The landmark federal tax reform proposal released on Friday includes a provision to encourage economic growth in Puerto Rico and other economically distressed areas that was requested by Puerto Rico Resident Commissioner Jenniffer González-Colón and several other members of Congress in a letter to congressional tax leaders.
The tax bill omits several of the group’s other requests. When asked about the omissions during a Friday night press conference, Rep. Kevin Brady (R-TX), the Chairman of the congressional conference committee that released the tax bill, explained that more assistance for Puerto Rico would be forthcoming in separate legislation expected to pass by the end of the week.
The December 12 letter, which was led by Resident Commissioner Jenniffer González-Colón (R-PR) and signed by Representatives Jose Serrano (D-NY), Nydia Velazquez (D-NY), Ileana Ros-Lehtinen (R-FL), Darren Soto (D-FL) and Stephanie Murphy (D-FL), urged the tax leaders “to take action on several provisions that will incentivize direct economic activity in the local economy of Puerto Rico, rather than simply allowing corporations to attribute income there for tax purposes.”
The letter further explained that “[a]ttributing income to an area for tax purposes has for too long enabled companies to save far more in taxes than they contribute to the local economy.”
Recognizing that the “economic situation in the island…leads Puerto Ricans to look for better opportunities in the 50 states,” the letter’s signers – who are from Puerto Rico and/or have significant Puerto Rican constituencies – concluded that “[t]he simplest, and best, solution would be to treat corporations in Puerto Rico as domestic for tax purposes.” They further emphasized that “the conference should work towards that goal.” Corporations in Puerto Rico are not treated as domestic in the tax proposal released on Friday.
Resident Commissioner González-Colón and the co-signers of the letter also urged the inclusion of the Senate bill’s opportunity zone provision, which creates tax incentives for capital investments in economically distressed areas. The Senate opportunity zone language was ultimately included in the tax bill that is expected to be signed into law as early as Wednesday. The Senate provision explicitly defines “state” to include the U.S. territories.
An additional measure requested by the members of Congress who signed the letter – to help areas with poverty levels similar to those of Puerto Rico by offering a tax credit for local payroll costs and full expensing of investments in plants and equipment for ten years – was left out of the tax bill. It is this provision, which builds on the new opportunity zones, that Chairman Brady may have indicated at the Friday press conference would be included in unrelated legislation expected to follow congressional consideration of the tax bill and enacted into law by the end of the week.
The add-on to the opportunity zone provision “would have the overwhelming support of the people of Puerto Rico because it would create jobs, opportunities and economic growth for all,” according to González-Colón and her colleagues.
In addition, the letter reminded the committee of some previous requests made by many of the signatories:
- Extension of the Earned Income Tax Credit to Puerto Rico
- Equal coverage under the Child Tax Credit (CTC), which applies to all children in the states but does not cover the first two children born into a family in Puerto Rico
- Making the Rum Excise Tax Cover-Over permanent
- Equal treatment under the Domestic Production Tax Deduction
When asked about the possibility of expanding the child tax credit to cover all children in Puerto Rico, Chairman Brady responded “not yet,” raising the hopes of CTC expansion proponents that the law will be changed in a subsequent tax bill.
Two of the other provisions of tax law – the rum excise tax cover-over and the domestic production tax deduction – expired last year, and their extensions were included in the House tax bill but not incorporated into the conference agreement.
The rum excise tax cover-over was a temporary grant to Puerto Rico and the U.S. Virgin Islands of $2.75 per proof gallon of the $13.50 federal tax on liquor for rum produced in the territories or in foreign countries. The territories receive $10.50 of the $13.50 tax under ongoing law. The temporary increase has provided Puerto Rico with at least $60 million a year. The House bill would have extended the grant retroactively and through 2022.
The other provision that expired last year was the temporary application to Puerto Rico of the domestic production tax deduction. It enables companies to exclude nine percent of income from domestic manufacturing from taxable income, currently reducing the 35% corporate tax rate to just over 32%. It is used by companies from the States that manufacture in Puerto Rico directly as U.S. companies as opposed to through foreign subsidiaries. Gonzalez-Colon has sought to have this provision restored for this year since a new reduction in the corporate tax rate takes effect January 1st.
The letter concluded with a reminder that Puerto Rico is still in need of help to recover from Hurricane Maria’s devastation and encouraged the tax conference to use tax policy “as part of the recovery process in order to bring jobs, investments and opportunities to Puerto Rico.
Click here to see a copy of the letter.