Senate Committee Votes To Cut Roosevelt Roads Funds By 50%... Resident Commissioner Tries To Hide Roosevelt Roads Cut... Disinvestment Plan And Rum Tax Transfer Dropped From Economic Bill... Lott Predicts Calderon Tax Cut For Companies In The States Before 2005

May 23, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

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Senate Committee Votes To Cut Roosevelt Roads Funds By 50%

The U.S. Senate Armed Services Committee recommended a 50 percent cut in funding for the largest military base in Puerto Rico, the Roosevelt Roads Naval Station.

The recommendation was made in approving the national defense policy bill for the fiscal year that begins October 1. The bill passed both Houses of the Congress late Thursday.

The Committee report "strongly" supported a Navy plan to reduce operations at Roosevelt Roads, which is located on the eastern side of Puerto Rico’s main island. The plan will cut employment at the base by 65 percent and "reduce the number of military operational and administrative units [at the base] by 60 percent" over an 18-month period.

The Committee said the reductions warranted a cut in the base’s operating budget from $58 million to $29 million.

Its report noted that the base is being downsized because of the closure of the Atlantic Fleet’s longtime weapons training range on the Puerto Rican island of Vieques and the relocation of Vieques-based training functions to the States [and adjacent waters].

The Committee agreed with the Navy that, "[a]s a result, the overhead structure at [Roosevelt Roads] is ‘. . . significantly oversized for the remaining missions and must be reduced.’"

It backed the "plan to dis-establish or reassign military administrative and operational units currently located at [Roosevelt Roads] that were previously connected with training at Vieques." Supporting training on the Vieques range and in nearby waters had been Roosevelt Road’s major function.

The Senate action was an unsurprising setback for the goal of Puerto Rico Governor Sila Calderon ("commonwealth"/no national party) to have operations at Roosevelt Roads maintained at the Vieques range training level despite the end of the training -- which she sought. The commander-in-chief of the Atlantic Fleet, Admiral Robert Natter, recently said that the base is "a waste of taxpayer dollars" without the range.

Earlier, the Navy’s highest-ranking officer, Chief of Naval Operations Vernon Clarke, made a similar suggestion to the House Armed Services Committee.

Calderon’s pleas to have base operations continued despite the end of Vieques training are falling on ears that are particularly deaf to them because she did not honor an agreement between her predecessor, Pedro Rossello (statehood/D) and the federal government regarding the range. Her refusal to recognize the agreement as well as her intentional violations of it caused senior military officials to feel that Puerto Rico is not a reliable location for military facilities investments.

The Roosevelt Roads cutback is the latest in a series of military cutbacks in Puerto Rico influenced by Calderon’s violations of the Vieques agreement. Last year, the Army’s Southern Command moved away from the territory just two years after moving there.

The command had been located in Puerto Rico -- at Fort Buchanan in San Juan -- due to Rossello’s efforts. Calderon, however, did not seek to keep it in the islands until after the decision to move it had really been made. She also contributed to a political atmosphere that made officers feel uncomfortable. In addition, later, the Congress rescinded an appropriation of $32 million for improvements at Fort Buchanan.

Calderon’s official representative in the Congress, Resident Commissioner Anibal Acevedo Vila, has tried to convince officials in Washington that that the waters off Vieques should still be used for naval training and that Roosevelt Roads is still needed militarily. He has not succeeded. Calderon does not want the base to be closed because of the economic impact, especially on the community near the base, which is located in the municipality of Ceiba.

Closure is a serious prospect in light of the closure of the Vieques range and of the views of top military officials, like Clarke and Natter. The views are shared by some key members of the Congress.

The base’s fate will probably be ultimately determined in 2005 by a "base realignment and closure commission" established by law that will consider consolidations of military facilities to cut unneeded costs.

Resident Commissioner Tries To Hide Roosevelt Roads Cut

Resident Commissioner Acevedo Vila apparently tried to hide the Committee’s recommended cut of funding for Roosevelt Roads from Puerto Ricans. Acevedo issued a news release on the Committee’s action on the national defense bill but did not mention the Roosevelt Roads cut.

Instead, Acevedo hyped insignificant language in the report on the environmental clean-up of former Navy lands on Vieques. The language was insignificant in importance because it merely restated the law on the subject and asked the Navy to keep the Congress’s armed services committees informed of clean-up actions and plans.

The language addressed the clean-up of both the former range, which was on the eastern side of Vieques, and the ammunition storage facility, which was on the western side. The Navy transferred control of the land on the western side -- 25 percent of the island -- to the municipality of Vieques, the U.S. Department of the Interior, and the Puerto Rico Conservation Trust, a joint entity of the territorial government and the Interior Department in May 2001. It transferred control of the land on the east — 40 percent of the island — to the Interior Department earlier this month.

The Committee report discussed clean-up procedures for the western land that reiterated the requirements of a law enacted in 2000 that approved elements of the agreement regarding the Vieques range worked out by former Governor Rossello with then President Clinton and Pentagon officials.

It also noted that most of the land on the eastern side is to be managed as a wildlife refuge and the former main bombing area is to be maintained as a wilderness area with no public access and that these uses would govern the extent of the clean-up. The language should have been a disappointment to Acevedo and Calderon who want to have most of the land transferred to local ownership and a clean up consistent with non-federal ownership.

The Clinton-Rossello agreement regarding the range would have enabled Puerto Ricans to obtain three-quarters of the land. Legislation sought by the Interior and Navy Departments to authorize the transfer was dropped when Calderon acted against the agreement as governor.

The Committee said that information regarding the Vieques clean-up could be submitted to it through a broader report on the overall Defense Environmental Restoration program. It stated an expectation that the clean-up would be expeditious but also noted that this would have to be within "available funds, overall priorities, and applicable laws."

Governor Calderon recently suggested that she had obtained a higher clean up standard for the land by designating it as Puerto Rico’s priority on the "Superfund" National Priorities list maintained by the Environmental Protection Agency. An agency official said, however, that the designation might make the clean-up a higher priority but was not expected to result in a higher clean-up standard since the standards to be used -- as the Senate committee noted -- are based on the planned use of the property.

The official noted that Calderon had been told this earlier by EPA Administrator Christie Todd Whitman, who announced her resignation this week.

Disinvestment Plan And Rum Tax Transfer Dropped From Economic Bill

Republican leaders this week rushed to have the Congress pass a $350 billion economic bill in response to President Bush’s $726 billion tax cut package as the week ended. The bill would cut taxes $330 billion and provide $20 billion in aid to States and territories, including Puerto Rico.

Bush and Vice President Dick Cheney worked out final details with Republican congressional leaders including House of Representatives Ways and Means Committee Chairman Bill Thomas and Senate Finance Committee Chairman Charles Grassley. Democrats were not included in the negotiations.

The House passed the bill early Friday morning and the Senate was expected to pass it later in the morning. President Bush plans to sign it next week.

The signature element of the package would cut the tax on stock dividends and capital gains (profits from the sale of investments) to 15 percent through 2008. It would benefit Puerto Ricans with substantial earnings from the States. Investors now pay a tax of up to 38.6 percent for dividends and 20 percent for capital gains.

Many more Puerto Ricans would benefit from a temporary increase from $600 to $1,000 in the refundable tax credit that parents can take for their children. The credit applies to Puerto Ricans who pay Social Security tax and have three or more children. The payments will be made as early as July. The increase would apply in 2003 and 2004. The credit would drop to $700 in 2005, go up to $800 in 2009, go back to $1,000 in 2010, and fall to $500 in 2011.

Puerto Rico would also get shares of the $20 billion. As of this writing, half of the $20 billion would be for Medicaid, the federal subsidy for medical care for low-income individuals, and half would be for other needs. Some of the unrestricted aid would be for municipal governments.

The Commonwealth would get a relatively small percentage of the funds, however. It would be treated in funding provisions like the other territories rather than the States and the District of Columbia.

The problem with this is that the other territories have tiny populations -- 140,000 in the case of the largest, Guam. With a population of 3.8 million, Puerto Rico, by contrast, has a population greater than 24 States and D.C.

Some federal funding formulae recognize this and provide Puerto Rico with a State share of funding. This legislation does not. Puerto Rico would get shares of the aid that are significantly less than its share of the national population.

It would also get shares that are much less on a per person basis than the other territories would get. Two statehood party Puerto Rico senators who would like to succeed Resident Commissioner Acevedo Vila, Minority Leader Kenneth McClintock Hernandez (D) and Miriam Ramirez de Ferrer (R), criticized Acevedo for not obtaining a better funding formula. In fact, it is not clear that Acevedo or Governor Calderon’s lobbyists attempted to do so.

The disinvestment incentive that was added to the bill in the Senate last week was dropped from the final legislation. The provision would have lowered the corporate income tax rate on earnings that companies in the States receive from "controlled foreign corporations" (CFCs) in territories as well foreign countries from 35 percent to 5.25 percent for one year only. The purpose was to encourage companies to ‘repatriate’ as much in profits and assets to the States as possible.

Acevedo had sought Puerto Rico’s inclusion in the cut, mistakenly considering it to be a step toward a Calderon proposal to which it bears some similarity. He did not understand that it would be a disinvestment incentive and not an incentive for new investments in the territory. Calderon’s proposal would also cut the corporate tax on repatriated CFC income from 35 percent to 5.25 percent — along with alternative cuts to 3.5 percent and to zero but would limit the cut to CFC profits from U.S. territories and provide the cut on a permanent basis.

The intent of the disinvestment incentive is that it not be extended so that it would provide a powerful incentive to companies to repatriate earnings to the States over the next year. Before Acevedo’s request for Puerto Rico’s inclusion, it was estimated that the provision would cause companies to repatriate $135 billion to the States. Afterwards, the estimate was increased to $140 billion.

The Congress’ Joint Committee on Taxation estimated that the federal government would lose $2.2 billion in taxes on income repatriated from Puerto Rico to the States if the tax rate is cut to 5.25 percent for one year. The $2.2 billion represents much more in funds that are expected to be repatriated from Puerto Rico to the States as it would just be the taxes lost on the total amount of the repatriated funds.

Acevedo this week disputed the Joint Tax Committee’s estimate of the amount of money that companies in the States would have repatriated from their Puerto Rico CFCs but there is no question that the proposal would only have provided a disinvestment incentive -- and not an investment incentive.

The disinvestment proposal is now expected to be included -- or at least seriously considered -- in a reform of provisions of the federal tax code dealing with foreign and territorial income of taxpayers in the States.

The final bill also did not include an amendment that the Senate passed earlier this week although it passed the economic bill itself last week. The amendment would extend the transfer to Puerto Rico and the neighboring U.S. territory of the Virgin Islands of $3 per proof gallon of federal taxes on rum distilled in the two territories and on rum imported into the States from foreign countries.

The grant is due to expire at the end of this year. The amendment would have extended it through 2004. Congressional tax committee staff say that the amendment is likely to be included in a package of extensions of expiring tax provisions later this year.

The $3 provides Puerto Rico with about $60 million a year. It was initiated by President Clinton working with then Governor Rossello and then Resident Commissioner Carlos Romero Barcelo (statehood/D).

A sixth of the funds go to the Puerto Rico Conservation Trust. Lobbyists for the Trust were largely responsible for the Senate amendment this week.

In addition to the $3, $10.25 of the tax is transferred to the two territorial governments as a federal subsidy of their operations. The total tax is $13.50 per proof gallon.

Lott Predicts Calderon Tax Cut For Companies In The States Before 2005

Senator Trent Lott (R-MS), Governor Calderon’s closest ally in the Senate, predicted approval this Congress of her proposal to cut the tax on CFC income repatriated from territories only to parent companies in the States 85-100 percent on a permanent basis.

He said that when he and Senator John Breaux (D-LA) team up on an issue they often win. Lott was recently deposed as Senate Republican leader. Breaux has often bill a key figure in tax legislation.

However, Lott and Breaux failed to convince the Senate Finance Committee to approve the Calderon plan two weeks ago -- with Breaux even noting that it lacked the votes to pass the committee. Additionally, the plan has been opposed by Chairman Thomas of the House Ways and Means Committee and the senior Democrat on the Senate committee, Max Baucus (MT). It is also not supported by Senate committee Chairman Grassley, the Treasury Department, or the Bush White House.

The proposal could also be hurt by the decisions of Calderon and Acevedo not to run for re-election and the apparent popularity of Rossello as a candidate to replace Calderon. Rossello has been a strong critic of the Calderon proposal and a supporter of extending an existing tax credit for wages, investments, and local taxes in Puerto Rico by companies based in the States.

In rejecting the Calderon proposal, the Senate committee indicated a willingness to consider alternatives to Calderon’s proposal. Baucus and Thomas have specifically suggested a willingness to consider extending the existing wage based credit, among other ideas. The Treasury Department has previously supported an extension.

The "Washington Update" appears weekly.

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