What The Senate Finance Committee Has In Mind In Studying Puerto Rico’s Economy And Options For Helping Puerto Ricans

October 22, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

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What The Senate Finance Committee Has In Mind In Studying Puerto Rico’s Economy And Options For Helping Puerto Ricans

U.S. Senate Finance Committee Chairman Chuck Grassley (R-IA) and top Ranking Democrat Max Baucus (MT) last Thursday released requests to two congressional agencies for comprehensive reports on Puerto Rico’s economy and federal economic assistance. The goal of the requests -- which are really directives -- is to determine whether the territory and its U.S. citizens need further economic assistance and, if so, what kind.

News of the requests was released two weeks after the Committee’s second public rejection of a proposal by Governor Sila Calderon ("commonwealth" party/no national party) for 85-100% tax cuts on profits of territorial subsidiaries of companies based in the States. The proposal, which would amend Internal Revenue Code (IRC) section 956, has been Calderon’s top federal priority and the centerpiece of her economic plan.

The timetable for the reports makes it highly unlikely that Calderon’s proposal -- or an alternative -- could pass the current Congress. A report by the General Accounting Office (GAO), Congress’ investigative agency, is due next June 30th and a report by the Joint Committee on Taxation, the technical arm of the Senate committee and the House of Representatives Ways and Means Committee, is due two weeks later. The Finance Committee expects to then review the reports until shortly before the 2004 elections.

This schedule would prepare the Committee to take legislative action -- if it determines legislation is needed -- in early 2005. That will be early enough for the Congress to enact further economic assistance for Puerto Rico before the current tax incentives for investment in the territory expire at the end of the year. The incentives are IRC sec. 936, which cuts the tax on income that a company attributes to Puerto Rico by 40%, and IRC sec. 30A, which provides tax credits for capital investments and local taxes as well as wages in Puerto Rico.

The timeframe is also late enough to ensure that a new administration is in place in San Juan. Calderon is retiring. The leading candidate to succeed her is her predecessor, Pedro Rossello (statehood/D). He favors extending sec. 30A and measures that are established federal policy that would assist needy individuals and businesses in Puerto Rico.

The other major candidate is Calderon’s official representative to the Congress, Resident Commissioner Anibal Acevedo Vila ("commonwealth"/D). He has been an ardent advocate of the sec. 956 amendment and, like Calderon, an opponent of sec. 30A -- although both were elected on a platform of extending it.

Since the Finance Committee’s latest rejection of the sec. 956 amendment, however, Calderon and Acevedo have been unclear about whether they will continue to push the proposal. But while they are unclear about this in public, Acevedo and Calderon’s other Washington lobbyists continued to desperately seek support for the amendment in the Congress as late as this past week.

The GAO is to study Puerto Rico’s economy and tax burden, the application of federal tax and social program laws to the territory, and make comparisons to the States. The Joint Tax Committee is then to report on the economic and tax policy and budget implications of options to address any needs that the GAO identifies.

Although the letters requesting the reports were signed by Grassley and Baucus alone, and the requests were just announced, a number of members of the Committee agreed on the studies.

Their agreement was reached in tandem with an agreement on a substitution for Calderon’s proposal in the international tax bill that the Committee acted on two weeks ago. The substitute included manufacturing income from Puerto Rico in the bill’s nine percent tax cut for U.S. manufacturing income. The substitute was originally proposed by Senator John Kerry (D-MA), a leading presidential candidate. It was offered in the Committee meeting by Grassley and Baucus.

The Committee leaders’ letters did not specify the options that they want considered but their aides have identified the proposals to the Joint Committee and GAO staffs, which helped draft the requests. The options include the following.

  • An extension of sec. 30A.
  • Extension of:
    • Child Credit payments to low-income workers to Puerto Ricans with one child or two children;
    • Earned Income Credit payments to low-income workers; and
    • Supplemental Security Income (SSI) aid to the needy aged, blind, and disabled.

Child Credit payments have already been extended to Puerto Ricans with three or more children. The needy aged, blind, and disabled in Puerto Rico receive benefits under the program that also covered the States before SSI was established in the 1960s. The Puerto Rico program provides about $1 per day in aid. These extensions were proposed by Senator Bob Graham (D-FL) and are also supported by Rossello. Acevedo has grudgingly supported Graham’s proposal but he has put more emphasis on undermining it.

  • Extension of the IRC sec. 243 deduction for dividends paid to corporate shareholders in the States to dividends paid by Puerto Rico corporations. This proposal was made by former U.S. Internal Revenue Service Commissioner Donald Alexander.
  • The designation of Puerto Rico as an ‘Enterprise Zone.’ Enterprise Zones are underdeveloped areas of the States that win competitions for the designation and receive special tax and program benefits. A conservative think tank, the Institute for Policy Innovation, recently proposed revising Enterprise Zone benefits and extending the benefits to Puerto Rico and other U.S. possessions.
  • Other ideas that may be proposed for addressing any Puerto Rican economic needs that the GAO identifies.

The studies will also cover Calderon’s IRC sec. 956 amendment proposal. But congressional staff expect it to fare badly in the studies due to the terms that the Committee has laid down for the reports. Indeed, many of the terms were designed to expose the deficiencies of the proposal and the lobbying claims for it.

The terms of the GAO study include the following.

  1. An explanation of how federal taxes and duties in Puerto Rico differ from the revenue laws regarding the States, the District of Columbia, and the other U.S. territories.
  2. A comparison of the federal revenue burden borne by Puerto Ricans with the burden borne by residents in the States, D.C., and the other territories.
  3. A breakdown of each revenue burden by types of revenue and levels of government.
  4. A comparison of the treatment of residents of Puerto Rico under major federal social programs with the residents of other U.S. jurisdictions.
  5. A comparison of Puerto Rico’s economic indicators since the early 1980s with indicators at the national level, including unemployment, Gross Domestic Product growth, poverty levels, and educational attainment.
  6. Information on how private sector economic activity in Puerto Rico and investment from the States is distributed among possessions’ corporations (companies that use IRC sec. 936), other companies based in the States, Puerto Rico businesses, and foreign entities -- aimed at the controlled foreign corporations (CFCs) that Calderon’s proposal was intended to benefit and that are now headquartered in foreign tax havens.
  7. Information on the flow of investments between Puerto Rico and the States and Puerto Rico and foreign countries.
  8. A comparison of the flows to those prior to the beginning of the phase-out of secs. 936 and 30A. This seeks to identify the transformation of companies using the sec. 936 credit into foreign-based CFCs to avoid the federal income taxation intended by the 1996 phase-out.
  9. Changes in the activities and tax status of companies based in the States doing business in Puerto Rico since sec. 936 was sunsetted.

The Joint Taxation Committee’s report is to compare the options with laws regarding the States, D.C., and the other U.S. territories as well as report on the economic and tax policy implications of the options and estimate their costs.

Committee officials indicate that they sought the data because of misleading information given members of the Congress through the Calderon and Acevedo 956 amendment multi-million dollar lobbying campaigns. For example, Calderon and Acevedo said that the amendment was needed to keep existing plants in Puerto Rico and to lure new jobs and investment. In fact, however, the amendment’s billions of dollars in tax benefits would have primarily gone to pharmaceutical and electronics companies that are already so profitable in Puerto Rico that they are expanding.

Pharmaceutical companies alone invested $2.9 billion in Puerto Rico from 1997 (after the phase-out of sec. 936 became law) through 2002, creating 5,500 jobs. They are investing over $4 billion more through 2009 -- three years past the final end of sec. 936. Additionally, these companies would have received the Sec. 936 amendment’s federal addition to their profits without having to invest or hire more in Puerto Rico than they would otherwise.

Meanwhile, plants in labor-intensive industries, such as a tuna cannery and garment manufacturers, that have been leaving for lower-cost foreign locations would not have benefited from the 956 amendment. This is because companies would have had to have significant profits to qualify for its tax benefits. These plants would have been helped, however, by a wage subsidy, such as provided by sec. 30A and in Enterprise Zones.

Further, many of the plants that might have been attracted to Puerto Rico by the 85-100% tax cuts would move from locations in the States -- hardly a practice that representatives of the States in the Congress want to encourage.

Acevedo and Calderon lobbyists were stunned Thursday afternoon by the studies requests. Acevedo gamely tried to suggest that the studies would validate the 956 amendment but he also acknowledged that the studies would preclude action on the amendment before 2005. By then, Puerto Rico may have a governor and resident commissioner who would make federal requests that are more realistic and more geared towards helping Puerto Ricans.

The "Washington Update" appears weekly.

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