Tax Panels To Work On Possible Vehicle For Calderon Proposal... Democratic Presidential Hopeful Said To Back Calderon Tax Proposal... Chairman Plans DC House Vote Bill in 2003 but Speaker Unsure

July 4, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Tax Panels To Work On Possible Vehicle For Calderon Proposal

The chairmen of the U.S. Congress’ tax law-writing committees plan to turn their attention this month to legislation that would revise rules regarding income that companies based in the States and the District of Columbia receive from elsewhere.

The Senate Finance Committee agreed in May to review ideas for replacing Internal Revenue Code (IRC) Section 936 in its development of the international tax bill. Section 936 gives companies a credit against 40 percent of the taxes due on income they attribute to Puerto Rico, however, it expires at the end of 2005.

Puerto Rico Governor Sila Calderon ("commonwealth’" party/no national party) has proposed that 85 to100 percent of the profits that the companies receive from Puerto Rico and other territories be permanently exempted from taxation. A majority of the Senate Finance Committee appeared to oppose the proposed amendment to IRC Section 956 in May but agreed to look into Puerto Rico’s economic needs and ideas for helping the territory when it considered the international tax bill.

One idea that some Senators have considered is extending tax code Section 30A. This law provides a credit against taxes for wages and local taxes paid in Puerto Rico and investments in plants and equipment. (Section 30A also expires at the end of 2005.) An aide to the Senate Finance Committee stated that the panel was open to other ideas as well.

Senate Finance Committee Chairman Charles Grassley (R-IA) and senior Democrat Max Baucus (D-MT) plan to draft a bill in consultation with other Senate Finance Committee members with the goal of introducing it by the end of this month. They intend for the Finance Committee to consider the bill in September or later. The schedule could slide, however, because of conferences with congressional Members of the House of Representatives on the Medicare prescription benefit and the Refundable Child Credit bills.

Senator Grassley rejected requests by Senator Trent Lott (R-MS), the former Majority Leader of the Senate, and Senator John Breaux (D-LA) in May to include Governor Calderon’s Section 956 proposal in the tax cut legislation that became law shortly afterwards. Senator Baucus has also publicly contradicted Governor Calderon’s claim that he had supported the proposal.

House Ways and Means Committee Chairman Bill Thomas (R-CA) plans to have his committee consider his own version of an international tax bill this month. The bill does not include provisions on Puerto Rico and Chairman Thomas has spoken against Governor Calderon’s proposal.

House Ways and Means Committee senior Democrat Representative Charles Rangel (D-NY) has stated that Chairman Thomas "does not have the votes," necessary for passage of the bill. This is because two of the House Ways and Means Committee’s Republicans support an alternative bill sponsored by Representatives Rangel, Ways and Means Trade Subcommittee Chairman Philip Crane (R-IL) and Small Business Committee Chairman Donald Manzullo (R-IL).

Their bill would provide a 10 percent tax cut for manufacturing in the States and the territories of the U.S. with a lower tax cut in foreign countries. The bill’s advantage for Puerto Rico over foreign countries is that it would meet a goal that Governor Calderon has spoken of quite a bit. However, the bill’s lack of an advantage over the States would not meet another one of her goals, one that she does not explain very often.

Representatives Crane and Rangel have been the primary House supporters of Governor Calderon’s 956 amendment, which would provide a much greater tax cut for manufacturing in U.S. territories than in the international tax bill.

In addition, a House Ways and Means Committee aide believes that the competing Thomas and Crane-Rangel-Manzullo bills will be combined.

Driving the legislation is the need to repeal tax benefits for certain subsidiaries that companies set up exclusively in order to export products. The World Trade Organization (WTO) has ruled that the ‘Foreign Sales Corporations’ provisions are an unfair subsidy for exports. The WTO can penalize the U.S. substantially if the law is not changed. A law on the subject is, therefore, considered to be ‘must pass’ legislation.

Democratic Presidential Hopeful Said To Back Calderon Tax Proposal

The head of Governor Calderon’s offices in the States has quoted Senator Bob Graham (D-FL) as saying he would support measures such as Governor Calderon’s Section 956 amendment.

Puerto Rico Federal Affairs Administration Executive Director Mari Carmen Aponte this week issued a news release stating that Senator Graham, one of nine Democrats seeking their party’s presidential nomination, made the statement in response to a question that she asked at a national conference of Latino elected officials.

Executive Director Aponte also quoted Senator Graham as saying "it was a mistake to have rolled back the benefits which had created such a positive investment climate in Puerto Rico" -- presumably a reference to Section 936 and, possibly, Section 30A.

According to an aide to Governor Calderon, Senator Graham went on to state, "As president -- as a senator today -- I will work to see that there are incentives that encourage investment in this important part of America."

It should be noted that Senator Graham was not asked to -- and did not -- endorse Governor Calderon’s Section 956 amendment specifically. But Senator Graham’s generally supportive words were clearly taken by Aponte as a boost to the Governor’s 956 campaign.

In fact, Senator Graham’s comments were placed in the release second only to Aponte’s characterization of herself as "a nationally regarded leader in the Hispanic community." Aponte’s release also gave a brief resume of her career rather than of Senator Graham’s.

Senator Graham has been an active and reliable supporter of proposals for Puerto Rico. He worked with Governor Calderon’s predecessor Pedro Rossello (statehood/D) and with President Clinton to extend Section 30A as well as to increase health care funding in the territory. Senator Graham also worked with them to enable the territory to choose to be a State of the U.S. or a nation.

Aponte’s question for Senator Graham was a leading one. Her preface claimed that "12 members of the Senate Finance Committee gave indications of their support for the Governor’s proposal," in May.

In fact, according to the primary sponsor of the proposal, Senator Breaux, the Senate Finance Committee rejected it in the May meeting. Eleven senators, instead, joined with Senator Breaux in order to make sure that corporate subsidiaries based in Puerto Rico are treated the same as subsidiaries in foreign countries in a measure designed to accomplish the opposite purpose of Governor Calderon’s: disinvestment rather than investment.

This proposal would have given companies based in the States an 85 percent tax cut for one year on funds sent to the States from foreign countries and U.S. territories. Its goal was to encourage U.S. companies to shift assets from areas outside the States to the States.

Senator Breaux moved to include income from Puerto Rico at the request of Governor Calderon’s official representative in the Congress, territorial Resident Commissioner Anibal Acevedo Vila ("commonwealth"/D). Resident Commissioner Acevedo apparently did not understand that the proposal was designed to encourage disinvestment in areas outside the States rather than investment.

Chairman Plans DC House Vote Bill in 2003 but Speaker Unsure

The chairman of the U.S. House of Representatives committee with jurisdiction over most of the District of Columbia issues "hopes" legislation to grant the district a Representative with a vote on the final passage of legislation in the House "will pass this year," his spokesman stated this past week.

However, House Speaker J. Dennis Hastert (R-IL) said House Government Reform Committee Chairman Tom Davis (R-VA) "has not talked to me about this." He added that "Davis floats things from time to time."

Chairman Davis, who represents a Washington, DC suburb, has stated that he is developing a proposal that would also give a State -- probably Utah -- an additional House seat. Giving predominantly Republican Utah another Representative would prevent the granting of a vote to the overwhelmingly Democratic District of Columbia which would affect the current 12 vote Republican advantage in the House.

Granting non-State DC a representative could, however, have important implications for the political status of Puerto Rico and the other territories of the U.S. It would raise the question of whether they, too, could obtain representatives in the U.S. House.

This could result in the development of a new ‘commonwealth’ proposal in Puerto Rico or proposals in other territories for the territory to elect a representative.

On the other hand, since Chairman Davis’ plan would have to involve an amendment to the U.S. Constitution in order to be effective, it could support the idea of statehood for Puerto Rico. Federal courts have consistently ruled that the U.S. Constitution only permits States to have representatives with votes on the final passage of bills in the U.S. Congress.

Amending the Constitution is difficult. Amendments require two-thirds votes in favor in each House of the Congress and the approval of three-quarters of the States. Puerto Ricans who want representation in their national government would recognize that it might be much easier to obtain statehood than to obtain a constitutional amendment.

Additionally, as a State, Puerto Rico would have six Representatives rather than one and it would have two seats in the U.S. Senate. Some Washington, DC statehood leaders oppose Chairman Davis’ idea, contending that it would impede statehood and the granting of two senators to the district for equal representation.

Congressional Republicans have traditionally opposed statehood or full voting representation for Washington, DC -- where Democrats outnumber Republicans 11 to 1. Some congressional Republicans have also opposed statehood for Puerto Rico concerned that it, too, would be a ‘Democratic State.’ However, other Republicans favor statehood for Puerto Rico and believe Republicans could be competitive in Puerto Rico.

Chairman Davis’ plan could also affect congressional views of Puerto Rico statehood by increasing the number of Members of the House. Puerto Rican statehood has been questioned by some opponents because it would either require that the current 435 seats be reapportioned, with the current States losing a total of six, or that six seats be added to the U.S. House. Although the U.S. Congress can change the number of Members of the House of Representatives by law, the number has remained at 435 since 1912, except for a two-year period, in which it was temporarily expanded to 437 after the admission of Hawaii and Alaska as States.

The "Washington Update" appears weekly.

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