Presidential Candidate Proposes Economic Stimulus Plan For Puerto Rico… Congress Approves Determining Base Land Use Through Slower Process...Puerto Rico Corporate Tax Exemption Lobbyists Make Little Progress…

September 26, 2003
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Presidential Candidate Proposes Economic Stimulus Plan For Puerto Rico

U.S. Senator Bob Graham (D-FL) Thursday proposed a bill to stimulate Puerto Rico’s economy that "focuses on . . . the part of the economy . . . that has been neglected -- Puerto Rican families and children."

The presidential candidate’s bill would extend three major federal programs for low-income people to the territory:

  • The refundable Earned Income Credit;
  • The refundable Child Credit for low-income workers with one child or two children; and
  • Supplemental Security Income (SSI).

The programs would be phased-in over a 10 year period.

The Earned Income Credit provides low-income workers with credits against their income taxes and actual payments to the extent that credits are not needed for income taxes. The refundable Credit theoretically refunds payroll taxes -- Social Security and Medicare -- in the case of workers with incomes too low to have an income tax liability or a full income tax liability. The program is intended to reward work versus welfare as well to assist low-income Americans.

The refundable Child Credit is a related program. It currently applies to Puerto Rican workers with incomes less than $26,625 per year and three or more children. In the States, the Credit applies to low-income workers with any number of children. It provides payments of up to $1,000 per child per year. Earned Income Credit payments are deducted from the $1,000 amount and the Child Credit payments are also limited to the amount of payroll taxes paid. An estimated 100,000 Puerto Ricans with three or more children are currently eligible for Child Credit Payments under a law enacted during the year 2000. The payments last year reportedly averaged $1,500 per worker.

SSI provides aid to low-income aged, blind, and disabled individuals. These individuals in Puerto Rico currently receive benefits under the federal program that also provided benefits in the States before SSI was created some 40 years ago. It provides a little more than $1 per day – a fraction of what SSI would provide. SSI also currently applies to the U.S.’ other territory which has its local government named "the Commonwealth," the Northern Mariana Islands.

In introducing the bill, Graham said that "[p]utting money into the hands of the people who will spend it will provide the most direct stimulus for the economy of the island." This point echoed an approach that the federal government has taken to stimulate the national economy in recent tax laws.

But the former Florida governor also emphasized that his plan was designed to help the many low-income Puerto Ricans left behind by the current and past major economic measures for the territory. "For over 30 years, U.S. policy toward improving the economic situation on the island has focused on corporate tax incentives," he said, noting that Puerto Rico still "struggles with a high rate of poverty."

In arguing for increased aid to low-income Puerto Rican families, Graham told the Senate that "58 percent of Puerto Rican children live below the national poverty level . . . In contrast, the State with the highest child poverty rate, Mississippi, has a child poverty rate of 27 percent."

Recognizing that Puerto Ricans are not liable for federal income tax on local income and that this is often used as a rationale for excluding Puerto Rico from federal benefits, Graham also noted that "well over half -- and perhaps as much as three-quarters -- of Puerto Rican families would likely owe no U.S. income tax if they were taxed in the same manner as other citizens."

He, additionally, said that it is wrong to conclude that Puerto Ricans not having to file federal income tax returns and pay tax on income from the islands "is a huge benefit to the majority of the people." This is "[o]ne of the . . . most misunderstood aspects" of Puerto Rico’s territorial status, Graham asserted.

Graham said that his "bill puts Puerto Rican families on par with other families in America by extending to them the benefits of our social safety net . . . Just like other working families in America who work hard and play by the rules, low-income employees in Puerto Rico deserve relief from . . . payroll taxes." The refundable credits that he would extend to the territory "have long been recognized as an effective way to provide such relief."

Acknowledging that some members of the Congress "disagree with the notion of providing refundable credits to offset payroll taxes," he said "that is a different debate than whether low-income families in Puerto Rico should be treated the same as low-income families in the 50 States. This is a matter of equity, not tax policy."

Graham’s proposal includes elements of an economic plan for Puerto Rico recently proposed in a report for the Institute for Policy Innovation

by the chief economist of the U.S. Chamber of Commerce that was recently first disclosed by UPDATE. That plan also included other measures, however.

Graham has been one of the most active members of the Senate on Puerto Rican affairs, consistently advocating equal treatment for Puerto Ricans and federal measures to enable Puerto Ricans to choose the territory’s ultimate political status among options that include nationhood and U.S. statehood.

He played a key role in increasing Medicaid and Child Health Insurance Program (S-CHIP) funding for Puerto Rico in the late 1990s. Medicaid provides health care insurances for needy people. S-CHIP provides additional coverage for needy children. The programs are not limited as to amount in the States but are limited in the territories.

Graham was also one of the two leading sponsors of a bill during the period that would have enabled Puerto Ricans to choose the territory’s status and a leading sponsor of the resolution that the Senate passed in 1998 supporting a Puerto Rican status choice. He also is the only Democratic presidential nomination hopeful to have raised the issue during the candidates’ formal debates.

Among other Puerto Rico measures, Graham has, additionally, worked to extend the tax credit that companies in the States can take for wages, capital investments, and local taxes in Puerto Rico, Internal Revenue Code (IRC) Section 30A, past 2005. He recently visited Puerto Rico, where he met with Pedro Rossello (statehood/D), who advocates extension of the credit and is seeking a third term.

Congress Approves Determining Base Land Use Through Slower Process

A last minute change in the Congress this week revised the way that the future use of the property that makes up the Roosevelt Roads Naval Station in Puerto Rico will be determined and implemented.

The ‘conference’ committee of House of Representatives and Senate leaders on the bill to provide funds for most national defense programs made the change Tuesday to an agreement discussed last Thursday.

The House then overwhelmingly passed the bill Wednesday and the Senate followed suit Thursday. President Bush is expected to sign the bill.

Under the bill, the Navy would close the base within six months after the bill becomes law. The closure and the disposal of the base’s land and facilities would be conducted according to the requirements of the Defense Base Closure and Realignment Act of 1990.

The draft agreement would have enabled the property disposed of according to a plan that a Puerto Rico redevelopment authority would have had six months to develop, presuming the Secretary of the Navy agreed with the plan.

The ultimate language gives the territorial government greater assurance that its plan for the use of the property will be approved but greatly complicates the process of disposing of the property, probably substantially lengthening the time that it will take.

The original sponsor of the base’s closure and the property’s disposal, House Defense Appropriations Subcommittee Chairman Jerry Lewis (R-CA) said that the change was a real set-back for Puerto Rico and could cause the process to take a decade because of its many requirements.

His co-sponsor of the original proposal, senior Subcommittee Democrat John Murtha (D-PA) and the senior Democrat on the Senate Defense Appropriations Subcommittee, Daniel Inouye (D-HI), emphasized the benefit of greater ultimate local control over decision-making regarding the property, however.

Puerto Rico Resident Commissioner Anibal Acevedo Vila ("commonwealth" party/D) was a clear loser in the change although he tried to make the best of it in public statements. He lost what would probably be a much shorter time frame for determining the future use of the property and wound up with a much more complicated process for the disposal of the property and implementing its future use. He also offended Lewis -- who he will need in the future on the issue -- by switching sides a second time on the question of the future use process.

Puerto Rico Corporate Tax Exemption Lobbyists Make Little Progress

Puerto Rico business executives descended on the U.S. Senate this week in a lobbying blitz arranged by the territorial government. The purpose was to convince senators that Puerto Ricans wanted Governor Sila Calderon’s ("commonwealth" party/no national party) top federal priority: 85-100% tax exemption for profits that companies based in the States receive from subsidiaries set up in U.S. territories as "foreign" corporations.

The mission recognized that many congressional tax policy-makers identify the proposal with its beneficiaries -- profitable, multi-national pharmaceutical corporations that would get an immediate multi-billion dollar windfall from it --rather than as a measure for Puerto Ricans. Indeed, the companies helped Calderon’s new husband, then Economic Development and Commerce Secretary Ramon Cantero Frau, craft the proposal.

The Senate Finance Committee is expected to soon consider the legislation that is Calderon’s latest hope for a ‘vehicle’ for the proposal: a bill to reform the taxation of income that companies based in the States earn outside the States.

Committee Chairman Chuck Grassley (R-IA) and senior Democrat Max Baucus (D-MT) introduced the bill late last week. Committee staff this week said that it could be considered next week or the week after.

The bill does not include Calderon’s proposal . . . but it was not expected to. Baucus has publicly opposed it and Grassley has been decidedly cool to it.

So, the primary sponsor of the bill in the Senate during the last Congress, Committee Member John Breaux (D-LA), has said he will propose the amendment to IRC Sec. 956 as an amendment to the bill. Despite the lobbying led by Economic Development and Commerce Secretary Milton Segarra, however, Breaux this week privately said that the proposal still lacked enough support to be approved.

Breaux offered the proposal as an amendment to a tax bill that the Committee considered May 9th but he withdrew it from consideration acknowledging that it would have been defeated. His argument at the time that IRC Sec. 936 should be replaced led to Committee suggestions that different ideas for replacing Sec. 936 could be considered in the context of the international tax bill.

Sec. 936 provides companies based in the States with a credit that eliminates the tax on 40 percent of the income they attribute to Puerto Rico. It expires at the end of 2005. The Sec. 956 amendment would take effect at the beginning of 2006.

The Capitol Hill visits made no apparent converts. By contrast, at least one meeting accomplished the opposite of its purpose: It convinced a leading senator to oppose the proposal.

A major problem for the proposal it is that key provisions of the bill would emphasize the advantage that it would give companies manufacturing in Puerto Rico over companies manufacturing in other places -- including the States. The bill would phase-in a nine percent tax cut for manufacturing income from the States by 2009 -- a tax cut only one-tenth or eleventh the reduction that Calderon proposes for profits from Puerto Rico beginning in 2006.

A major amendment to the bill that is expected to pass would give companies an 85 percent tax cut for one year only on income from foreign subsidiaries -- including those in Puerto Rico -- that is reinvested in the States while Calderon proposes an 85-100 percent cut for territorial income only a permanent basis.

Committee staff say that these provisions also, however, make it more important that the legislation include a manufacturing incentive for Puerto Rico. One possibility would be to include manufacturing income from Puerto Rico in the nine percent cut that would apply to income from the States.

Another would be to exempt manufacturing income from foreign subsidiaries in Puerto Rico from the 85 percent, one year tax cut. The one-year cut is intended to get companies to move money from foreign countries to the States. Exempting Puerto Rico from the cut would eliminate the incentive for companies to also move money away from Puerto Rico.

It would be awkward for Calderon’s representative to the U.S. House of Representatives, Anibal Acevedo Vila, to request -- or even agree to -- exemption, however. Acevedo asked Breaux to propose inclusion of Puerto Rico when the 85 percent, one -year cut was considered by the Committee May 9th, apparently not understanding that it would be bad for Puerto Rico’s economy.

An option not favored by Calderon or Acevedo that has some Committee support would extend IRC Sec. 30A. Sec. 30A would help the type of plants that have been leaving Puerto Rico, such as textile companies, but Calderon and Acevedo want something different because it is supported Rossello.

The "Washington Update" appears weekly.

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