Why The Senate Did Not Vote On Closing Puerto Rico Base… Calderon Confident Of Federal Tax Exemption For Companies

July 18, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Why The Senate Did Not Vote On Closing Puerto Rico Base

The U.S. Senate Thursday night approved legislation to fund most national defense activities during the year that begins October 1st without considering whether to close Naval Station Roosevelt Roads, the largest military installation in Puerto Rico.

The Defense Appropriations Bill that the House of Representatives passed the week before includes a section that would require the base to be closed within six months and its 8,600 acres sold in a public sale.

Senate Armed Services Committee Member James Inhofe (R-OK) filed an amendment to the version of the bill that the Senate Appropriations Committee reported last week that was identical to the House language. The Senate committee bill did not include a provision regarding the base.

Two factors appear to have persuaded Inhofe to not actually offer the amendment. One was strategic. Broad Puerto Rican opposition to closing the base prompted fellow Armed Services Committee Member Bill Nelson (D-FL) to offer a counter amendment.

Nelson’s amendment would have expressed the "Sense of the Senate" that the question of the future of the base should be considered when a Base Realignment and Closure Commission considers the consolidation of all U.S. military facilities in 2005. Although "Sense of the Senate" language is not binding, the language would have prevented the base’s closure if it substituted for the House/Inhofe language.

Although Inhofe reportedly had the backing of Armed Services Chairman John Warner (R-VA), the outcome of a contested vote in the full Senate between the two amendments was uncertain. Moreover, the fight was unnecessary. Language requiring closure of the base could appear in the final congressional version of the bill even if it was not added to the Senate version.

The inclusion of closure language in the House bill means that the issue will be resolved by the conference of House and Senate leaders on Defense Appropriations issues that will be named to reconcile the differing House and Senate versions of the bill. These leaders may be more sympathetic to the idea of closing the base than the full Senate.

The full Senate, however, would almost certainly accept the judgment on the issue of the Defense Appropriations conference. It could only reject the decision by rejecting the entire Defense Appropriations conference report.

Also influencing Inhofe was the request of Puerto Rico Senator Miriam Ramirez de Ferrer (statehood/R). Ramirez is respected by Inhofe and other key congressional figures on military issues for courageously and steadfastly supporting the base’s major activity -- combat amphibious invasion practices on a range on the nearby Puerto Rican island of Vieques -- despite overwhelming opposition from other territorial leaders.

It is the closure of the range May 1st in response to Puerto Rican demands and the territorial government’s violations of an agreement with the federal government regarding the range that led to the House provision to close the range.

The agreement, worked out in 2000 by then President Clinton and then Governor Pedro Rossello (statehood/D), would have let the residents of Vieques determine whether the range would be closed May 1st or continue to exist. Although it had been endorsed by the territorial legislature and most of its provisions had been enacted into federal law, Rossello’s successor, Sila Calderon ("commonwealth"/ no national party), refused to recognize the agreement and broke some of its specific commitments in a vain effort to have the training ended immediately.

Ramirez is just as strong a supporter of the continuation of Roosevelt Roads as she was of the continuation of the range.

The combination of these factors persuaded Inhofe to not offer his amendment. When he did not, Nelson also dropped his amendment.

Ramirez wasn’t the only Puerto Rico leader lobbying the Congress to continue the existence of the base this week. Governor Calderon and Resident Commissioner Anibal Acevedo Vila ("commonwealth"/D) said they discussed the legislation with a number of senators. The meetings, however, were not held with the Congress’ key decision-makers on the issue.

Calderon and Acevedo also discussed the situation with Department of Homeland Security Deputy Secretary Gordon England. As Secretary of the Navy, England approved the final plan for closing the Vieques range. The purpose of the talks was to convince the new federal department to locate operations at the Roosevelt Roads base, replacing Navy units.

Acevedo claimed that England was "concerned" about the closing and suggested that his new agency might locate an operation at the base if it remained open.

Acevedo did not, however, suggest that the Homeland Security Department would inform the Congress that it was interested in taking over base facilities from the Navy. It would certainly do this if it were really interested in locating operations there. And Calderon seemed to downplay the possibility in the same news conference in which Acevedo suggested it.

More targeted lobbying on the issue was conducted by a group of Puerto Rico Republican leaders. They met with Republican House members and others

in an effort to get them to discourage the primary sponsor of the House language, Defense Appropriations Subcommittee Chairman Jerry Lewis (R-CA), from pressing the issue in the conference.

The group included: the territory’s Republican National Committeeman, Luis Fortuno, and Committeewoman Zoraida Fonalledas; the mayor of Puerto Rico’s second most populous municipality, Ramon Luis Rivera, Jr. (statehood); and others. It was accompanied by lobbyists Juan Carlos Iturregui and Jose Fuentes Agostini. Iturregui represent the city of San Juan and Fuentes represents Puerto Rico’s other municipalities that have statehood party mayors.

Calderon Confident Of Federal Tax Exemption For Companies

Calderon’s congressional meetings appeared to be more geared towards obtaining support for her proposal that profits that manufacturing companies in the States receive from U.S. territories be exempted from federal taxation.

After what she described as "very positive" talks on the proposal with a number of senators and primary House sponsor Charles Rangel (D-NY), she said she was so "confident" about its prospects that she would not compromise on it. She declined, however, to give any information on the outcome of the meetings, saying she wanted to be "discreet."

Calderon said she was withholding encouraging information to prevent lobbying by unnamed forces opposed to "the best interests" of Puerto Rico. But she also may have declined to characterize the positions of individual members of the Congress because past statements that she and aides, including Acevedo, have made in this regard have proved to be untrue and angered key congressional figures on the issue.

When Calderon said that Senate Finance Committee senior Democrat Max Baucus (MT) supported the proposal, he issued a news release to say that he did not. When Acevedo and Calderon’s chief economic advisor and romantic friend, Ramon Cantero Frau, said that they thought House Ways and Means Committee Chairman Bill Thomas (R-CA) would support the proposal based upon a meeting that they and Calderon had with the chairman, Thomas told a reporter that he did not. When UPDATE recently revealed that the Internet website of Calderon’s office’s in the States claimed that the Senate Finance Committee approved the proposal, it caused consternation in the Committee and the primary section of the website making the claim was subsequently eliminated.

Calderon’s proposal would permanently exempt from federal taxation 85-100 percent of the profits that territorial subsidiaries established as foreign corporations transfer to their parent companies in the States. Primarily amending Section 956 of the Internal Revenue Code, it is designed to replace Code Sections 936 and 30A, which in 1996 were limited to existing users of the sections and ended at the end of 2005.

Section 936 provides companies in the States with tax credits equal to 40% of the income that they receive from Puerto Rico subsidiaries. Section 30A, established as a preferred alternative to Section 936 in 1993, provides companies with tax credits based on wages and local taxes paid in Puerto Rico as well as investments in plants and equipment there.

Calderon began her talks this week on the proposal the day after the Finance Committee conducted its second and final hearing in preparation for developing the bill in which the governor hopes her proposal will be included. The bill would make a number of changes in tax laws regarding the foreign income of companies based in the States.

When Finance Committee members discussed Calderon’s proposal in May, its primary proponent in the Committee, Senator John Breaux (D-LA), said he recognized that it did not have the support of a majority of the members but asked that the question of replacing Section 936 be examined. A consensus developed on examining the question and alternatives to Calderon’s proposal when the Committee considered legislation on reforming tax laws on foreign income. Several senators also suggested that the question be covered by a hearing on the foreign income legislation.

Recently, Committee Chairman Chuck Grassley (R-IA) and Baucus determined that the hearing this past Tuesday would be the final hearing before they develop the proposed legislation. They plan to introduce the proposal in early September -- after the Congress takes a month-long break from meeting in August -- and they hope to have it considered by the Committee later in September.

The legislation is being expedited because the World Trade Organization has determined that U.S. "Foreign Sales Corporations" ("FSCs") violate international agreements that prohibit government subsidies of exports and that the European Union can levy $4 billion a year in penalties on the U.S. because of this.

FSCs are special subsidiaries of U.S. companies established only to export products. U.S. tax laws give FSCs special tax cuts.

The Finance Committee’s plans for the legislation probably helped get Calderon to visit Washington this week. Her 956 amendment has been the top federal priority of her administration.

Although Calderon said that the reactions to her 956 requests this week were very encouraging, the actual results were unclear. UPDATE found that at least one of the four Finance Committee members she met was convinced after his meeting with her that the proposal was a bad one. Two of the four criticized it during the Committee’s May meeting that discussed it. And Committee sources continued to report no serious interest in the proposal.

In an effort to obtain a more viable investment incentive for Puerto Rico, territorial Senate Majority Leader Kenneth McClintock (statehood/D) arranged to have a statement requesting an extension of Section 30A included in the hearing. McClintock’s statement noted that 30A would help the type of plants that have left Puerto Rico for lower-cost foreign locations whereas the 956 amendment would only benefit companies that are already very profitable in their Puerto Rico operations. Recognizing the similarities between the proposed 956 amendment and Section 936, he also pointed out that a past majority of the Committee had supported an extension of 30A while there had been overwhelming congressional opposition to the continuation of 936.

Calderon may have had a more successful meeting with Rangel. In addition to being a primary sponsor of the 956 amendment in the House, the senior Democrat on the Ways and Means Committee is also a primary sponsor of one of the two major proposals being considered by the Committee to replace the FSC law.

Rangel’s FSC replacement legislation would give all U.S. manufacturing -- including manufacturing in Puerto Rico and other U.S. territories a 10 percent tax cut beginning in 2006 (the day after the 936 and 30A tax cuts for manufacturers in Puerto Rico expire).

After the Rangel meeting, Acevedo said that the Rangel 10 percent tax cut for manufacturing in Puerto Rico and all other U.S. areas and Calderon’s 85-100 percent tax cut for territorial profits were "compatible." He did not explain whether this meant that he would settle for a 10 percent tax cut for all U.S. manufacturing, all U.S. manufacturing should get a permanent 85-100 percent tax cut, or he envisions manufacturing in territories getting an 85-100 percent tax cut in a bill that gives manufacturing in the States only a 10 percent tax cut.

The "Washington Update" appears weekly.

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