Calderon Aides Giving Up On Federal Tax Exemption For Companies In The States… Federal Tax Drafts Omit 956 Amendment…Bush Reform May Shift Tax Burden To Lower Incomes As Well As Change Islands’ Issues… Study Shoots Down Claim That Navy Made Vieques Air Harmful

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

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Calderon Aides Giving Up On Federal Tax Exemption For Companies In The States

Puerto Rico Governor Sila Calderon’s ("commonwealth" party/no national party) top aides are giving up on their boss’ -- and party’s -- longtime top federal priority and major economic strategy: permanent exemptions from federal taxes on the Puerto Rico income of companies based in the States.

The clearest statement of this came this week from Resident Commissioner Anibal Acevedo Vila ("commonwealth" party/D). Acevedo as well as Calderon, her other representatives, and previous party leaders have consistently identified such exemptions as the top federal objective and centerpiece of their economic plan. But this week Acevedo said that exemptions "are no longer, and have never been, the cornerstone of the Puerto Rico economy." He termed an amendment to Section 956 of the federal Internal Revenue Code (IRC) proposed by Calderon as "something we can work on in Washington" while more important economic efforts are made in Puerto Rico.

The amendment would permanently exempt from federal taxes up to 100% of the profits that companies based in the States receive from Puerto Rico.

Acevedo’s new explanation expanded on statements made days before by the official spokesman in Calderon’s office. It also came days after Calderon’s chief economic assistant, Economic Development and Commerce Secretary Ramon Cantero Frau, abruptly resigned from office.

Cantero was the chief official architect of Calderon’s version of the tax exemption, which attempted to recreate an exemption under IRC Sec. 936 that the federal government repealed in 1996. The repeal came after years of unsuccessful efforts to prevent companies from abusing the exemption. Cantero developed the proposal working with big drug manufacturers who had been some of biggest abusers.

Cantero and Acevedo also were the chief official lobbyists for the proposal. They were assisted by some of Washington’s biggest and best lobbyists and consultants paid with millions of Puerto Rican taxpayer dollars.

Calderon and her team should be expected to continue to lobby for the proposal. Their downplaying of it now probably means just that they finally recognize that its approval is unlikely.

This recognition came after a spate of recent disappointments in their efforts to win federal support.

A major initial setback came when the Congress’ Joint Committee on Taxation estimated the 10 year cost at over $32 billion -- vs. the $1 billion plus that Calderon claimed.

Then, major disappointments came in the form of opposition from the chairmen of the U.S. House of Representatives and Senate tax law committees: Republican Bill Thomas of the House Ways and Means Committee and Democrat Max Baucus of the Senate Finance Committee. There also was word that officials of the Treasury Department were advising Members of Congress against the proposal.

Initial support from Senate Democratic Leader Tom Daschle evaporated after Daschle consulted with Baucus. Their positions may have influenced Senate sponsor John Breaux (D) to back away from the proposal.

Calderon broke relations with the main House advocate of the proposal, Charles Rangel (D-NY), calling into question whether he would continue to push it. And although Acevedo recently suggested that they were pinning hopes for the proposal on Senate Republican co-sponsor Orrin Hatch, they may have learned that he is not enamored of it.

Disappointments in recent days came when two visiting Democratic senators who they thought would be good prospects did not support the proposal. One was Jon Corzine of New Jersey, a state which has a number of drug companies that have operations in Puerto Rico. The other was John Kerry, a leading presidential aspirant for whom Cantero organized a major fundraising event.

Even greater disappointment came when the best friend of Calderon and Acevedo in the Senate, Republican Trent Lott, put his claim on the Senate majority leadership post in jeopardy by suggesting that the country would have been better off if southern States had been allowed to maintain segregation between people of different races. Acevedo had recently identified Lott as a prospective champion for the passage of the proposal.

It is not clear whether Calderon’s aides recognized that the record of incoming Senate Finance Committee Chairman Charles Grassley (R-IA) suggests that he would be unlikely to support the proposal. Acevedo, at least, did not recognize that the record of a major rival of Lott’s for the majority leadership is not consistent with the proposal.

In criticizing Lott days after speaking of him as an ally, Acevedo said that he and Calderon were also close to Lott rival Don Nickles and they hoped for his support on the 956 amendment. Nickles, like Lott, Calderon, and Acevedo is a strong opponent of statehood for Puerto Rico, opposing equal benefits and power for the 3.9 million U.S. citizens of the territory.

According to his staff, however, Nickles also generally opposes creating new tax credits. Although Calderon’s proposal would not technically create a new tax credit, it would effectively restore a tax credit that was finally repealed at the insistence of some of Nickles’ fellow conservative Republicans. They termed it unwarranted ‘corporate welfare’. It has also been criticized in national publications with a conservative editorial philosophy.

Federal Tax Drafts Omit 956 Amendment

The Calderon Administration’s downgrading of the importance of its amendment to IRC Sec. 956 came just before key congressional leaders refined their economic stimulus plans for the next Congress. The plans, and plans by aides to President Bush, do not include the Calderon amendment.

Republican leaders of the House are discussing a $300 billion package that would: extend unemployment benefits; give employers a holiday from paying unemployment insurance; permit businesses to write off the cost of equipment more quickly; move up to next year individual income tax cuts and an increase in the tax credit for children; providing greater tax benefits for retirement savings; cut the taxation of dividends from corporate stock holdings; extend the repeal of the estate tax and other provisions of the 2001 tax cut scheduled to end in 2010; and lower higher income tax rates for married couples.

The package is similar to a draft Bush Administration plan that would cut the tax on individuals on stock dividends, and speed up to 2003 individual income tax cuts and benefits for business capital investment. Also being considered are an increase in the amount of stock losses that can be deducted from income, the earlier increase in the child tax credit, and eliminating the ‘marriage penalty.’

The Senate Finance Committee’s top Democrat proposed a very different package. The $160 billion over 10 years plan by Max Baucus would give $75 billion to States and territories next year, extend unemployment benefits, give all taxpayers a one-time income tax cut of $300, provide $4 billion for highway construction, eliminate tax shelters, create a tax credit for health insurance premiums paid by small businesses, and create a special tax deduction for equipment purchases by small businesses.

Baucus also, however, signaled a willingness to reach agreement with Republicans on a final tax package -- enhancing the prospects that one will be enacted early next year. He, specifically, suggested that he may be willing to accept a cut in the taxes that individuals pay on stock dividends.

Bush Reform May Shift Tax Burden To Lower Incomes As Well As Change Islands’ Issues

The reform of the federal tax system that Bush Treasury Department officials are drafting may shift more of the burden of taxes on individuals from people with higher incomes to those with lower incomes.

The reform is the longer-term -- and much more ambitious -- of the two tax plans that the Bush Administration is preparing. The more immediate and lesser proposal is expected to cut taxes $300 billion over the next decade. It is expected to become public in the coming weeks and be included in President Bush’s budget for the fiscal year that begins October 1, 2003.

The bigger proposal will be decided on and revealed later, and may not be seriously pursued until 2005. It may become a centerpiece of the President’s 2004 re-election campaign.

As previously revealed in UPDATE, drafters of the plan want it to propose a new federal tax on consumption -- purchases by businesses as well as consumers. This would raise the revenue needed to make a ‘flatter,’ simpler income tax system possible. The flatter system will have less income tax rates -- possibly just one -- and fewer credits and deductions than the current rates. ?

The implications for Puerto Rico issues would be major. The consumption tax may well apply in Puerto Rico and the other territories in addition to the States and Washington, DC. Since it would replace a significant portion of the current tax burden on incomes, which has not been extended to Puerto Ricans on Puerto Rican source income, it would undermine the argument that supporters of Puerto Rico’s territorial status make that statehood would mean major new federal taxes. Puerto Ricans would be bearing much more of the tax burden borne by other Americans. This would enhance the argument that they ought to have political power in the federal system.

The other major implication for Puerto Rico would flow from the plan to eliminate most breaks in the tax on the income of companies. Another major argument of supporters of territorial status is that the tax breaks that manufacturers from the States have enjoyed in Puerto Rico would not continue under statehood or independence. The reform could mean that the tax breaks would not continue under territorial status either.

Both changes would also, of course, have major implications for Puerto Rico’s economy.

The flat income tax rate(s) would be lower than the current rates for higher income individuals but, probably, higher for lower income individuals.

In an effort to make this change politically palatable, Administration experts are preparing to make the case that higher-income individuals are now bearing too great a share of the tax burden and lower-income individuals are not paying their fair share.

Treasury Department experts are reportedly revising the calculations of the burden on different income levels. The President’s Council of Economic Advisers (CEA) is said to be drafting a report that would focus on the tax burden of the affluent and question current calculations of the burden on the not so well off.

The Treasury officials are crafting charts that show a lower tax burden on lower-income individuals than is now generally accepted and a higher tax burden on higher-income individuals. One way of making this case is to exclude payroll taxes -- Social Security and Medicare taxes -- from the calculation of tax burden. This controversial strategy holds that these taxes should not be included since the taxes finance direct benefits for the payers of the tax.

Calculations of the tax burden on individuals in the top five percent income level illustrate the impact of not including payroll taxes. These individuals pay 41% of all taxes but up to 59% of income taxes.

Some Administration officials and their allies contend that the government is increasing relying on higher-income individuals to finance its programs for lower-income individuals and that this is causing problems. CEA Chairman R. Glenn Hubbard said last week that, "The increasing reliance on taxing higher-income households and targeted social preferences at lower incomes stands in the way of moving to a simpler, flatter tax system."

A recent Wall Street Journal editorial entitled, "The Non-Taxpaying Class" argued that, "Workers who pay little or no taxes" are "detached from recognizing the costs of government." And Treasury Deputy Assistant Secretary J.T. Young recently wrote that higher-income individuals "cannot produce the level of revenues needed to sustain the liberals’ increasingly costly spending programs over the long-term . . . If federal government spending is not controlled then the tax burden will have to begin extending backward down the income ladder."

Study Shoots Down Claim That Navy Made Vieques Air Harmful

A major study has found no evidence that target practice on the Navy’s bombing range on the eastern end of the island of Vieques, Puerto Rico has stirred up pollutants that damage the health of -- or even endanger -- the residents of the island.

Opponents of the only range that east coast U.S. Navy and Marine Corps forces have for practicing combat amphibious invasions have long -- and loudly -- claimed that bombing during the training disburses dangerous substances that are carried miles away by air and harm residents.

The study is the latest to demolish unsubstantiated claims of range opponents of environmental harm or danger to residents from the training. One earlier study found no basis for Governor Calderon’s claim that noise from guns on ships miles from the range thickened the heart walls of Vieques’ residents -- in fact it found that the hearts of the people who Calderon claimed had been thickened were not unusually thick.

Calderon has also supported claims that pollution from the air has caused cancer and other illnesses in Vieques. The island’s civilian population lives at least eight miles from the target range.

Another study found that Vieques’ groundwater was not dangerous because of the training.

The air quality study, like the others, was done by the Agency for Toxic Substances and Disease Registry, an arm of the U.S. Department of Health and Human Services. Like others, it was prepared in consultation with Puerto Rico’s territorial government and independent experts as well as the federal Environmental Protection Agency.

The report said that the study could not rule out a greater impact from the training in the past when live ordnance was used but it judged that the impact probably was not significantly greater. Target practice at the range only uses non-explosive ordnance under a directive that then President Clinton issued after consulting with former Puerto Rico Governor Pedro Rossello (statehood party/D) as well as the top officials of the U.S. military.

The study also reported that Vieques residents were not exposed to harmful levels of uranium by an incident in which a Marine Corps plane fired some bullets made out of depleted (non-radioactive) uranium. News of the incident also led to claims of the health of Vieques residents being damaged.

The studies followed an agreement regarding the range that Clinton developed with Rossello and military officials and a White House directive issued shortly before Clinton left office. The investigations were funded with federal appropriations enacted into law under the Clinton/Rossello/U.S. military agreement. Calderon opposed the agreement and lobbied to have it overturned, but she also requested the studies.

The "Washington Update" appears weekly.

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