Lott Still Expected To Push Calderon Tax Exemption For U.S. Companies… Puerto Rico’s "Fiscal Autonomy": What States And Other Territories Have…Homeland Security Law May Override Puerto Rico Law

December 27, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

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Lott Still Expected to Push Calderon Tax Exemption for U.S. Companies

Senator Trent Lott’s (R-MS) recent loss of the Senate Majority Leader post was a major blow to the federal agenda of Puerto Rico Governor Sila Calderon ("commonwealth" party/no national party). Calderon's alliance with the Mississippi Republican has been based on the strong friendship between Lott and her chief federal lobbyist, Charlie Black. Black's influence has influenced Lott's strong opposition to statehood for Puerto Rico.

Lott’s loss of power was an immediate blow to the centerpiece of Calderon’s economic strategy. Lott had supported a proposal to permanently exempt profits that companies in the States receive from their territorial subsidiaries from federal taxation. The Calderon Administration had been counting on Lott to push the proposal through the Senate and to help gain its ultimate approval. To date, most other key decision-makers on federal tax law have opposed the proposal.

Although Lott has lost his leadership position, Black says that Lott will still push the proposal as a member of the Senate Finance Committee. But whether Lott’s advocacy will be enough to overcome opposition from important players on the issue who now outrank him in position and influence -- such as Chairman Bill Thomas (R-CA_ of the House Ways and Means Committee and officials of the Treasury Department, as well as key Democrats – remains to be seen.

In the wake of the proposal’s rejection by most key federal decision-makers, Calderon’s spokesmen, including Resident Commissioner Anibal Acevedo Vila ("commonwealth" party/D), recently downplayed the importance of and need for the proposal. However, Acevedo Vila has said that they will continue to seek its approval.

Calderon and her supporters likely view the proposal as a long shot but still worth trying for. Calderon, who faces re-election in 2004, clearly wants to lower expectations for its approval. She presumably has realized that she will have to count on other economic accomplishments for her re-election record and that the tax exemption will have to be 'the icing on the cake’ if she ultimately wins its approval.

Puerto Rico’s "fiscal autonomy": What States and other territories have

In downplaying the proposed federal tax exemption for the Puerto Rico profits of companies based in the States, Calderon’s official spokesman and Acevedo said that the Commonwealth’s "fiscal autonomy" was the cornerstone of the territory’s economy and the Calderon Administration’s economic strategy. But what did they mean when they said ‘fiscal autonomy’" . . . and what is it actually?

Some "commonwealthers" like Calderon and Acevedo say that Puerto Rico’s fiscal autonomy is a replacement of the power of the Government of the United States to tax in Puerto Rico.

They (erroneously) base this contention on three elements of law. One is a provision of a 1917 federal law that reorganized the territory’s government and provided for federal-territorial relations. It applied federal laws other than most tax laws to Puerto Rico.

The second element of law is a provision in the 1950 law that provided for a territorial constitution. It left the provision of the 1917 law that applied laws other than most tax laws to Puerto Rico in effect and it made the provision a part of the Puerto Rican Federal Relations Act.

The third element is a provision of the 1950 law that authorized Puerto Ricans to accept or reject the law. Some commonwealthers contend that this authorization means that the Federal Government cannot change any provision of law covered by the 1950 law. They stretch this even further to assert that not only have most tax laws not been applied in Puerto Rico but also that the Government of the United States cannot apply tax laws in the territory.

The assertion contradicts determinations of federal power in the territory by the U.S. Supreme Court and other national government authorities. It also, however, ignores the fact that the federal government has applied taxes to the territory.

The most well known instance of federal taxation in Puerto Rico concerns the excise tax on rum produced in the territory. The 1917 law’s extension of most federal laws to the territory applied laws taxing products. It also provided for the revenue from these taxes to be transferred to the territorial treasury. A 1984 law changed this, however. It provided for the revenue from all products other than rum to stay in the federal treasury, and for a portion of the revenue from rum to stay in the federal treasury as well.

Four subsequent laws have provided for a portion of the rum revenue to stay in the federal treasury. The last of these was enacted last year -- while Calderon and Acevedo were in their present offices!

The biggest instances of federal taxation in Puerto Rico have applied income taxes to the Puerto Rico income of companies based in the States. Most of the income is taxed under a 1993 law. A 1996 law taxes more of it and makes all of the income taxable as of 2006. ?

The federal government has long taxed the non-Puerto Rican income of Puerto Ricans. Similarly, assets in the States left to Puerto Ricans are subject to federal estate and generation-skipping taxes.

Federal taxes on petroleum, chemical feedstocks, certain imported chemical derivatives, ozone-depleting chemicals, and certain vaccines have also been extended to Puerto Rico.

So what is Puerto Rico’s fiscal autonomy? In large measure it is the territory’s authority to enact its own taxes. But this authority is analogous to the authority that the States and the other U.S. territories have – in other words, it is nothing unique.

Puerto Rico’s fiscal autonomy is also the non-extension to date of federal income taxes to the Puerto Rico income of Puerto Ricans. But the Federal Government can end this unilaterally. Additionally, Puerto Rican income of Puerto Ricans by definition is not external investment so often sought for economic development.

Homeland Security Law May Override Puerto Rico Law

Commonwealthers of the Calderon and Acevedo stripe also contend that the joint federal and local approval of Puerto Rico’s territorial constitution means that the Federal Government cannot override provisions of the territorial constitution or laws enacted under it.

In a recent case, they contested the application of a death penalty to Puerto Rico on the grounds that the territorial constitution bans capital punishment. (They lost in the courts, of course.)

Now, theoretically at least, they may have to contend with a new area of intentional federal pre-emption. The law establishing the new federal Homeland Security Department contains an exemption from State and territorial disclosure requirements.

The law specifically applies in full to Puerto Rico. It is another instance of the Federal Government in which Puerto Ricans have no vote applying laws to Puerto Rico -- including in areas that could override territorial law.

The law moves to the new department a number of federal agencies that perform major government services in Puerto Rico. Included are: the Immigration and Naturalization Service; the Coast Guard; the Transportation Security Administration; the Federal Emergency Management Agency; most of the Customs Service; the Agriculture Department’s agricultural inspection unit; and the Bureau of Alcohol, Tobacco, and Firearms, which handles the rum taxes partially transferred to the territory.

A noteworthy aspect of the law for some federal employees in Puerto Rico is that its exempts certain departmental personnel from some civil service protections. The law also changed policies regarding hiring for federal jobs in the case of the new department.

The "Washington Update" appears weekly.

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