Inter-Agency Report Cautioned About Calderon Trade "Agreements"… Calderon Aide Signals Compromise on Corporate Tax Exemption Plan… Acevedo "Releases" Aid Commitment Made Publicly Seven Weeks Before… Increasing Deficit May Affect Puerto Rico Proposals

August 29, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Inter-Agency Report Cautioned About Calderon Trade "Agreements"

Last week, UPDATE reported important elements of the background to U.S. State Department actions this month to rein in Puerto Rico Governor Sila Calderon’s ("commonwealth" party/no national party) foreign ventures.

The major action was a directive by Secretary of State Colin Powell to U.S. ambassadors throughout Latin America and in some European capitals to remind their host governments that Puerto Rico is a U.S. territory. Foreign officials were to be told that the Commonwealth does not have authority to enter into international agreements or organizations that require national sovereignty. The approval of its national government -- the Government of the United States -- is required for any international arrangements.

UPDATE this week learned that a week prior to Powell’s directive an official who reports to the secretary wrote the heads of other federal agencies to caution them about Calderon Administration plans to negotiate "bilateral trade agreements" with foreign governments. He mentioned news articles quoting Calderon aides, including Puerto Rico Economic Development and Commerce Secretary Milton Segarra. The articles also highlighted the efforts of Calderon lobbyists who together are paid millions of dollars a year.

"This attempt to usurp federal foreign relations power . . . is a chronic problem" the official reported, citing previous problems with the Commonwealth’s international ventures.

His report also warned that "the legal . . . significance of routine federal-local cooperation will be . . . misrepresented in local . . . contexts so that federal officials appear to . . . endorse the idea that Puerto Rico has sufficient . . . sovereignty to conduct international relations."

The report stated that "the usual standard for . . . the Commonwealth of Puerto Rico or any other territorial government . . . would be to extend . . . the same . . . courtesy . . . in federal matters as may be allowed for a state, county or city government." It also pointed out, however, that "Puerto Rico may not be entitled to the same degree of participation in federal matters as the states" because of its territorial status.

It explained that "Puerto Rico is a domestic jurisdiction and political subdivision of the United States and the local constitution grants the territorial government authority only over local matters."

Noting that Puerto Rico is part of the ‘customs territory’ of the U.S. (the U.S. market) the report also advised that "federal statutes giving Puerto Rico special treatment under fiscal, tax or trade policies do not in any way confer or imply sovereignty over these issues at the national or international level."

Despite the Commonwealth’s territorial status, the report recommended that Puerto Rico be treated as other local governments are in trade and other issues. It also stated that the Congress would have to agree to treat Puerto Rico differently.

In addition to advising against the Calderon Administration’s plans and cautioning that "benign" federal actions are "inflated" locally, the report countered several assertions by Calderon and her aides, including Resident Commissioner Anibal Acevedo Vila, the "commonwealth" party candidate to succeed the governor. Among the assertions are contentions that --

  • the Commonwealth has greater autonomy than a State of the U.S.,
  • the Commonwealth is exempt from federal tax laws, and
  • Puerto Rico is a "partner" and "ally" of the U.S. – vs. a territory.

The report also struck a blow at Acevedo’s often-stated plan to obtain greater foreign affairs powers for the Commonwealth. Additionally, it contradicted his claim that these powers could be granted by the federal executive branch without congressional approval. Puerto Rico’s sole representative in the Congress has repeatedly identified seeking approval for the Commonwealth to enter into more important trade agreements and international organizations as a principal goal.

Calderon Aide Signals Compromise on Corporate Tax Exemption Plan

Economic Development and Commerce Secretary Segarra has given the first indication that Calderon is willing to accept a substantial change in the economic approach of her top objective in Washington: federal tax exemption for profits that companies in U.S. states claim come from manufacturing in the Commonwealth.

The concession was made in the wake of the introduction of major bills in the Congress that would contradict Calderon’s proposal. The bills are expected to be the basis for the legislation that Calderon aides had hoped would be the ‘vehicle’ for approving her proposal: legislation to reform the taxation of the foreign activities of U.S. companies.

A bill by Senate Finance Committee Orrin Hatch (R-UT) would provide a tax cut on most of the income that U.S. companies receive from foreign subsidiaries. The tax cut would be similar to the exemptions proposed by Calderon -- but it would not be limited to income attributed to Puerto Rico.

The bill would not, therefore, meet Calderon’s goal of Puerto Rico being granted an advantage over both foreign countries and the states as a location for manufacturing.

Another major bill -- by House Ways and Means Committee Chairman Bill Thomas (R-CA) -- would also grant a tax break similar to the exemptions Calderon proposed but it, too, would not be limited to income reported to be from Puerto Rico. Further, it would only last for six months. Its goal is the opposite of Calderon’s: disinvestment from areas outside the States.

In an interview, Segarra pointed out that the bills would not prevent the Congress from approving other economic measures for Puerto Rico. He identified any advantage over other areas as a location for manufacturing as the territorial administration’s current goal.

Segarra did not give an indication of the nature of a proposal to amend these bills to give Puerto Rico a worldwide advantage as a location for manufacturing. He did, however, announce that Senator John Breaux (D-LA) -- a key Member of the Senate Finance Committee -- plans to propose an amendment to the bills to give Puerto Rico an advantage.

On May 9th, Breaux said that Calderon’s proposal lacked enough support to pass the Finance Committee. At the request of Resident Commissioner Acevedo, he also proposed that profits from Puerto Rico be treated the same way that income from foreign countries was to be treated under legislation similar to Thomas’. Acevedo apparently thought that the measure would be a step towards Calderon’s proposal and did not realize it would encourage substantial disinvestment from Puerto Rico.

Segarra also identified Finance Committee Members Rick Santorum (R-PA) and Trent Lott (R-MS) as "allies" in the effort to obtain tax benefits for profitable corporate subsidiaries in Puerto Rico. Santorum and Lott supported Calderon’s proposal at the May 9th Committee meeting in which Breaux also spoke on the issue.

Segarra’s statements were made as Calderon lobbyists launched yet another lobbying blitz in favor of her proposal as the Congress’ August ‘recess’ drew to a close. The leaders of both congressional tax committees hope to have foreign tax legislation considered sometime in September.

Acevedo "Releases" Aid Commitment Made Publicly Seven Weeks Before

Resident Commissioner Acevedo this week released a letter from U.S. House of Representatives Defense Appropriations Subcommittee Chairman Jerry Lewis (R-CA) pledging to work with other officials to close the U.S. Navy’s Roosevelt Roads base in Puerto Rico a way that could contribute to the surrounding area’s economic benefit to the maximum degree. The release was issued as if the letter was news.

The letter was written five weeks earlier and, essentially, reiterated what Lewis had said in asking the House to approve the base’s closure seven weeks ago.

The letter was also written a day after Lewis was quoted in the Washington Times expressing confidence that that the U.S. Senate would also approve his proposal to close the base.

Acevedo and Governor Calderon have been lobbying to keep the base open even though most of its activities have been moved to bases in the States and more will be. Acevedo has said that the base is needed for military reasons as well as that it is important to Puerto Rico’s economy. U.S. military officials disagree with Acevedo’s national security assessment.

The primary mission of the base had been to support Navy and Marine Corps training on a Navy range on the nearby Puerto Rican island of Vieques. The range was closed, however, in May, as agreed by Calderon’s predecessor, Pedro Rossello (statehood/D), and then President Bill Clinton. Calderon’s breaking of the agreement led to the Navy’s determination to move all of the base’s functions to locations in the States.

The base had previously injected hundreds of millions of dollars a year into Puerto Rico’s economy.

The Navy last year alone reallocated $113 million in spending from the Puerto Rico base to bases in the States to replace the Vieques training. The Senate Armed Services Committee earlier this year approved a Navy plan to cut its remaining spending at the base by 50 percent before Lewis agreed to a Navy suggestion that the base be closed in six months.

Navy officials have said that keeping the base open "would be a waste of taxpayer dollars."

Acevedo’s release may have signaled his acceptance of the likely failure of his efforts to keep the base open. In issuing it, he characterized the possible closing as an economic "opportunity" for the eastern region of the island of Puerto Rico.

He also said that his lobbying goal was to "obtain the best possible deal for Puerto Rico" in the closing of the base. Earlier, he said that his primary goal was to prevent the base’s closure.

Acevedo also revealed that an aide was working with the Navy to have the 8,600 acre property transferred to the territorial government to be developed according to a plan that the Calderon Administration is developing. At the same time, Calderon Economic Development and Commerce Secretary Segarra, who is leading development of the plan, said that he hoped that it would be submitted to the Congress and the Navy in three months. This, however, would be after the Congress is expected to complete action on the base closure proposal.

Meanwhile, the Navy this week began its first major training exercise under its replacement for the Vieques range. The replacement involves a dozen military bases in the States. In a sharp contrast to protests against the Vieques range that Calderon, Acevedo, and others encouraged, officials in the States have welcomed training at bases in their communities and there have been no protests against it.

Increasing Deficit May Affect Puerto Rico Proposals

A Congressional Budget Office report this week estimated that the federal budget deficit will skyrocket to a staggering $480 billion next fiscal year will remain hundreds of billions of dollars a year in the red through 2011. It increased concern about proposals that would further worsen the budget situation.

An earlier White House Office of Management and Budget estimate of the deficit for the year beginning October 1 had been just $5 billion less but hundreds of billions less in future years.

The concern could affect Calderon Administration proposals. The governor’s proposed federal tax exemption for companies in the States would cost the federal treasury as much as $33.1 billion over 10 years. Her proposal with Acevedo to keep the Roosevelt Roads base open and prevent the property from being sold would require unnecessary spending and lose a Navy-estimated up to $1.7 billion that could be gained from selling the property. The proceeds of a sale could more than recoup the $400 million replacing the Vieques range is estimated to cost.

Adding to the concern is that the budget projections do not include likely measures that would worsen the deficit. An almost certain measure is a reform of Medicare, the health subsidy for senior citizens and the disabled, that would subsidize prescription medicines. It would cost $400 billion over 10 years -- including hundreds of millions to equalize hospitalization payments in Puerto Rico.

Another almost certain cost not included in the calculations is tens of billions of dollars to rebuild Iraq.

Additionally, President George Bush and other Republicans who dominate the Congress want to extend tax cuts enacted into law during the Bush Administration. Extending cuts supported by Bush would reduce federal revenues by an estimated $1.1 trillion over 10 years. Extending other likely tax cuts would cost $2 trillion.

The total of these budget costs and spending on other programs increasing at the rate it has in recent years would increase the deficit $4.8 trillion over a decade.

Congressional budget leaders are zeroing in on restraining new budget costs in programs other than the almost certain priorities noted above. For example, Senate Budget Committee Chairman Don Nickles (R-OK) and senior Democrat Kent Conrad (D-ND) -- who are also both Finance Committee members --have opposed Calderon’s corporate tax exemptions proposal on budget as well as tax policy grounds.

The "Washington Update" appears weekly.

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