Two Influential Republicans Cast Aside Governor’s Tax Plan, Former Senate Sponsor Also Dashes Hope for Inclusion in Current Tax Bill… Economist Rips Governor’s Proposal, Suggests a Very Different Alternative… U.S. Senators Support Puerto Rico Congressional Candidate

August 1, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Two Influential Republicans Cast Aside Governor’s Tax Plan, Former Senate Sponsor Also Dashes Hope for Inclusion in Current Tax Bill

One of the two U.S. senators who formerly sponsored Governor Sila Calderon’s top federal priority this week explained that it would not make sense in light of a bill he proposed last week.

Orrin Hatch (UT), the second-ranking Republican on the Senate Finance Committee, also contradicted Resident Commissioner Anibal Acevedo Vila’s strategy for Calderon’s proposal.

Hatch’s disappointing words for Calderon ("commonwealth" party/no national party) and Acevedo ("commonwealth"/D) came in a statement to the full Senate. He explained that the bill he introduced last week to reform the taxation of business income would provide companies in the States with special subsidiaries in foreign countries and U.S. territories with a tax break that Calderon proposed for companies with the subsidiaries in the territories alone.

The Judiciary Committee Chairman recognized that this would give companies in the States no incentive to invest in Puerto Rico. He added that he would support separate economic legislation for the territory. He did not, however, indicate what such a bill would do or when it would be proposed -- let alone considered.

The statement appeared to have been requested by Calderon and/or Acevedo. It used language that they have used. Neither Calderon nor Acevedo, however, notified Puerto Ricans of it -- perhaps because it embarrassed them.

Calderon’s proposal would exempt profits that companies in the States receive from "controlled foreign corporation" ("CFC") subsidiaries in U.S. territories from 85%, 90%, or 100% of the federal corporate income tax. Hatch’s would exempt 85% of the profits that companies in the States receive from their CFCs in foreign countries as well as territories and productively invest in the States.

In the last Congress, Hatch joined Senator John Breaux (D-LA) in introducing the Calderon plan. Breaux is the only Member of the Congress to have formally proposed it in this Congress, however. He raised it during a Finance Committee meeting in May but also acknowledged that a majority of the Committee would not support it.

Breaux’s statements did, however, get a few Committee members to agree to consider whether special tax measures are needed for Puerto Rico when the Committee considers legislation to reform the taxation of "international" income of U.S. companies. (Corporate income from U.S. territories is considered "international.")

The special measures would replace credits that companies based in the States currently can claim against taxes on 40% of their Puerto Rico income or for wages, investments in plants and equipment, and local tax payments in the territory. These credits expire at the end of 2005.

Committee interest in the question of whether to replace the credits appears to have diminished since May. Still, Acevedo and Calderon have been working to have Calderon’s proposal included in the international income legislation.

Both Houses of the Congress are expected to act on the legislation beginning in September, after the annual August "recess."

The primary Senate bill is expected to be proposed by Finance Committee Chairman Chuck Grassley (R-IA) and senior Democrat Max Baucus (D-MT). Their bill also is not expected to include Calderon’s proposal. Grassley has privately rejected it and Baucus has publicly spoken against it.

The primary House of Representatives bill includes a version of Calderon’s proposal that would be even worse for Puerto Rico’s economy than Hatch’s. Sponsored by Ways and Means Committee Chairman Bill Thomas (R-CA), the bill would give companies with CFCs in both foreign countries and U.S. territories an 85% tax cut for six months only. The purpose is to encourage companies to take money out of their CFCs and reinvest it in the States.

Thomas has also publicly criticized Calderon’s proposal. His bill is expected to be acted on in September. Hatch’s is a rough counterpart to it, although the two bills differ on the CFC provision.

Even after Thomas and Hatch introduced their bills last week, Acevedo’s office was expressing confidence that the resident commissioner would get Calderon’s proposal added to the Senate bill. So, Hatch’s explanation that his proposal would make Calderon’s impossible and Puerto Rico needs would have to be the subject of another bill contradicted Acevedo’s office.

Ironically, Acevedo Vila asked for the inclusion of CFCs in Puerto Rico in legislation in the Senate similar to the Thomas proposal -- apparently not understanding that it would result in substantial disinvestment from the territory. That legislation passed the Senate by a vote of 75 to 25 in May but was not acted on at the time by the House, although a large number of House Members have sponsored similar bills.

Economist Rips Governor’s Proposal, Suggests a Very Different Alternative

A conservative ‘think tank’ issued a major report on economic policies for Puerto Rico this week that extensively criticized Calderon’s proposal and offered very different economic measures to help the territory. The measures include local as well as federal actions.

The report by the Institute for Policy Innovation was written by the Chief Economist of a leading Republican policy institute, Lawrence Hunter of Empower America. Empower America is headed by former Republican vice presidential candidate Jack Kemp and fellow member of the Cabinet of the first President Bush, William Bennett.

Hunter is a former Republican Staff Director of the Congress’ Joint Economic Committee and a former Chief Economist of the U.S. Chamber of Commerce.

His report contended that "there is little likelihood" the Calderon proposal "will produce lasting prosperity . . . for the people of Puerto Rico," pointing out that the expiring credit for wages, capital investments, and local taxes is "more attuned to job creation."

The assertion has important political implications for Puerto Rico because Acevedo’s leading opponent to succeed Calderon as governor, Calderon predecessor Pedro Rossello (statehood/D), helped develop the wage-based credit.

Hunter wrote that Calderon’s proposal "could turn Puerto Rico into a 'laundry' for the earnings generated by [CFCs in foreign countries]." He explained that it would permit a Puerto Rican sales branch of a company to claim most of the income from a product even if it was manufactured in Ireland. 

He also noted that "if the product were never to pass through Puerto Rico, virtually all of the income . . . would likewise avoid Puerto Rico income tax."

Another criticism was that the "proposal . . . would also make it more attractive for a U.S. company to invest in Puerto Rico than to maintain their operations in, say, North Carolina or New Jersey."

A further concern was that the proposal could violate World Trade Organization (WTO) agreements because it would provide a tax subsidy to pharmaceutical and electronics products sold in foreign countries. The report said that the proposal bears a similarity to tax policies that the federal government has repealed because of conflicts with WTO agreements. The need to repeal a similar U.S. tax law is the driving force behind the legislation to reform the taxation of the international income of U.S. companies now in the Congress.

The report also disputed Calderon’s claim that her proposal would cost less than the expiring wage-based credit. It, additionally, asserts that the Congress’ Joint Committee on Taxation assumed that the Calderon proposal would cause companies to take money out of Puerto Rico -- the opposite of Calderon’s stated goal.

"When the dust settles [the Calderon proposal] will look, smell and sound awfully like section 936, the expiring credit for income attributed to Puerto Rico, the Republican economist wrote. He added that "tax subsidy schemes like section 936 shovel tax benefits to a very small group of off-Island concerns."

The report includes data showing that these companies have benefited far more from the section 936 credit than Puerto Rico has. In 1997, the tax benefits were an average of 50% greater than the compensation to workers. In the pharmaceutical and electronics industries, the tax benefits were more than double the compensation.

The report proposed a five point federal plan to help Puerto Rico’s economy. Four measures were economic benefits:

  • Make Puerto Rico an Enterprise Zone -- areas in States that are given special economic development assistance.
  • Extend the Earned Income Credit -- payments to low-income workers.
  • Extend the Supplemental Security Income program -- aid to low-income aged and disabled individuals.
  • Exempt Puerto Rico from the requirement that ocean shipping between American ports be on American vessels

In return, the transfer to Puerto Rico of most revenue from federal taxes on rum produced in Puerto Rico and foreign countries would be phased out. The territorial government would also commit to taking measures in four areas:???

  • Meet the standards of the 2001 federal elementary and secondary education reform law.
  • Overhaul its business permitting processes.
  • Revise its tax laws and regulations.
  • Cut its payroll.

The report asserted that "[t]he federal government's direct cost of implementing the policies suggested . . . will be less than . . . [the] new tax subsidies" requested by Calderon.

It also pointed out that Puerto Rico's economic growth rate exceeded that of the States during seven of the eight years that Rossello was governor. Further, "economic growth actually improved substantially after the phase-out of section 936" began.

Another dramatic finding was that Puerto Rico's income taxes take a much higher percentage of the income of individuals than the taxes of any State.  In 1992, the percentage was 50% more than the highest State -- New York.

Last, but not least, the report concluded that Puerto Rico’s "unsettled [political] status situation remains an obstacle to economic growth." The issue makes it unclear what economic policies should be.

Stating that "[t]his report does not advocate any particular permanent political status," he wrote that federal "tax subsidies stalled final resolution of the question of political status by influencing that choice."

U.S. Senators Support Puerto Rico Congressional Candidate

Two U.S. senators lavished effusive praise on a candidate for the statehood party’s nomination for resident commissioner this week.

Senators John Kyl (R-AZ) and Jim Inhofe (R-OK) went out of their way to express support for Senator Miriam Ramirez de Ferrer, a fellow Republican.

Ramirez held a reception for Washington area supporters and friends at the Republican Party’s social club near the U.S. House of Representatives. Kyl was among those attending. He not only spoke to the gathering on Ramirez’s behalf, he joined her in personally speaking with every guest.

Ramirez reportedly said that Senator Craig Thomas (R-WY) told her that he would join the gathering if he could get out of another engagement. He did not.

Inhofe, however, rushed to the room from elsewhere in the building when he was told Ramirez was there. "I love her dearly" he reportedly said.

Inhofe is Chairman of the Environment and Public Works Committee and a leading member of the Armed Services Committee. He currently is advocating the quick closure and sale of Roosevelt Roads Naval Station in Puerto Rico.

Like Calderon and most other Puerto Rico officials, Ramirez favors continuation of the base. She recently played a key role in getting Inhofe not to offer an amendment to the Fiscal Year 2004 Defense Appropriations bill to close it and sell the property.

Inhofe and Ramirez bonded because of their mutual support for the important Navy training range that recently closed on the nearby Puerto Rican island of Vieques. Supporting the range was the base’s main function.

Ramirez has not been able to change Inhofe’s mind on the base issue, however. He agrees with the Navy and the House of Representatives that the closure of the range -- in response to Government of Puerto Rico demands -- -- has eliminated the need for the base. He reported also is upset that Calderon violated a law regarding the fate of the range that he helped write in 2000 as well as territorial government commitments on the issue.

Kyl and Thomas are members of the Finance Committee and the Energy and Natural Resources Committee -- which has lead jurisdiction within the Senate on most territorial issues, including the status of the islands.

Ramirez’s strong support from influential Republican senators should come as no surprise. For 15 years, she has had more influence in official Washington than most Puerto Rico leaders.

The statehood activist and medical doctor has been close to President Bush’s Chief of Staff since he was Deputy Chief of Staff to the first President Bush. She has also worked closely with the leading Republicans in the House of Representatives on Puerto Rico status issues, including now Chairman of the Public Works and Transportation Committee Don Young (R-AK) and Representative Dan Burton (R-IN).

Ramirez was a driving force behind the major bills to enable Puerto Ricans to choose the territory’s ultimate status that were considered in the Congress from 1989 through 2001 and from 1996 through 2000. She is said to have gained her influence through persistence, presentations that strike policy-makers as particularly genuine, accurate arguments and materials, a keen understanding of the federal perspective on issues, and Republican activism.

The "Washington Update" appears weekly.

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