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Section 956 Amendment Doomed From The Start

Numerous Washington Insiders Convinced It Was Impossible To Get Amendment Approved As Conceived Because Of Confusing Interests


October 9, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

"The Section 956 amendment never had a chance because it was bad tax policy in the view of a number of powerful members of both the House and Senate, and no amount of lobbying could have sold it," said a Senate staffer involved since the beginning of the campaign.

The overall effort to push the 956 amendment "cost tens of millions of dollars and hundreds of thousands of dollars in campaign contributions," said Jeffrey Farrow, co-chairman of the White House Interagency Task Force on Puerto Rico in the Clinton administration.

He recalled that one of the top people in Washington representing Gov. Sila Calderon boasted that it was a main objective of the governor’s $6 million voter-registration drive on the U.S. mainland in 2000. Another said the drive in Florida "was to get [presidential adviser] Karl Rove to override the opposition of the U.S. Treasury Department to the amendment." Farrow said, "That was a naive strategy as well as a costly mistake."

One Senate staffer cited the case of Sen. John F. Kerry (D-Mass.) as a good example. "As a presidential candidate, he would have liked to obtain the support of the Popular Democrats in Puerto Rico, but he couldn’t support the amendment because it was increasingly being described by key Congress members involved in the issue in both houses as a scam," he said.

Farrow said the positions Kerry took were based on wanting to help Puerto Rico to the extent that he could, and were justifiable. Farrow said examples were Kerry’s proposing amendments to extend 30A and to extend the bill’s 9% tax cut for manufacturing on the U.S. mainland to territories, which was accepted.

‘Money can’t buy everything’

After then-Secretary of Economic Development & Commerce Ramon Cantero Frau, now gubernatorial first man, reportedly provided "a huge amount to Kerry’s campaign, the senator told both Cantero [and Resident Commissioner Anibal Acevedo Vila] that he couldn’t support the amendment," a Washington observer recalled. "Kerry told them that what he could support essentially was an extension to 30A. They were upset and [Gov.] Sila [Calderon] boycotted the meeting."

"This wasn’t the only case of the Calderon administration giving members of Congress who are candidates a lot of money but being turned down on the amendment even though they wanted to help Puerto Ricans," said Farrow. "The Sila team greatly overestimated the value of campaign contributions and of well-connected lobbyists. They had good and effective lobbyists and consultants. They just had a bad policy no one could have ever sold. Money sometimes gets little things that are bad, but not big policy items as bad as this amendment.

"Some recalled the whole campaign with Section 936 in 1993 and how the abuses of 936 by some companies resulted in it being cut to a 40% credit from 100%," said Farrow. "What happened was the creation of the federally preferred alternative in which the tax benefits were directly tied to job creation."

"The purpose of 936 had been to create jobs in Puerto Rico," recalled a veteran House staffer who was involved in the futile exercise. "The problem was that a number of companies used 936 to save much more money in taxes than they paid in wages in Puerto Rico. One of the big problems was that whatever loopholes were closed, the companies found new ways to get unintended and unjustifiable further benefits."

Another House staffer involved recalled the decision to phase out 936 in 1995 resulted from the perception that it was still so notorious that it couldn’t be saved. "The wage credit was all that had a chance," said the staffer. "Actually, then-Gov. Pedro Rossello was smart to come up with the idea of giving it a separate number. It was really arrived at in negotiations between the Clinton administration and the Senate-House negotiators."

"Sila [Calderon] and Anibal [Acevedo Vila] may believe that 936 was phased out because of Rossello’s action or inaction and to balance the budget, as they have so often said," said Farrow. "But they are wrong on both counts."

He pointed out that 30A "wasn’t saved from the phaseout of 936 because the Populares made the mistake of vainly lobbying to save 936. It only got 10 votes in the 435-member House because of the problems it had and because of the pique of then-House Ways & Means Committee Chairman Bill Archer [R-Calif.] who supported 936."

Farrow recalled that then-President Clinton, with the support of Rossello and others, including Sen. Bob Graham (D-Fla.) and then-Sen. Daniel Patrick Moynihan (D-N.Y.) "tried hard to extend 30A and it won majorities in both tax-writing committees. The only real impediment was Archer, who had a veto."

‘A catastrophic mistake’

Noting that Archer retired in 2000, Farrow charged the governor and the resident commissioner "made a catastrophic mistake in not taking advantage of this opportunity. In fact, Acevedo had supported 30A from 1997 to 2000. The governor, however, through Cantero, cooked up the 956 amendment scheme with some companies, mostly pharmaceuticals, that wanted more tax savings than the substantial savings 30A offered."

"Sila et al were also intent on proving that Rossello was bad and wrong," Farrow said. "They have had reasonable chances to get 30A but haven’t wanted to admit that Rossello was right—and as time went on they made a mistake in not getting a 30A extension."

Indicating that Calderon and the Populares "wanted to please their corporate sponsors more than the companies required or had asked for," Farrow said, "The companies would have been happy with 30A, but they would much rather have the more lucrative 956 amendment."

"This 956 amendment was a transparent attempt to recreate 936 almost as it was before 1993 and with new loopholes," said a House staffer. "It never had a chance. It would have granted billions of dollars in tax savings to companies that are already in Puerto Rico, are already profitable there, and are investing billions of dollars more—even with 936 ending—without their making any further contribution to Puerto Rico’s economy."

A House staffer said, "Advocates of this gimmick are both naive and arrogant to have ever believed this was going to fly in Washington at this time of soaring costs [$87 billion for Iraq alone] and ever-plunging deficits."

This Caribbean Business article appears courtesy of Casiano Communications.
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