Treasury Issues Rules For Puerto Rico Disinvestment Tax Cut… Puerto Rico Military Critic Named To Base Closing Panel… Status Quo Defender To Head Puerto Rico Offices In The States... Democrat Crosses Aisle For Swearing-in Of New Resident Commissioner... Ex-Senator Active On Puerto Rico Issues Named To Bush Tax Panel... Hispanic Leaders Rebuke Puerto Rican Seeking Democratic Party Post

Janauary 14, 2005
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Treasury Issues Rules For Puerto Rico Disinvestment Tax Cut

The Bush Administration Thursday defined how companies could obtain a one-year, one-time tax cut for assets taken out of Puerto Rico and foreign countries and reinvested in the States.

Assets in Puerto Rico were included in the disinvestment incentive last year at the request of now Governor and then Resident Commissioner in the U.S. Anibal Acevedo Vila ("commonwealth" party/D).

Under the incentive, companies can repatriate money from their "controlled foreign corporations" ("CFCs") at a 5.25 percent tax rate, 85 percent less than the normal 35 percent rate if they reinvest the money in specified ways to increase employment in the States.

The provision is expected to prompt companies to take as much as $500 billion out of CFCs. Most of Puerto Rico’s major manufacturing operations are CFCs.

Companies with major manufacturing operations in Puerto Rico have been among those said to be most interested in taking advantage of the disinvestment incentive. They include Eli Lilly, Hewlett-Packard, Merck, Pfizer, and Johnson & Johnson.

One company, Oracle, has estimated that the tax cut could save it $650 million.

Uses of the money that qualify it for the tax break include stabilizing the parent company’s finances, corporate acquisitions, research and development, advertising and marketing, hiring, and purchasing new equipment. Companies will not be allowed to use the money to repurchase stock held by investors or to pay investors increased dividends, however.

Bush Budget May Have Especially Big Impacts on Puerto Rico

The budget that President Bush submits to the Congress February 7th may have especially big impacts on Puerto Rico.

Bush was re-elected pledging to cut during his second term the unprecedented annual deficit run up during his first term. Many of the budget measures Bush is reportedly planning to propose for fiscal year 2006, which begins October 1st, are designed to help cut the deficit. Others, though, have other goals.

One major Bush initiative is expected to propose funding the health care program for the needy, Medicaid, in the States the way that it is funded in Puerto Rico rather than the way it is funded in the States now. Puerto Rican officials have aspired to the State method of funding.

In the States, the federal government pays 50-83 percent of the costs of State Medicaid programs whatever the cost may be. Medicaid’s cost-share for Puerto Rico is ostensibly 50 percent but funding in Puerto Rico is also subject to a dollar ‘cap’ on the amount. The current dollar limit provides about 20 percent of the costs of the Commonwealth’s Medicaid program.

Bush proposed giving the States a set amount of Medicaid funding last year but the proposal was not considered. It may get more consideration this year since it is not an election year and there is more concern in the Congress about the federal deficit.

The proposal least year would have initially increased the amounts that States are getting but decreased the amounts in later years. It would also have given States more flexibility in their Medicaid programs.

The Bush initiative could narrow the difference between the federal government’s treatment of the Commonwealth in Medicaid and its treatment of the States. The narrowing could be to Puerto Rico’s advantage if the Bush measure provides an opportunity for increasing the Puerto Rico cap.

In the health care field, some Republicans in the Congress are also thinking about tightening up the prescription drug benefit enacted into law in 2003. Senate Budget Committee Chairman Judd Gregg (R-NH) this week said that "about 30 percent of the program is a subsidy to big business." Medicare faces a huge long-term shortfall in funding.

Bush is also said to be planning to propose major changes in the Department of Housing and Urban Development’s (HUD) community assistance programs. The programs would be shifted to the Departments of Commerce and Labor and could be cut substantially.

The $4.7 billion Community Development Block Grant program, which makes major grants in Puerto Rico, could be cut by 50 percent, sources say.

Some funding cuts would be facilitated by merging the HUD programs into the Commerce and Labor Department budgets.

Administration officials, however, contend that the primary purpose of the shifts is to eliminate or consolidate duplicative or inefficient programs.

Two programs which could help replace expiring tax incentives for companies based in the States to manufacture in Puerto Rico, Empowerment Zones and Renewal Communities, are expected to be included in the shift to the Commerce Department. The programs provide tax benefits, including credits for wages against taxes due, for investments in designated underdeveloped communities.

Another proposal ignored last year that Bush is expected to renew next month would cut U.S. Army Corps of Engineers water projects. Puerto Rico has a number of projects it wants funding for in the Corps pipeline. Governor Acevedo had been particularly unsuccessful as the territory’s resident commissioner in obtaining appropriations for Corps projects -- even those supported by Bush — while his colleagues in the Congress increased, rather than decreased, Bush Corps budget proposals.

Bush’s 2006 budget is, additionally, expected to hold the current line of spending for programs used by many military veterans in Puerto Rico despite increased costs. The cost savings in the national proposals would be achieved by making veterans pay a greater share of their medical costs and tightening up eligibility for programs.

Overall, the Bush budget is expected to propose no increase for programs other than national defense and homeland security programs. Domestic programs were increased just .8 percent between fiscal year 2004 and this fiscal year.

Puerto Rico Military Critic Named To Base Closing Panel

U.S. House of Representatives Speaker J. Dennis Hastert named one of the two most vociferous critics of Puerto Rican efforts to close the U.S. Navy’s training range on the island of Vieques, PR to the commission that will determine which military bases will be closed this year.

Hastert named former Representative James Hansen to one of the two House Republican majority seats on the panel. Before his retirement from the Congress in 2003, Hansen chaired the House Resources Committee, which has jurisdiction over territorial affairs and had served as chairman of an Armed Services subcommittee. Along with then Senate Armed Services Subcommittee Chairman James Inhofe (R-OK), Hansen was the strongest congressional critic of closing the main training range of the Navy’s Atlantic Fleet.

Hansen’s appointment is noteworthy because Puerto Rico’s government does not want the Army’s Fort Buchanan in San Juan closed, Hansen strongly opposed now Governor Acevedo’s unsuccessful efforts to close the Vieques range, and Fort Buchanan is considered to be more important to veterans and Army reserve personnel than it is for actual national defense purposes.

Defense Secretary Donald Rumsfeld wants to have U.S. military bases reduced by 25 percent. A 20 percent cut in base capacity is considered likely by some observers.

The commission is to recommend a base closure and consolidation plan to President Bush by September 8th. By law, the president must approve or disapprove of the list by September 23rd. The plan will take effect if the Congress does not disapprove of it within 45 days of receiving it from the president.

Status Quo Defender To Head Puerto Rico Offices In The States

Independence Party voters gave Puerto Rico’s new "commonwealth" party governor his razor-thin margin of victory. Helping Governor Acevedo win these votes was a platform pledging to immediately act to block U.S. statehood for the territory and obtain national government powers for its Commonwealth insular government.

Statehood was to be blocked by a convention that would enable "commonwealth" nationalists and independentistas to unite to edge out statehood votes in determining a status petition to the U.S. Government.

The national government powers included the powers to reject federal laws and to enter into international agreements as if Puerto Rico were a sovereign nation (powers that federal officials say the Commonwealth cannot have).

Despite Acevedo’s status pledges and his recognition that Puerto Rico’s current status is undemocratic at the national government level, he selected a staunch defender of the status quo as head of the territorial government’s U.S. affairs agency, Eduardo Bhatia. Bhatia has defended Puerto Rico’s current status as a frequent representative of the "commonwealth" party in forums in the States on Puerto Rico’s status issue.

Puerto Rico is unincorporated territory of the U.S. but Bhatia contends that it is a "commonwealth" -- a non-existent status that takes its name from a word in the name of Puerto Rico’s local government ("Commonwealth"). He believes that "commonwealth" insulates Puerto Rico from the U.S. Government’s powers to govern its non-State territory in matters handled by State governments in the States.

Puerto Rico’s new resident commissioner in the States — the territory’s official representative to the federal government -- extended an ‘olive branch’ to Bhatia on his appointment even though the commissioner is from the statehood party. Commissioner Luis Fortuño spoke positively about Bhatia’s record in the territorial Senate and about their personal relationship.

Bhatia, however, was not as conciliatory. One of the first points he made after being named was to assert that the governor’s voice was the most important on the status issue.

The remark attempted to diminish the role of Puerto Rico’s Legislative Assembly as well as the resident commissioner. Statehooders hold most seats in both houses of the legislature. Fortuño and the legislature’s new leaders have signaled their intent to advance the cause of a fully-democratic status for Puerto Rico chosen by its people from among the territory’s status options. Their goal is at odds with Acevedo’s plan for a convention of leaders that would seek national powers for Puerto Rico without it giving up the benefits of its U.S. status.

Status was one of two issues that Bhatia identified as priorities. The other was economic development.

He also said he hopes that the Legislative Assembly will continue to fund PRFAA’s controversial $6 million a year drive to register residents of the States to vote in the States. The drive has primarily been controversial because it uses a substantial amount of Puerto Rican taxpayer dollars to provide a service to non-residents of Puerto Rico while Puerto Rican needs are not being met. The new President of Puerto Rico’s Senate, Kenneth McClintock, has been among the critics of the program.

As Director of the Puerto Rico Federal Affairs Administration (PRFAA), Bhatia will control Commonwealth government funds traditionally made available to the resident commissioner to supplement the federal funding that goes along with the seat in the U.S. House of Representatives that the resident commissioner occupies. Acevedo, however, has said that his administration will maintain the current $554,000 a year allocation out of PRFAA’s $11 million a year budget. Acevedo was Puerto Rico’s resident commissioner before becoming governor at the beginning of this month.

Acevedo has also said, however, that he will redefine PRFAA’s functions in light of "challenges" that he did not explain -- presumably his differences with Fortuño. Bhatia confirmed that differences with Fortuño were the issue, saying this week that the office "will be more active than it has been in the past." He explained that, rather than support the resident commissioner’s official representation of Puerto Ricans, he would represent the governor’s position to members of the Congress and federal executive branch officials.

Helping Bhatia lobby the Congress will be Flavio Cumpiano, an aide to Acevedo Vila in the resident commissioner’s office after being the representative in Washington of activists on Vieques, PR against the major U.S. Navy training range there that was closed because of Puerto Rican opposition.

Bhatia’s appointment fueled speculation that he was being groomed to run for resident commissioner in the next election (in 2008). The new PRFAA head wanted to run for the office in 2000 but was persuaded by party leaders to run for mayor of San Juan instead. Ironically, Acevedo wanted to be the candidate for mayor of San Juan in 2000 but was relegated by party leaders to being the candidate for resident commissioner, considered to be a less-desirable post. But Acevedo won his office while Bhatia did not. Bhatia also failed in a second race for the San Juan mayoralty last year.

In selecting Bhatia, Acevedo turned down Bhatia’s predecessor, Mari Carmen Aponte, in whose home Acevedo stayed during most of his "resident" commissioner visits to Washington. Aponte wanted to keep the job.

Bhatia this week signaled more changes are in store for PRFAA. The agency’s Website was pulled from the Internet. And Bhatia suggested that Aponte would not be the only one of PRFAA’s 60 employees to be let go.

Bhatia’s selection could also mean new lobbyists in Washington for the territorial government. Bhatia, for example, is friendly with Thurgood Marshall, Jr., son of the first person of African heritage on the U.S. Supreme Court. The younger Marshall’s government service has included stints as then President Clinton’s Secretary of the Cabinet and then Vice President Gore’s Legislative Director. It was learned this week that Marshall is moving from the law firm where he has been working to its lobbying subsidiary.

Democrat Crosses Aisle For Swearing-in Of New Resident Commissioner

The Democrat who is most senior member of the U.S. House of Representatives of Puerto Rican origin took the unusual step of going over to the Republican side of the House to take the oath of office January 4th with Resident Commissioner Fortuño.

Representative Jose Serrano crossed party lines to signal that he will work with Fortuño in the interests of Puerto Rico. He also sent a message that he approves of Fortuno’s goal of enabling Puerto Ricans to choose the territory’s ultimate status, although he has no preference between the options of nationhood and statehood for the territory and Fortuño is a statehooder.

This week, Serrano also hailed the election of another statehood party member as one of Puerto Rico’s principal officials. Like Serrano, Senate President McClintock, however, is a Democrat.

Ex-Senator Active On Puerto Rico Issues Named To Bush Tax Panel

President Bush has named a recently retired U.S. senator who had been active on Puerto Rico tax issues as vice chair of his tax reform advisory committee.

Bush appointed former Senator John Breaux, who had been a power on the Senate Finance Committee until his retirement from the Senate this month.

Breaux was the lead Senate sponsor for the proposal of then Governor Calderon and then Resident Commissioner Acevedo to exempt from taxation profits that companies based in the States receive from territorial subsidiaries organized as foreign operations.

Recognizing that the proposal would fail in the Finance Committee when he sought approval a second time at Acevedo’s request, Breaux agreed in advance with Democratic presidential nominee John Kerry on an alternative. It included income from Puerto Rico in a national nine percent tax cut for manufacturing income . . . but Acevedo complained about the tax cut.

Acevedo’s complaint led to the eventual exclusion of Puerto Rico income from the tax cut. It created a situation in which Puerto Rico manufacturing income is taxed at a higher rate than income from the States for the first time since 1921.

At Acevedo’s request, Breaux also sponsored the one-year, one-time 85% tax cut for income that companies take out of Puerto Rico and reinvest in the States.

Breaux later endorsed the candidacy of former Governor Pedro Rossello (statehood) over Acevedo, asserting that Rossello’s election would be better for Puerto Rico’s economy.

Breaux’s selection to be the number two on Bush’s tax reform advisory group may help Puerto Rico obtain new incentives for investment to replace incentives that expire at the end of this year.

Hispanic Leaders Rebuke Puerto Rican Seeking Democratic Party Post

Hispanic leaders of the Democratic National Committee (DNC) have strongly rejected requests for support from a prominent candidate of Puerto Rican heritage for a DNC vice chairmanship. The leaders wrote that they, instead, were supporting the candidacy of another person of Puerto Rican heritage.

The separate rebukes were sent to former DNC Hispanic Caucus Chair Nelson Diaz, who has also been Solicitor of the city of Philadelphia, PA and General Counsel of the U.S. Department of Housing and Urban Development. Among those sending the message were the second-ranking officer of the nation’s largest labor organization, the AFL-CIO, and a Georgia state senator.

The two are among many Hispanic leaders supporting the candidacy of Washington lawyer Alvaro Cifuentes, Puerto Rico’s secretary of the governorship during the first term of then Governor Rossello and the current Hispanic Caucus Chair.

AFL-CIO Executive Vice President Linda Chavez-Thompson wrote Diaz, "I regret that you have gotten into this race. I have given Alvaro Cifuentes my full endorsement and support and am working the labor delegates on his behalf. Alvaro has my support because of the work he has done as Chair of the Hispanic Caucus and how hard he has worked to increase the number of Hispanics at the DNC."

Georgia State Senator Sam Zamarripa wrote Diaz that Cifuentes "would be a terrific Vice Chairman . . . I think it would be impractical for someone to secure enough votes to challenge him. It may be a good time to rethink your run."

Cifuentes this week added a powerhouse to his campaign team, Harold Ickes, former Deputy Chief of Staff to President William Clinton. Ickes, who had widely been considered a top candidate for DNC Chair until he decided last week that he didn’t want the job, became Chairman of Cifuentes’ campaign.

The appointment illustrated the seriousness with which Cifuentes is approaching the job. He is waging a more extensive campaign than any other candidate and, perhaps, candidates for DNC Chair. He has also pledged to be a DNC Vice Chair on "virtually a full-time basis" -- a good argument for his election, according to Ickes.

Ickes praised Cifuentes in a statement, referencing Cifuentes’ understanding of the increasingly-important Hispanic electorate and what he said was Cifuentes’ unparalleled effectiveness as DNC Hispanic Caucus Chair. He asserted that the Puerto Rican had developed an "extraordinary national Hispanic political network."

He also said that Cifuentes’ "talents will be of extraordinary benefit to our Party on a wider scope as we take on the radical and destabilizing policies of the Bush administration."

Ickes remains the most senior political advisor to Senator Hillary Clinton (D-NY), who is considered the frontrunner for the 2008 Democratic presidential nomination.

Meanwhile, the chairman of Puerto Rico’s Democratic Party committee, defeated "commonwealth" party resident commissioner candidate Roberto Prats, said that he and two other Puerto Rico commonwealthers on the DNC would support the candidacy of U.S. Rep. Gregory Meeks (NY) to be DNC Vice Chair rather than either of the candidates of Puerto Rican heritage even though the three were the only Hispanics to sign Diaz’s nominating petition.

Prats also said that the three commonwealthers would vote for former Vermont Governor Howard Dean to be the DNC Chair. Prats and other commonwealthers supported Dean’s candidacy for the Democratic presidential nomination last year in return for Dean agreeing to discontinue saying that he favored statehood for Puerto Rico.

Puerto Rico’s other representative on the DNC, Senate President McClintock, is supporting Cifuentes for Vice Chair.

Also seeking territorial support for DNC Chair is former U.S. Rep. Tim Roemer. Roemer is the son-in-law of former U.S. Senator J. Bennett Johnston, who acted as a senator from Puerto Rico while in the Congress and later was a lobbyist for the territory under then Governor Rossello.

As chairman of the lead Senate committee on territories issues, Energy and Natural Resources, Johnson devoted great effort to trying to enable Puerto Ricans to choose the territory’s future status. He fell out of favor with Puerto Rico commonwealthers when he could not agree to their proposals for autonomy from federal powers for the Commonwealth and he recognized statehood as an option for Puerto Rico.

The "Washington Update" appears weekly.

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