Bush Wants To Tighten Tax Exemption Calderon Has Proposed Expanding… Bush Also To Propose Different Measures For Helping Manufacturing… Senate Republican Agenda Includes Another Different Plan… McClintock: “Puerto Rico Deserves Statehood”

January 16, 2004
Copyright © 2004 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Bush Wants To Tighten Tax Exemption Calderon Has Proposed Expanding

President Bush plans to propose ending a tax loophole that is similar to a key element of Puerto Rico Governor Sila Calderon’s ("commonwealth" party/no national party) top federal priority.

U.S. Treasury Department officials disclosed January 13th that the Bush tax plan will be contained in the President’s Fiscal Year 2005 budget proposal, which is scheduled to go to the Congress February 2nd. The federal fiscal year begins October 1st.

Bush’s tax proposal would tighten the rules that exempt income from deposits that ‘controlled foreign corporations’ (CFCs) make in banks in the States from the federal income tax. Calderon has proposed that all investments that CFCs in U.S. territories make in the States be 90 percent exempt from the tax.

CFCs are subsidiaries that companies based in the States set up in foreign countries or U.S. territories. CFCs offer parent companies and their shareholders the advantage of CFC income not being taxed until it is ‘repatriated’ to the States.

The ‘deferral’ of the federal income tax ends when CFC dividends are paid to the parent companies or -- with one exception -- when CFC profits are invested in the States. CFC funds deposited in banks in the States are exempt from the taxation of repatriated CFC income rule.

Calderon’s proposal is one of three elements of her administration’s major request to the federal government. A second would exempt from taxation 85 percent of dividends that CFCs in U.S. territories pay to parent companies. The third would provide a 100 percent exemption for loans between CFCs and their parent companies from the tax code provision that ‘imputes’ interest income to loans -- and taxes it -- if interest is actually not paid.

Bush’s proposal to tighten the tax exemption for CFC bank deposits is to be included in a package of measures to close tax loopholes and simplify tax laws.

The overall package would result in an additional $45 billion in federal tax revenue over the next 10 years. Tightening the CFC bank deposits exemption would generate $234 million of this, according to a U.S. Treasury estimate.

The Congress’ Joint Committee on Taxation determined that Calderon’s proposal as originally submitted would cost up to $33.1 billion over 10 years -- almost as much as the entire planned Bush package. Calderon has agreed to changes to her proposal that would reduce the cost to $6 billion from $11 billion over 10 years -- in any case many times more than the cost of the Bush proposal to tighten the similar tax exemption.

Calderon and her official representative in the Congress, Resident Commissioner Anibal Acevedo Vila, have been unsuccessfully lobbying for her proposal for almost three years. The Treasury Department and the chairmen of the U.S. Senate’s Finance Committee and the U.S. House of Representatives’ Ways and Means Committee opposed it from the outset.

Continued lobbying by Calderon and Acevedo led to the Senate committee formally voting down the proposal last fall. It also led the committee’s leaders to ask congressional agencies for comprehensive studies of Puerto Rico tax and social programs issues. The studies are generally expected to forestall further consideration of Calderon’s proposal during her term of office, which ends this year. The studies are also generally expected to further expose the aspects of Calderon’s proposal that have caused most federal tax policy-makers to oppose it.

Bush Also to Propose Different Measures for Helping Manufacturing

Calderon and Acevedo have lobbied for the governor’s proposal claiming that it would stem the loss of manufacturing jobs in Puerto Rico since the federal government decided in 1996 to end by 2006 the current tax benefits related to manufacturing in Puerto Rico. These benefits gave companies already operating in the territory a choice of a tax credit that covers 40 percent of the taxes due on income attributed to Puerto Rico or a tax credit for wage, capital investment, and local tax spending in Puerto Rico -- benefits that are less than those Calderon and Acevedo have been unsuccessfully seeking.

Calderon and Acevedo claimed the loss of 27,000 manufacturing jobs in lobbying the Congress for Calderon’s proposal and that this was a greater loss than has occurred in the States. Subsequently, Calderon claimed the loss of over 37,000 manufacturing jobs. Most recently, she has cited a net gain of 3,000 factory jobs.

In any case, Puerto Rico’s manufacturing employment situation is better than that in the States -- as Calderon has also recently asserted. Factory job losses in the States during the past three and a half years alone have exceeded 2.7 million.

The Bush Administration’s proposal for countering factory job losses is very different from Calderon’s request. Unveiled January 16th by Commerce Secretary Donald Evans, it calls for time-limited tax cuts made during the Bush Administration to be made permanent. The plan will also create a President’s Manufacturing Council, identify tax law simplification and regulatory measures, and continue a network of nonprofit centers that provide technical assistance to small and medium-size manufacturers. (Bush earlier proposed cutting the network.) Another element of the plan would fill an assistant secretary of Commerce for manufacturing post that Bush earlier said he would establish.

Senate Republican Agenda Includes Another Different Plan

Senate Republican leaders have privately prepared an agenda for the 2004 session that begins next week that includes much greater proposals for U.S. manufacturing.

The list includes a tax bill that the Senate Finance Committee approved when it rejected Calderon’s proposal last fall. The bill would permanently cut taxes by nine percent on income from manufacturing in U.S. areas, including Puerto Rico. It also includes a cut in taxes on assets that CFCs repatriate to the States that is similar to an element of Calderon’s proposal -- the one that exempts from taxation 85 percent of dividends that parent companies in the States receive from CFCs in U.S. territories -- with a critical difference.

While Calderon proposed a permanent 85 percent tax cut, the Senate committee’s bill would provide a one-time, one-year cut.

The purpose of the proposals is also different. Calderon claims hers is intended to encourage investments in U.S. territories. The Senate committee bill is intended to encourage disinvestment from CFCs (whether in foreign countries or U.S. territories.)

Curiously, Acevedo lobbied to have the CFC disinvestment proposal applied to Puerto Rico. The proposal’s original intent only concerned foreign countries.

Acevedo surprisingly also criticized the nine percent cut in taxes on manufacturing income. The original proposal would not have applied to U.S. territories. Senator John Kerry (D-MA) and Committee Chairman Charles Grassley (R-IA) and top Ranking Democrat Max Baucus (D-MT) offered the amendment that extended the cut to the territories, citing their desire to help Puerto Rico’s economy.

The House of Representatives has passed legislation that is similar to the Senate committee bill, so enactment of the measures into law seems to be a real possibility.

Other items on the Senate Republican leaders’ agenda that will potentially significantly affect Puerto Rico include reauthorizations of the federal road construction, welfare, Head Start, and higher and disabled education programs.

Additional measures of interest to the territory would change basic laws regarding class action lawsuits, medical malpractice limits, and pensions.

Senate Republican leaders hope to have these and other measures acted upon before a six-week break in the session that is to begin July 23rd. They plan for the Senate to be in session only three weeks this year after that break. The three weeks would be between September 7 and October 1.

This schedule would make it virtually impossible to pass special economic assistance legislation for Puerto Rico this year. The bipartisan leadership of the Senate Finance Committee has decided to not entertain such legislation until its comprehensive studies of Puerto Rico program and tax issues are completed in July and reviewed by the committee.

The House of Representatives plans a schedule similar to the Senate’s. Additionally, Ways and Means Committee Chairman Bill Thomas (R-CA) has indicated that he does not plan to have his committee consider major economic assistance legislation for Puerto Rico until more reasonable representatives of the territory make more reasonable proposals than Calderon’s. Further, Ways and Means Committee staff are also interested in the outcomes of the Senate Finance Committee studies.

Other Bush Proposals

Tax simplification measures in the planned Bush tax loophole and simplification package include provisions that are intended to increase access of low-income workers to the Earned Income Credit and the Child Credit.

Senate Finance Committee Member Bob Graham (D-FL) has proposed legislation that would extend Earned Income Credit grants to low-income workers in Puerto Rico and extend Child Credit grants to low-income workers in Puerto Rico with one child or two children. (The Child Credit grants already are available to low-income workers in Puerto Rico with three or more children.)

A spokeswoman for Calderon has said that increasing the amount of Child Credit grants would not benefit Puerto Ricans. Acevedo has dismissed Graham’s legislation. It is, however, one of the alternatives to Calderon’s tax proposal that the leaders of the Senate Finance Committee asked congressional agencies to study.

Among the provisions included in recent tax laws that Bush will seek to make permanent is an increase in the amount of the Child Credit. The current level is now set to be reduced after 2005.

McClintock: "Puerto Rico Deserves Statehood"

Puerto Rico Senate Minority Leader and Democratic National Committeeman Kenneth McClintock renewed his call for statehood for the territory in an eloquent column in the Johnstown, PA Tribune-Democrat, January 10th. McClintock was prompted to write the ‘op-ed’ by the White House activation last month of the President’s Task Force on Puerto Rico’s Status.

The Puerto Rico statehood party leader noted that the 3.8 million citizens of Puerto Rico "are being neglected and are being denied their right to vote" despite the numerous contributions that Puerto Ricans have made to the U.S. since becoming citizens of the country 86 years ago. Stressing that Puerto Ricans have most of the responsibilities of citizenship but not all of the rights, McClintock added, "The time to allow Puerto Rico to decide its future has come."

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