Draft House Bill Also Excludes Governor’s Tax Cuts For Puerto Rico Profits... Calderon And Acevedo Still Lobbying For Sec. 956 Amendment... Acevedo Dismisses Senate Dems For Proposing Other Aid For Puerto Rico... U.S. Appeals Court Agrees With Overturning P.R. Supreme Court Ruling... Calderon Administration Flips Party Position On Dominican Republic Trade

October 10, 2003
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Draft House Bill Also Excludes Governor’s Tax Cuts For Puerto Rico Profits

The chairman of the U.S. House of Representatives’ tax committee has outlined a compromise international tax bill that that excludes Puerto Rico Governor Sila Calderon’s proposed 85-100% tax cuts for the territorial profits of manufacturing companies based in the States.

The Senate’s tax committee last week rejected Calderon’s proposal. The tax cuts have been Calderon’s ("commonwealth"/no national party) top federal priority.

House Ways and Means Committee Chairman Bill Thomas (CA) this week began to quietly consult fellow Republicans on a tax package that he hopes to have the committee approve next Wednesday.

The package breaks a stalemate on the legislation. The stalemate arose from Thomas proposing a bill that included one major idea for stimulating manufacturing in the States and other influential House members proposing another approach.

Thomas broke the stalemate by incorporating both mechanisms. He had earlier proposed a bill that would have provided companies in the States with an 85% tax cut on assets that they take back from their ‘Controlled Foreign Corporation’ (CFC) subsidiaries in foreign countries and U.S. territories, including Puerto Rico, over a single, six months period. The Committee’s second ranking Republican, Phillip Crane (IL), and top ranking Democrat, Charles Rangel (NY), and the Chairman of the Small Business Committee, Donald Manzullo (IL), had earlier proposed a bill that would have permanently lowered the 35% corporate income tax rate in the case of manufacturing in the States and the territories.

With a couple of other Ways and Means Republicans supporting the Crane-Rangel-Manzullo bill, Thomas had lacked the votes in the committee to pass his bill. He also faced problems in the full House because Speaker Dennis Hastert (R-IL) also backed the Crane-Rangel-Manzullo approach.

Both ideas are also incorporated in almost the same form in the companion bill that the Senate Finance Committee approved last week. Its major difference from the Thomas compromise is that it would give companies a full year to ‘repatriate’ assets to the States at a 5.25% tax rate.

Thomas’ draft also includes a major new provision. In addition to lowering the 35% corporate income tax in the case of manufacturing in U.S. areas to 32%, it would give the same tax cut to all business that earn less than $20 million a year. Crane and Rangel’s sponsorship of the permanent cut in the 35% corporate income tax rate for manufacturing income to 32% is ironic. The two have been were the primary House supporters of Calderon’s 85-100% permanent cut in the rate for manufacturing income from U.S. territories.

Thomas, by contrast, has been an outspoken opponent of Calderon’s proposal.

He has, instead, been willing to consider an extension of an existing tax benefit related to the Puerto Rico income of companies based in the States -- a tax credit for insular wages, plant and equipment investments, and local taxes. Provided by Internal Revenue Code (IRC) Section 30A, the credit expires at the end of 2005. But Calderon has not wanted the investment incentive continued.

Thomas is, however, considering including another corporate tax benefit for Puerto Ricans in his compromise bill. Thirteenth on a list of 13 other items that he may include from the Senate Finance Committee bill is a provision that would lower the tax withholding on income that companies based in Puerto Rico earn in the States.

The basic tax withholding on income that companies based outside the States earn in the States is 30% of the income. The withholding is designed to ensure that foreign companies pay income taxes on earnings in the States.

The 30% withholding has been lowered to between five and 15% by tax treaties in the case of many countries. It has been lowered in the case of the U.S.’ other territories by legislation.

The provision being considered by Thomas would lower the withholding rate to whatever withholding rate Puerto Rico’s insular government may apply to the Puerto Rico earnings of companies based in the States.

Puerto Rico’s largest bank, Banco Popular, has sought a provision on the withholding. The bank has several branches in the States.

The bank has had a couple of lobbyists on the case. But Manuel Ortiz and others at a firm named Quinn Gillespie have been particularly effective. Ortiz’s main Puerto Rico client is the city of San Juan. One of the name partners of the firm is Jack Quinn, formerly Chief of Staff to then Vice President Gore and Counsel to then President Clinton. The other is Ed Gillespie, now the Chairman of the Republican National Committee.

Ortiz is also the coordinator in the States of the Puerto Rico gubernatorial campaign of Pedro Rossello (statehood/D). Rossello preceded Calderon in office.

Thomas is also considering including extensions of 14 expiring Internal Revenue Code provisions in the bill. Perhaps the one that would have the greatest importance to Puerto Rico would extend the Research and Experimentation Tax Credit.

This tax incentive was applied to the Puerto Rico income of companies based in the States at Rossello’s request. It is important to pharmaceutical companies -- which must do a lot of research and experimentation and do a substantial amount of manufacturing in Puerto Rico.

Thomas may also propose extending special tax benefits related to the District of Columbia, the nation’s capital.

Calderon and Acevedo Still Lobbying for Sec. 956 Amendment

Calderon’s official representative in the Congress, Resident Commissioner Anibal Acevedo Vila, and other lobbyists are quietly working to resurrect the governor’s proposed tax cuts for companies based in the States in the wake of its rejection by the Senate Finance Committee.

Their hope appears to be to have the proposal, which would amend IRC Section 956, added to the international tax bill on the Senate Floor.

The lobbying is being done personally by Acevedo, the "commonwealth" party’s candidate to succeed Calderon, and at least one of the governor’s million-dollar-a-year lobbyists.

Senate staff suggest that there is little prospect that an amendment would succeed. One said that the amendment’s resounding defeat in the Finance Committee would discourage other senators from voting for it. The aide said that the amendment would be strongly opposed by the Committee’s leadership, Chairman Chuck Grassley (R-IA) and ranking Democrat Max Baucus (MT), who would manage the bill on the Senate Floor.

Acevedo Dismisses Senate Dems for Proposing Other Aid for Puerto Rico

Resident Commissioner Acevedo dismissed two prominent Democratic senators during the past week for proposing economic assistance for Puerto Ricans other than Calderon’s IRC Sec. 956 proposal.

Acevedo harshest rebuke was delivered to Senator John Kerry (MA), a leading candidate for the nation’s presidency. The "commonwealth" party president strongly suggested that he and other party members would not support Kerry for President because the senator had proposed extending IRC Sec. 30A, the tax credit that substantially subsidizes the payrolls, investments, and local taxes in Puerto Rico of manufacturers based in the States.

Earlier, Acevedo suggested that Senator Bob Graham’s (FL) proposal of equal treatment for Puerto Ricans in three major programs of assistance to low-income and needy Americans was simply a presidential campaign ploy. Acevedo was reacting to Graham’s proposal that:

(1) Child Credit payments of up to $1,000 per child for low-income workers now paid to workers with three or more children in Puerto Rico also be extended to workers with one child or two children;

(2) Related Earned Income Credit payments be extended to low income workers in the territory; and

(3) Supplemental Security Income, the program providing living assistance to the needy aged, blind, and disabled, also be extended to Puerto Rico.

Graham this week dropped his bid for the nation’s highest office. He is a favorite, however, to win re-election to the Senate next year if he seeks it. He is also still considered a leading possibility to be the Democrats’ vice presidential nominee.

Gubernatorial candidate Acevedo probably was reacting to the two senators’ identification with the leading candidate for governor, former Governor Rossello, an active national Democrat as well as a statehood party leader. Kerry noted that Rossello advocated an IRC 30A extension when the senator reiterated his commitment to an extension after the idea was not considered by the Finance Committee last week. Graham had earlier endorsed Rossello for governor.

In dismissing Kerry, Acevedo also established two criteria for "commonwealth" party members to support Democratic presidential candidates. One is that the candidates support Calderon’s IRC Sec. 956 amendment. The other is that they support Acevedo’s vision of Puerto Rican "self-determination. "

Acevedo has previously identified Puerto Rican "self-determination" as consisting of two elements. One is that U.S. Government officials agree that Puerto Rico can be recognized as a nation in a permanent union with the U. S. with (1) the Commonwealth government having the powers to determine the application of federal laws and to enter into currently-prohibited commercial agreements with foreign governments and (2) the federal government continuing to grant citizenship to persons born in Puerto Rico and all current aid to individuals in the Commonwealth. The other element is that Puerto Ricans initiate and propose any status change that the federal government considers.

The "commonwealth" party can be expected to control half to two-thirds of the Puerto Rico delegates to the national convention that will nominate the Democratic presidential candidate. But Acevedo will have a hard time finding a candidate whom he can really like on Puerto Rico issues.

  • Former Vermont Governor Howard Dean has publicly expressed support for statehood for Puerto Rico and is a friend of Rossello’s.
  • Representative Richard Gephardt (MO) has termed the Commonwealth’s political status as "colonial" and supported statehood as an option for the territory -- positions that Acevedo rejects. The "commonwealth" party president has publicly criticized Gephardt for supporting a Puerto Rican status choice among all the territory’s options and rejecting an earlier, unrealistic Acevedo status proposal. Gephardt has also named "commonwealth" party Democrat Miguel Lausell to a senior campaign position. Acevedo does not like Lausell, who favors the Commonwealth becoming a real nation in a close, but non-binding, ‘free association’ with the U.S.
  • Retired General Wesley Clark worked with Rossello to install anti-illegal narcotics smuggling radar in Puerto Rico -- a project that a number of "commonwealthers" opposed. Clark also has close ties to former aides to then President Bill Clinton, whom Acevedo sharply disagreed with on Puerto Rico issues.
  • Senator Joe Lieberman (CT) has strongly supported a Puerto Rican status choice including statehood as an option. Lieberman’s campaign manager, however, formerly had a substantial contract with Calderon.

Acevedo’s negative words for Kerry and Graham were similar to his past criticism of Gephardt, Clinton, and other national Democratic leaders. In that case, his words, which were designed to get the national Democrats to change their views regarding the territory’s status, seemed to merely strengthen the relationship between the Democrats and then Governor Rossello.

U.S. Appeals Court Agrees with Overturning P.R. Supreme Court Ruling

The U.S. First Circuit Court of Appeals this week upheld the decision of the Chief Judge of the U.S. District Court for Puerto Rico that a provision of the Commonwealth’s electoral law is unconstitutional.

The court agreed with Judge Hector Laffitte that requirements for the establishment of a new political party in Puerto Rico are excessive and violate the freedom of expression guaranteed by the First Amendment to the U.S. Constitution. The ruling overturned a decision of the local Supreme Court. The law had been defended by the Commonwealth’s Election Commission.

The decision represented another judicial rejection of the "commonwealth" party’s claims of the Commonwealth’s absolute autonomy on local government matters.

Puerto Rico is U.S. territory and its local government was established pursuant to U.S. law and remains subject to federal law. Many "commonwealth" party leaders erroneously claim that federal law cannot overturn local law because the federal government allowed Puerto Ricans to participate in the establishment of the territory’s local government.

Calderon Administration Flips Party Position on Dominican Republic Trade

Acevedo and Calderon’s Secretary of Economic Development and Commerce, Milton Segarra, this week supported a free trade agreement that federal officials are negotiating with the Dominican Republic. They told a hearing of the U.S. Trade Representative’s office that the agreement would eliminate trade barriers to Puerto Rican products in the Dominican market.

The approach to Dominican trade is the opposite from the one that "commonwealth" party leaders have taken during the past decade. They have previously sought trade barriers against Dominican agricultural products in the territory.

In particular, they sought the barriers based on the "commonwealth" proposal that obtained a plurality of the vote in a 1993 status referendum in Puerto Rico. The idea was rejected by the Clinton Administration and House leaders.

The "Washington Update" appears weekly.

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