Conservative Tax Plan: Sec. 936 Tax Credit An Economic Failure… ABC-TV To Puerto Rico: "Give Me A Break!"… Acevedo’s Congressional Aide Throws Mud at Senior Democrat... Senators Renew Puerto Rico Medicare Increase Proposal... Status Process Petitions Referred to Committee in Senate

March 21, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Conservative Tax Plan: Puerto Rico Tax Exemption Failed Its Economy

One of the most influential conservative policy organizations in the country this week termed the federal tax credit that companies based in the States can take for business income attributed to Puerto Rico a "failed" economic growth strategy and "corporate welfare."

The criticism of Internal Revenue Code (IRC) Section 936 came in a tax reform proposal for underdeveloped communities throughout the nation.

The proposal was made by Empower America, a policy action institute headed by two of the most respected and leading conservative Republican voices in the country: Jack Kemp and William Bennett. Kemp was the Republican candidate for vice president in 1996, Secretary of Housing and Urban Development under President Bush’s father, and a member of the U.S. House of Representatives before that. Bennett was the first President Bush’s "Drug Czar" and Secretary of Education under President Reagan.

Co-Directors of Empower America with Kemp and Bennett are: William Cohen, Secretary of Defense under President Clinton and a Republican senator before that; Jeane Kirkpatrick, President Reagan’s Ambassador to the United Nations; and Vin Weber, a former Republican House member and now a top lobbyist in Washington.

The proposal cites the Sec. 936 credit as a failed economic strategy in criticizing federal ‘empowerment zones’ – underdeveloped areas in which the federal government provides special development aid. It says "empowerment zones were nothing more than a warmed-over effort to inflict on the rest of the country the same failed tax strategy that the federal government had been attempting in Puerto Rico for years – misguided tax subsidies, corporate welfare and federal spending programs that were supposed to ‘stimulate economic growth but which in fact led to further economic stagnation and dependency." A footnote clarifies that Sec. 936 was the failed tax strategy.

The criticism is important because:

    • of the stature and influence of Empower America;
    • it came from conservative advocates of less federal taxation, and
    • it would also apply to the proposal by Puerto Rico Governor Sila Calderon ("commonwealth" party/no national party) for tax exemption for profits that companies based in the States receive from territorial subsidiaries (through an amendment to IRC Sec. 956).

The Empower America ‘white paper’ notes that President Bush has proposed no further funding for the nation’s 15 Empowerment Zones. It also notes that the Empowerment Zones concept was a mid-‘90s expansion of Enterprise Zones, which were originally proposed by Kemp while a member of Congress. (Co-sponsoring the Enterprise Zones proposal with Kemp was Robert Garcia, a New York Democrat of Puerto Rican heritage.)

The Empower America proposal suggests new "National Enterprise Zones of Choice" in territories as well as States. The zones would be areas of with a high rate of residents far below the national median income level. Individuals as well as businesses in the zones would have the option of being taxed under "a simplified, single-rate system that taxes income only once and allows low-income people and small businesses to get access to capital."

Local governments would have to adjust their tax policies to the new system. Businesses would be able to immediately deduct the cost of investments in the zones from their income subject to taxation and would also be able to deduct the cost of inventories held in the zone. Individuals would enjoy not only a low rate of income taxation but also a substantial personal exemption. In addition, income from savings would not be taxed until withdrawn, there would be no tax on profits made from stock investments, and corporate dividends would not be taxed at both the corporate and stockholder levels. Areas would remain zones until five years after the median income of their residents approached the national median.

Poor areas of New York and Los Angeles and Native American reservations were mentioned as proposed zones along with "territories like Puerto Rico and Guam."

ABC-TV to Puerto Rico: "Give Me a Break!"

The ABC television news program "20/20" cast a critical eye March 14th on Puerto Rican requests that the Roosevelt Roads Naval Station be kept in operation even though the Navy and Marine Corps training range on the island of Vieques is closing in response to Puerto Rican requests. The broadcast explained that supporting the range has been the base’s main function.

The report also explained that the base pumps hundreds of millions of dollars annually into the local economy. It noted that the Commander-in-Chief of the Atlantic Fleet, Admiral Robert Natter, has said that maintaining the current operations level at the base without the range would be a waste of taxpayer dollars.

It did not note that the contradictory Puerto Rican policy of wanting to keep the base at its operating level but force an early end to most of its operations has been the policy of the Calderon administration.

"It’s as if some of the protesters want bombs to stop falling from the sky, but they want money to keep falling" program host John Stossel said, concluding "Give me a break!"

Calderon’s position on the issue contrasts with that of statehood and independence advocates. Statehooders also support continued operation of the base but most wanted the Vieques range closed pursuant to a federal-Commonwealth agreement rather than forced, as Calderon vainly tried to do. And some statehooders did not favor closure of the range. Almost none took Calderon’s position on the range. Independentistas have wanted both the range and the base closed.

The Navy has already begun making cutbacks at the base and closing training facilities related to the range. The range is to close May 1, a date was worked out between then President Clinton, then Puerto Rico Governor Pedro Rossello (statehood party/D) and the Navy and Marine Corps -- primarily represented by Natter. Until recently, Calderon refused to accept the date.

The cutbacks are to be completed by the end of this fiscal year – September 30th. Other activities, such as counter drug trafficking efforts, are expected to continue at the base at least through 2005. The federal government is scheduled to consider closure and realignments of military bases in 2005.

Puerto Rico Congressional Aide Throws Mud at Senior Democrat

The top aide to Puerto Rico’s Resident Commissioner in the House of Representatives, Anibal Acevedo Vila ("commonwealth" party/D) sought to discredit a senior House Democrat this week.

Acevedo aide Carlos Dalmau told a reporter that Representative Dale Kildee (MI) in 1994 opposed equal funding for Puerto Rico in elementary and secondary school programs for needy children. For many years, the program was funded in Puerto Rico at about 75% of the national rate.

Dalmau did not point out that Kildee was a primary sponsor of a 1999 proposal to phase in equal funding for Puerto Rico in the programs. This proposal became law in 2001. It will eventually provide Puerto Rico schools with hundreds of millions of dollars a year more.

Dalmau was reacting to a letter that Kildee wrote to Acevedo’s predecessor, Carlos Romero Barcelo (statehood party/D), in which he noted that Romero was the original proponent of the equal funding.

Kildee is the top Democrat on a House Education subcommittee and the second-ranking Democrat on the full Committee on Education and the Workforce. He is also the second-ranking Democrat on the Committee on Resources, the House’s lead committee on territorial affairs. Kildee has served in the House for 26 years and is also Co-Chair of the Automotive Caucus.

Dalmau also told the reporter that the Puerto Rico increase was due to the work of the Calderon Administration and Acevedo in 2001.

In fact, the proposal was initially made earlier by then President Clinton in response to Romero’s request and with the support of then Governor Rossello. Kildee and the top Democrat on the Education and the Workforce Committee, George Miller (CA), were among its earliest proponents. Two other supporters of the Clinton-Romero proposal were Senators Christopher Dodd (D-CA) and Edward Kennedy (D-MA).

Senate Republicans blocked the proposal until the Senate majority switched from Republican to Democratic in 2001. The Democrats who had supported the Clinton legislation for a couple of years then forced its acceptance in a ‘conference’ committee of House and Senate leaders to resolve differences on the education reform bill that President Bush wanted enacted into law. After the conference reached agreement on the Puerto Rico increase, Acevedo publicly lobbied for such legislation.

Senators Renew Puerto Rico Medicare Increase Proposal

Senators Rick Santorum (R-PA) and Bob Graham (D-FL) this week reintroduced legislation to close half the gap between Medicare payments for hospitalization services in Puerto Rico and the rates that apply elsewhere in the nation.

The proposal would have the payments based 75% on the national rates and 25% local cost factors. Current law bases the payments 50% on the national rates and 50% on local cost factors.

The proposal was first made in 2000 by then President Clinton in response to requests from the Puerto Rico Hospital Association and then Resident Commissioner Romero Barcelo. It would increase Medicare payments in Puerto Rico by an estimated $38 million a year.

Santorum and Graham were leading congressional proponents of the proposal in 2000 but it was blocked from becoming law by then Senate Majority Leader Trent Lott (R-MS). Santorum and Graham have continued to support the proposal since then but it has been held up by other congressional differences in Medicare reform legislation.

Others who have supported the proposal since 2000 include Charles Rangel, the top Democrat on the Ways and Means Committee, which has jurisdiction over it in the House.

Ways and Means Committee Member Ben Cardin (D-MD) earlier introduced a bill to phase-in the 75%/25% formula by October 1, 2007 (fiscal year 2008).

The day after Santorum and Graham introduced their proposal, Resident Commissioner Acevedo introduced a similar bill in the House. Acevedo has tried to claim credit for originating the proposal although it was seriously considered in Congress the year before he was seated.

Status Process Petitions Referred to Committee in Senate

The U.S. Senate this week formally referred some 62,000 petitions for the federal government to provide a process by which Puerto Rico’s status issue can be resolved to its committee on territorial affairs (Energy and Natural Resources).

The petitions were recently presented to Senate Republican Conference Chairman Santorum by a group led by Puerto Rico Senator Miriam Ramirez de Ferrer (statehood party/R). They were gathered by the Organization for Full Statehood for Puerto Rico.

Puerto Rico currently is a U.S. territory. Its status issue can be resolved by the territory becoming a State of the U.S. or a sovereign nation (whether fully independent or in a free association with the U.S.). It is currently treated like a State for the purposes of most federal laws.?

The petitions are not expected to lead to action on the issue but Santorum had pledged that they would be formally received by the Senate.

Both Houses of the Congress have made it clear over the years that they would consider a Puerto Rican petition for a new political status for the territory. They have also made it clear, however, that the petition would have to represent a majority vote in Puerto Rico.

Still, this week’s formal introduction and referral of the recent petitions was noteworthy Senate Republican leadership respect for the petitions. Santorum is the Senate’s third ranking Senate Republican leader. Legislation supporting a status choice for Puerto Rico was opposed by Republican Party’s immediate past Senate leaders, Senators Lott and Don Nickles (OK).

Ramirez prompted House and Senate legislation to enable Puerto Ricans to choose the territory’s future status by presenting 300,000 petitions for statehood to congressional leaders in 1987.

The "Washington Update" appears weekly.

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