as "the poster child of corporate welfare.)


President Bush abruptly fired his Treasury secretary and chief economic adviser, seeking to instill greater public confidence in his economic policies and a greater commitment to tax cuts in his administration -- presumably with an eye on the 2004 election. His plans faltered, however, as it was learned that the intended replacements also had records that did not suggest as great a commitment to cutting taxes as to ending federal deficit spending.

Treasury Secretary Paul O’Neill was told that the president wanted his resignation after he made it clear that he was more interested in the long-term project of reforming the federal tax system than in a tax cut package for next year as well as creating other controversies and failing to instill confidence in the economy. Economic adviser Lawrence Lindsey was let go for failing to organize and publicly sell the President’s economic agenda. ?

Bush transportation company executive John Snow to replace O’Neill but the appointment of investment banker Stephen Friedman to be the top White House economic adviser was held up for days as conservatives criticized the two for records that focused on balancing the budget rather than cutting taxes.

Bush aides also made it clear that the new appointees were expected to have more of a role in selling the tax package than in crafting it. Still, it was expected that the announcement of the package would be delayed from this month to next to give them some time for input. Bush aides also suggested that politics would carry more weight in decisions about the composition of the package than they had under O’Neill and Lindsey.

The assumed key questions for Puerto Rico related to the package are whether it will include a holiday for workers from paying Social Security and Medicare taxes and whether it will include Governor Calderon’s tax code Section 956 amendment.

Treasury Secretary-nominee Snow has been a member of the Board of Directors of Johnson & Johnson, a giant pharmaceutical firm with substantial operations in Puerto Rico. The firm would seem to be a likely beneficiary of Calderon’s proposed multi-billion dollar income tax exemption. Snow’s involvement with the company may be bad news for the proposal, however. If the Treasury Department -- which has told lawmakers that it does not like the proposal -- now supports it, Snow could be accused of changing the policy for his personal benefit or the benefit of former colleagues.

Snow’s main position is Chairman of the Board of Directors of CSX Corporation, the parent company of the second-largest ocean freight company serving the market between Puerto Rico and the States.

Snow would not be the first administration official with a background with a pharmaceutical company in Puerto Rico to avoid Calderon’s proposal. Office of Management and Budget Director Mitch Daniels has not touched it although – or because -- a company that he served as president, Pfizer, would presumably be a major beneficiary.

Treasury officials have already put together their list of tax cut options for the White House according to a Senate Republican source, and there is no indication that the 956 amendment is on the list. It being added now could prompt investigations of why it was added.

It is said that the ultimate package could have a $300 billion over 10 years cost. It is widely expected that it will include: a reduction of the income tax that individuals pay on corporate dividends; a greater corporate tax write-off for investments in plants and equipment; moving income tax rate reductions for 2004 up to next year; and greater tax cuts on contributions to retirement accounts.

While the White House is now throwing cold water on Social Security and Medicare tax cuts, that is expected to be a centerpiece of an alternative Democrat plan. Democrats are also expected to accept cuts in taxes on corporate dividends but also push for an extension of unemployment benefits.

The impact of a major tax cut package on the federal budget continues to concern some Republicans as well as Democrats. The budget is hundreds of billions of dollars in the red and a war on Iraq could cost $200 billion more and a Medicare prescription drug benefit could cost $300 billion more over 10 years in addition to the $300 billion over 10 years cost of the tax cuts.


Governor Calderon’s closest ally in the U.S. Senate -- incoming Majority Leader Trent Lott -- came under increasing fire this week for saying for that the country would have been better off if segregationist Strom Thurmond had been elected president in 1948.

Democrats called on the Senate Republican leader to resign as it was revealed that Lott had made the statement before and it was not just an over-exuberant slip of the tongue at a 100th birthday party for Thurmond, who is retiring from the Senate.

Republicans -- who have made a great effort to attract minority group voters, especially Hispanics -- became concerned that Lott’s leadership would become an electoral handicap for the party. Thursday, President Bush repudiated the statements of his party’s Senate leader -- a blow to Lott’s prestige -- and Lott had to agree. Bush also said, however, that Lott should not resign as Republican leader in the Senate.

Lott’s alliance with Calderon was developed by the governor’s chief lobbyist, Charlie Black, a Lott confidant, and is based on the opposition that Lott shares with Calderon to statehood for the 3.9 million U.S. citizens of Puerto Rico. Lott, however, has not suggested that Puerto Ricans are incompatible with other U.S. citizens as the reason for his opposition as have Calderon and Resident Commissioner Acevedo. Instead, Lott has cited his view that Puerto Rico would be a Democratic State as the reason for his opposition.

Lott reached the conclusion after Black, Acevedo, and Calderon suggested that Puerto Rico would be a Democratic State and after associates of theirs lobbied the Congress against Puerto Ricans being able to choose the islands’ status. In opposing a status choice, the Calderon and Acevedo allies peppered members of Congress with statistics of high rates of crime, poverty, and illegitimate births in Puerto Rico and reports suggesting that Congress confirming that statehood was an option for Puerto Rico would lead to violence. The message was that a State of Puerto Rico would be a costly burden to the country that would inflict social ills on the rest of the States and result in terrorist attacks on federal officials and in the States.

U.S. and Puerto Rico Reach Chile Trade Deals

The United States and Chile reached a free trade agreement this week. The agreement, and one last month with Singapore, point to the need for Puerto Rico to develop a strategy to replace the reliance of its economy on being a part of the customs territory of the U.S. and having a competitive advantage over areas from which imported products face U.S. duties and quotas

Under the agreement, which is subject to congressional approval, tariffs would almost immediately be eliminated on 85% of the products that are sent from one of the countries to the other. Duties on the remaining products would be eliminated over the next 12 years. The agreement was announced by President Bush’s Trade Representative, Robert Zoellick.

The U.S. currently has free trade agreements with four countries -- Canada and Mexico and Israel and Jordan. The Bush Administration is turning its sights to negotiating free trade pacts with five Central American nations as well as Australia and African countries. It, like the Clinton Administration, has adopted the goal of free trade for all countries throughout the hemisphere with the exception of Cuba under the Castro dictatorship.

The government of Puerto Rico has been concerned that companies are finding other nations in the hemisphere and Singapore more attractive manufacturing locations than the territory. However, the Calderon Administration has been pursuing tax exemptions from the federal government that would benefit companies that are profitable in Puerto Rico rather tax credits that would help companies that are finding foreign locations to be more attractive.

Meanwhile, Puerto Rico Secretary of State Ferdinand Mercado announced a Puerto Rico business agreement with Chile. The agreement prompted consternation in the U.S. State Department especially because Mercado announced that it had been reached between "two countries" – suggesting that Puerto Rico is a country.

The "Washington Update" appears weekly.

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