Congress’ Democratic Leaders on Territories Hail Kerry Puerto Rico Plan
President Bush’s Budget for the fiscal year that begins October 1st proposes to discontinue tax refunds to some 100,000 Puerto Rican workers that are estimated to total about $2 billion over the next decade.
The proposal would prevent low and middle income Puerto Rican workers with three or more children -- and Puerto Rican workers alone -- from continuing to receive refunds of their payroll (Social Security and Medicare) tax payments.
It also includes special language to prevent the refunds from being extended to low-income Puerto Rican workers with one child or two children as has been proposed by Bush’s Democratic rival for the presidency, Senator John Kerry (MA), and by Senator Bob Graham (D-FL).
The proposal has seen no action in the Congress since it was made in February but a keen observer of the issue says that it could be picked up on in the remaining weeks of the session before this year’s elections. The $2.1 billion that the proposal would save the federal government would be an attractive source of funding for extending expiring tax cuts popular in the States, the observer suggested. It could be obtained relatively easily because Puerto Rico does not have votes in the Congress.
A 1997 initiative by then President Clinton included Puerto Rican workers with three or more children in the payroll tax refund program. The proposal was an expansion of the Child and Earned Income Tax Credits.
The Child Credit has long wiped out a portion of middle-income workers’ income tax liability on a per child basis. The purpose has been to provide tax relief to workers with family responsibilities.
The Earned Income Credit lowers the income tax liability of lower middle-income workers and refunds payroll taxes in the case of low-income workers. The intent has been to make work more rewarding than welfare for people at the lower end of the wage scale as well as to help them meet their basic needs.
Clinton’s initiative was designed to give workers with incomes too low to have any income tax liability (currently less than $26,625 a year for a family of four) and three or more dependent children assistance equivalent in value to the tax savings that higher income workers receive under the Child Tax Credit. It provides these low income workers with a check on a per child basis for the amount that the Child Tax Credit per child amount exceeds the Earned Income Credit amount.
The checks are considered to be refunds of payroll taxes as in the case of Earned Income Credit checks to low-wage workers.
Through imprecise drafting in the Congress of legislation to implement the initiative, the assistance included Puerto Rican workers with three or more children with incomes of up to $110,000. This is the maximum amount that a family with an income tax liability can earn and still be able to take the Child Tax Credit.
Puerto Ricans only pay federal income tax on income from the States so most with incomes do not have a federal tax liability. All workers in the territory do pay federal payroll taxes, however.
The result of the imprecise drafting created a version of the Clinton initiative in Puerto Rico that varies from the program in the States in two important respects.
The most significant is that in Puerto Rico it provides no assistance to low-income workers with one child or two children. This is because the Earned Income Credit, which provides the refund in the case of one and two child families in the States, does not apply in the Commonwealth.
The other difference in Puerto Rico is that the program provides payroll tax refunds to middle income workers. In the States, these workers can only take the Child Tax Credit to reduce their federal income tax liability. Few people in Puerto Rico have enough income from the States to have a federal income tax liability.
Senator Graham was the first to propose extending the refunds to low-income Puerto Rican workers with one child or two children. He introduced a bill in the Senate that would phase the Earned Income and full Child Credit programs into Puerto Rico over 10 years. The legislation would also extend
Supplemental Security Income assistance to poor aged, blind, and disabled individuals in Puerto Rico.
Surprisingly, Puerto Rico’s representative to the Congress, Resident Commissioner Anibal Acevedo Vila ("commonwealth" party/D), who is running for governor, dismissed the proposal.
He and Governor Sila Calderon ("commonwealth"/no national party) also declined to ask for the refunds to apply to low-income workers in Puerto Rico with one child or two children when legislation to increase the refund amount to $1,000 per child was considered by -- and passed -- both houses of the Congress.
As it is, an estimated 100,000 Puerto Rican low and middle-income workers with three or more children are eligible for the refunds. Extending the assistance to low-income workers with one child or two children would greatly expand the potential reach of the program.
Only some 35,000 Puerto Rican workers, however, filed for a total in excess of $50 million in payroll tax refund checks last year. And, reportedly, only some 45,000 have claimed the checks of up to $1,800 this year.
The fact that most eligible Puerto Ricans have not participated in the program is attributed to the disinterest of Acevedo and Calderon in it. They have refused to make Puerto Ricans aware of the availability of the refunds and the need to file federal income tax forms to get the assistance. Calderon’s office has even publicly denied the checks are available to Puerto Ricans.
The apparent reason for the disinterest of Acevedo and Calderon in a program that could give low-income Puerto Rican workers hundreds of millions of dollars a year is a baseless claim that the Commonwealth possesses "fiscal autonomy." This claim holds that federal tax laws cannot be extended to the Commonwealth without its consent.
To obtain the refunds, workers need to file federal income tax forms even though only those who have income from the States have a federal tax liability. The federal tax filing requirement contradicts a major Acevedo/Calderon contention regarding what they call "commonwealth status."
Those Puerto Ricans who have applied for the refunds primarily did so at the advice of H & R Block, the tax form filing service.
The proposal in Bush’s budget to disqualify Puerto Ricans is a part of a proposal to "reduce [the] computational complexity" of the refunds. The Puerto Rico implications of the proposal escaped most notice when the budget was submitted in early February because even the U.S. Treasury Department’s two-page description of the Budget proposal did not mention Puerto Rico or Puerto Ricans although its financial impact would fall almost exclusively on islanders.
Bush’s Budget said the proposal would save the U.S. Treasury $736 million over five years and $1.722 billion over 10 years.
The true import of the proposal was not overlooked in the Congress, however. The Joint Committee on Taxation exposed it in an analysis of the President’s Budget issued later in February, a major annual report. The report stated that, "There does not appear to be any particular simplification that results from the proposal other than to prevent Puerto Ricans . . . from . . . claiming a refundable credit."
The congressional committee also estimated the cost of the proposal at more than the Bush Administration had -- $859 million over five years and $2.122 billion over 10.
Despite this, Acevedo and Calderon took no action to preserve the refund for the 100,000 Puerto Rican families eligible or to obtain it for Puerto Rican workers with one child or two children.
June 9th, a leading Washington budget think tank with close ties to Democrats, issued a report on the proposal and Earned Income Credit simplification proposals contained in Bush’s budget. It pointed out that Senate Finance Committee Chairman Charles Grassley (R-IA) praised the package of proposals when he was informed about it a few weeks before Bush sent his budget to the Congress. The point was that the proposals should be taken seriously.
The report by the Center on Budget and Policy Priorities devoted a page and a half to the Child Credit refund proposal. It noted that, "Only a trivial number" of families in the States would receive less benefit as a result of the proposal. Instead, the change "would eliminate the child tax credit refund for families in Puerto Rico."
"From a Puerto Rico standpoint, it is a significant cut for families with three or more children that have learned . . . that they can receive the child tax credit if they file a U.S. tax return."
Noting the federal budget savings, the report also said that "nearly all . . . come from eliminating the child tax credit for families in Puerto Rico."
Coincidentally, Democratic presidential candidate John Kerry issued his comprehensive Puerto Rico policy proposal two days after the Center’s report. It pointed out that one of the "disparities" between the treatment of the needy in Puerto Rico and that of the needy in the States "is that the families of low-income workers in Puerto Rico with one child or two children cannot receive Child Tax Credit refund payments and that the Commonwealth’s low-income workers do not get Earned Income Tax Credit refunds."
The statement said that, "As president, John Kerry will work to help Puerto Rico’s families take advantage of the assistance available to other low-income Americans through the federal tax system."
Acevedo and Calderon remained disengaged from the issue, however, until this week when a small think tank in Puerto Rico, the Center for a New Economy, sent the Washington center’s report to a local print newspaper.
Leaders of both centers expressed concern to the paper that the lack of a defensive effort by Puerto Rico’s officials was endangering the refunds to Puerto Ricans.
Although they had not defended the refunds, Acevedo and Calderon defended themselves in response. Acevedo incorrectly said that the proposal "is not part of President Bush’s budget."
He also said that "it doesn’t have any possibility of passing" in contrast, for example, to Washington center leader Robert Greenstein’s concern that the proposal could be approved so that its $2.1 billion savings to the federal treasury could be used to pay for tax cuts that are popular in the States.
The tax cuts include maintaining the Child Tax Credit and its payroll tax refunds at this year’s level of $1,000 instead of allowing scheduled decreases in the benefit to take effect.
Acevedo’s downplaying of the danger to 100,000 Puerto Rican families was parroted by Calderon and her chief economic advisor. Calderon said that she didn’t see the proposal as a "direct threat.’
She also incorrectly identified the current benefit as half of what it actually is.
Economic Development and Commerce Secretary Milton Segarra misleadingly said that "the proposal has not been concretely included in the budget."
The campaign of Democratic presidential candidate Kerry reacted differently, however. It issued a statement saying that, "George Bush's callous action to cancel child tax credits is another of a growing list of examples of how out of touch he is with the realities of Puerto Rican families.
"As president, John Kerry will honor his pledge to fight for equal assistance for low-income Puerto Rican working families in federal tax programs."
After two days of questioning this week, the Bush Administration late on July 2nd explained why it had made the proposal (contradicting Acevedo’s claim that it was not part of Bush’s Budget). The explanation by a Treasury Department official, however, merely expanded on the paperwork simplification that the proposal would mean for Child Credit refund beneficiaries in the States. The official was unable to justify the proposal’s exclusion of Puerto Ricans from the program.
The February report by the Congress’ Joint Committee on Taxation, however, identified an "alternative" to the Bush proposal that "would appear to achieve similar simplification without affecting the child credit for residents of Puerto Rico with children."
