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Governor’s Corporate Tax Breaks Request Fails in Senate Committee
The U.S. Senate Finance Committee Wednesday rejected Puerto Rico Governor Sila Calderon’s ("commonwealth"/D) proposal for 85-100% federal income tax breaks on profits that companies based in the States earn in Puerto Rico and other U.S. "possessions."
As an alternative, the Committee applied a nine percent reduction in the tax rate on manufacturing in the States and the District of Columbia to the companies’ income from manufacturing in the possessions.
The Committee also approved a one-year 85% tax cut on assets that companies based in the States take back from their subsidiaries in U.S. possessions as well as foreign countries that are organized as foreign corporations.
Finally, the Committee decided to lower the 30% tax withholding on income that companies based in Puerto Rico earn in the States. The withholding rate would be decreased to any percentage of income that Puerto Rico’s local government withholds for tax purposes on income that companies based in the States earn in the territory.
The actions came as the Committee approved a major reform of the taxation of the foreign activities of U.S. companies.
The overall legislation was proposed by Committee Chairman Chuck Grassley (R-IA) and top ranking Democrat Max Baucus (D-MT). Grassley, Baucus, and Senator John Kerry (MA) proposed the alternative to Calderon’s top federal request.
The two leaders and Kerry also, though, subsequently indicated that they wanted consideration of other alternatives to Calderon’s proposal as well. Kerry, who is seeking the Democratic presidential nomination, Thursday said that he will continue "pushing" for the extension of Internal Revenue Code (IRC) Section 30A.
In addition to the amendment that was adopted, Kerry had also submitted a Sec. 30A extension amendment to the foreign corporate tax bill to the Committee. Sec. 30A provides companies based in the States with a tax credit for a portion of their wages, capital investments, and local taxes in Puerto Rico. It is limited to current users and expires at the end of 2005.
In reiterating his commitment to a Sec. 30A extension, Kerry noted that it is supported by former Governor Pedro Rossello (D), the leading candidate for the statehood party’s nomination to replace Calderon in next year’s elections. He also emphasized, however, that any tax benefit regarding Puerto Rico "has to be one that benefits the people of Puerto Rico and not just the balance sheets of big corporations." Although he didn’t name such a benefit, it was a clear reference to Calderon’s IRC Sec. 956 proposal.
Kerry’s Sec. 30A extension amendment was not acted on Wednesday because he, Grassley, Baucus, and Sen. John Breaux (D-LA) had already agreed to a substitute Kerry’s equal tax cut with the States (9%) amendment for Calderon’s (85-100% tax breaks) proposal, which Breaux and Sen. Rick Santorum (R-PA) offered anyway. In addition, Calderon’s Economic Secretary, Milton Segarra, spoke out against the extension after it was disclosed that Kerry had proposed it.
In the Committee meeting, Breaux and Santorum argued for the Sec. 956 amendment as an amendment to Sen. Gordon Smith’s (R-OR) proposal for the one-year 85% tax cut on assets that ‘controlled foreign corporations’ (‘CFC’) sent to their parent companies in the States. An 85% tax cut would reduce the 35% federal corporate income tax rate to 5.25%.
Senate Budget Committee Chairman Don Nickles (R-OK) reacted to the Breaux and Santorum arguments by saying that a permanent 5.25% tax rate on profits from Puerto Rico would cause many plants to move from the States to the territory. Nickles is known to be unhappy about a company’s recent decision to move a plant from his State to Puerto Rico.
The top Democrat on the committee that has jurisdiction over Puerto Rico’s political status then also opposed the 956 amendment. Sen. Jeff Bingaman said that if the corporate tax rate was reduced from 35% to 5.25% for income from Puerto Rico, it should also be reduced to 5.25% for his State of New Mexico.
Grassley then asked for the Bush Administration’s view of the 956 amendment. The Assistant Secretary of the Treasury for Tax Policy, Pam Olsen, said that Administration officials were concerned that it would result in substantial repatriation (disinvestment) from Puerto Rico as well as investment. In indicating the Administration’s disfavor, Olsen also said that the proposal ought to be considered in the context of the range of tax policies related to Puerto Rico.
With that, Grassley proposed the equal treatment with the States amendment as an amendment to Breaux’s amendment. Baucus also said Puerto Rico should be treated equally with the States.
After Nickles said that he supported the compromise, Breaux expressed his displeasure but the Committee majority substituted the equal treatment amendment for the 956 amendment. Equal treatment will cut the federal tax rate for manufacturing income from 35% to 32%.
Puerto Rico Resident Commissioner Anibal Acevedo Vila (D), the "commonwealth" party’s candidate to replace Calderon, and other Calderon Administration lobbyists were crestfallen after the substitution. Congress Daily reported that Acevedo was "visibly frustrated."
Calderon officials, curiously, had not expected the defeat. They had spent tens of millions of dollars and provided hundreds of thousands of dollars in campaign contributions in trying to obtain support for the proposal. They had also worked closely with some of the biggest companies in the country in the lobbying effort.
The two dozen companies were mostly pharmaceutical firms in Puerto Rico although a few electronics businesses were also included. All already have profitable operations in Puerto Rico without the proposed tax breaks.
Together, the Calderon Administration and the companies deployed a bevy of lobbyists, public relations personnel, tax experts, lawyers and political campaign consultants in their effort to win the 956 amendment.
Why Calderon officials were surprised is unclear. The 956 amendment was a transparent effort to recreate IRC Sec. 936, which also expires at the end of 2005, as it existed prior to a 1993 reform. Sec. 936 provides a 40% tax credit on income attributed to Puerto Rico. Before 1993, it provided a 100% credit.
It and Sec. 30A are being phased out under a 1996 law because of problems related to Sec. 936. The principal problem was that 936 enabled companies to obtain tax credits much larger than compensation to their employees in Puerto Rico although its purpose was to encourage companies to make job-creating investments in U.S. possessions.
Its greater benefits for companies based in the States than residents of the islands led to it being labeled "The Poster Child of Corporate Welfare." Sec. 30A, however, was also ‘sunsetted’ because one of 936’s few congressional supporters, then House of Representatives Ways and Means Committee Chairman Bill Archer, was upset that Sec. 936 was being ended over his objections.
President Clinton, Rossello, and majorities in both of the Congress’ tax-writing committees tried to revive 30A from 1997 through 2000 but Archer blocked the efforts. Calderon and Acevedo were elected pledging to continue the efforts but Calderon’s first Economic Secretary -- who she recently married -- developed the 956 amendment instead.
Baucus, Nickles, Archer’s successor, Bill Thomas (R-CA), and other key Members of Congress had publicly spoken out against the proposal before Wednesday. Grassley, Treasury Department officials, and other federal tax-policy-makers had quietly expressed opposition beforehand.
Acevedo recognized the importance of the rejection. He said it would be very hard to get the proposal considered again and that he was unsure whether he would try to pursue it if elected governor.
Calderon’s current Economic Secretary, Milton Segarra, by contrast, pretended that nothing had happened. He issued a release saying that the 956 amendment had not been proposed or considered in the Committee meeting.
Acevedo also said after the Committee mark-up that an equal tax cut with the States was inadequate. He additionally termed an extension of Sec. 30A as inadequate.
He attributed the Committee’s decision to its "confusion" and said that this was due to "external . . . third" forces which he did not identify. In fact, however, Grassley and Baucus in particular knew of the 956 amendment’s flaws and other senators, including Kerry, Bob Graham (FL) -- another presidential hopeful, Nickles, Bingaman, and Senate Democratic Leader Tom Daschle (SD) had been well-briefed on the flaws.
Grassley and Baucus considered excluding assets in Puerto Rico from the one-year 85% tax cut on repatriated CFC assets because it would presumably cause disinvestment from Puerto Rico in addition to foreign countries but they ended up not doing so. Acevedo had earlier asked Breaux to try to get Puerto Rico assets included in the CFC disinvestment proposal and Breaux had succeeded.
The resident commissioner disputed the view of the Congress’ Joint Committee on Taxation that the provision would result in disinvestment in Puerto Rico. He also may have seen it as a step towards Calderon’s permanent 85-100% tax breaks proposal.
In the Committee meeting Wednesday, Smith noted that the two proposals -- his and Calderon’s -- had different purposes. Smith’s is disinvestment from CFC areas. Calderon has says hers is investment in Puerto Rico. The Joint Tax Committee reiterated its calculation that the proposal would result in $135 billion in assets being withdrawn from CFC areas, however, including Puerto Rico, and transferred to the States.
The amendment to lower the withholding tax on income that Puerto Rico companies earn in the States was proposed by Senators Santorum and Jim Bunning (R-KY). A similar amendment had been submitted for the Committee ‘mark-up’ meeting by Graham.
The Santorum-Bunning amendment to lower the 30% amount of the income withheld to ensure payment of taxes later to 10% was modified by the Committee, however, to lower the amount to the amount of income that Puerto Rico withholds on income that companies based in the States earn in Puerto Rico.
Puerto Rico is one of the few areas of the world to which the 30% rate currently applies. The rate has been lowered by tax treaties with foreign nations and by law in the case of the other U.S. territories.
The lower rate was sought by Banco Popular, which has a number of branches in the States in addition to being the biggest bank in Puerto Rico.
Committee Leaders Want to Explore Alternatives to the 956 Amendment
Misleading and erroneous points made by lobbyists arguing for the Sec. 956 amendment, facts regarding Puerto Rico’s true economic situation and that of the country as a whole, and the different Puerto Rico proposals that had been made in connection with the foreign tax bill convinced Finance Committee Chairman Grassley and Ranking Democrat Baucus that further study should be done before the Committee acts on Puerto Rico economic issues.
Somewhat echoing Treasury Assistant Secretary Olsen’s call for a more comprehensive look at Puerto Rico tax-related issues in response to the 956 amendment, Grassley and Baucus think that Puerto Rico tax, economic, and federal social programs situation issues should be reviewed and compared with the situations of the States.
The two also think that the proposals require more consideration. In addition to the proposals noted above, they would want to consider two other proposals the Committee received. One was the proposal by Sen. Graham’s to extend Child Credit payments to low-income workers with one child or two children in Puerto Rico and Earned Income Credit payments to low-income workers.
The other proposal was made by former Internal Revenue Service Commissioner Don Alexander to enable companies based in the States with subsidiaries in Puerto Rico to take an existing tax deduction for dividends received from the subsidiary.
Bush Foreign Policy Aide Criticizes Calderon’s Secretary of State
A senior Bush Administration foreign policy official Friday criticized Puerto Rico Secretary of State Ferdinand Mercado for his approach to foreign organizations.
In Puerto Rico Senate hearings on his nomination to be Chief Justice of the Supreme Court of Puerto Rico, Mercado defended the interaction that he and Governor Calderon have had with foreign governments and organizations. U.S. Secretary of State Colin Powell in recent months has complained to U.S. embassies around the world about agreements that Calderon and Mercado negotiated with foreign governments without U.S. State Department approval and the two seeking treatment from and interaction with foreign governments as if they represented a sovereign nation.
Powell directed U.S. ambassadors to thwart such efforts. Federal officials, including Bush Administration appointees, have more recently made the federal government’s objections public.
Mercado this week said that he would wait to hear from the annual summit of heads of state and national governments on Calderon’s request for participation in the next summit before consulting with the U.S. State Department on the participation.
Calderon’s efforts to be treated as the head of the government of a sovereign nation at the last summit forced U.S. officials to ask summit organizers to deny her the treatment and participation -- which they did. One of Powell’s recent messages to U.S. embassies noted that the Calderon Administration was going to foreign governments to lobby for participation in this year’s summit without consulting with the U.S. State department. The message added that Powell doubted that the participation would be approved by the Government of the United States.
Mercado’s statement this week elicited a complaint by a Bush aide that it is exactly the approach Mercado said he would continue to take regarding participation in the summit that federal officials find to be wrong.
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