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Obama Budget Anticlimactic for Territory After Law to Resolve Fundamental Issue

After his 2014 budget successfully proposed legislation to resolve Puerto Rico’s fundamental issue — whether the territory will become a State or a nation, President Obama’s budget for next fiscal year was bound to be anticlimactic for Puerto Rico.  It is.

At least from what has been seen so far of the plan released yesterday, the only really new initiative would fund Medicaid fraud control units in U.S. territories to the extent of a total of $1 million a year. In addition to Puerto Rico, there are four other populated territories, although with much smaller populations than Puerto Rico’s 3.6 million.

Obama is proposing a number of tax measures to discourage businesses from making products developed in the States or the District of Columbia in low tax jurisdictions using “foreign” subsidiaries.

Puerto Rico is a low tax jurisdiction since it does not tax the income of such subsidiaries more than two percent and taxes the manufacturers four percent for products made in the Commonwealth.  These tax rates compare with the Federal 35% corporate income tax rate and the Commonwealth’s top business tax rate of 39%, which does not include other insular taxes such as the new one percent tax on all receipts of Puerto Rico companies.

Manufacturing is a major industry in the territory and the vast majority of production is done by subsidiaries of companies based in the States organized in foreign tax havens to avoid Commonwealth as well as Federal taxes.  The vast majority of production also uses “intangible assets” — exclusive product patents and brand names that account for much of the value of the products.

The President’s proposals would tax income related to goods made by foreign subsidiaries with intangible assets developed in the States.  Although his specific proposals are different from those made last week by U.S. House of Representatives Ways and Means Committee Chairman Dave Camp (R-MI), the goal is the same.  It is also consistent with the proposals offered last fall by then Senate Finance Committee Chairman Max Baucus.

Obama’s budget calls for a comprehensive reform of the Federal government’s taxation of income that companies in the States earn outside of the States.  Baucus’ bill would have done the same.  And Camp’s new bill would change all taxation of business and individuals.

Obama would lower the general corporate income tax rate to 28% but to 25% for income from manufacturing. Camp would lower the tax rate on business income to 25% — his highest proposed tax rate for individuals. 

The President’s budget also revives proposals that he has made before which would provide positive tax incentives for manufacturing under the U.S. flag versus abroad. Two measures would apply to Puerto Rico as well as to other territories, the States, and DC.

One would reduce taxes one-fifth on income from moving manufacturing operations away from foreign countries. 

The other would offer a tax savings to be determined later for income from new manufacturing operations in communities that had a major job loss event. The Commonwealth has lost one-fifth of its jobs during the past eight years.

As with the 2014 budget, the President does not propose extending the grant to Puerto Rico of an additional $2.75 per proof gallon of the tax on rum produced in the territory and in foreign countries. 

Ongoing law transfers to the insular government $10.50 of the $13.50 tax.  This is estimated to provide the territory with $422 million for local government operations and public projects this fiscal year and $425 million next fiscal year. 

A temporary initiative of President Clinton that was extended until last December 31st increased the “cover over” to $13.25 per proof gallon. The Congress extended the higher amount for calendar year 2013 without being requested by Obama.

The President’s budget was also again silent on another ‘tax extender’ for Puerto Rico that the Congress extended through 2013. This one allows companies in the States that manufacture directly in the territory — versus through ‘controlled foreign corporations’ — to exclude nine percent of the profits from their taxable income. 

The Domestic Production Deduction effectively lowers the corporate tax rate for income from American manufacturing from 35% to about 32%. 

It is ongoing law for income from the States but has been temporary law for income from Puerto Rico because of the opposition of a “Commonwealth” party representative of the territory who unsuccessfully tried to have all income from the islands exempted from Federal taxation.  

While silent on income from Puerto Rico, Obama’s budget does, however, assume the continuation of the Domestic Production Deduction for most corporate profits from the States.

The President’s budget reflects the law’s annual increase for the lesser food assistance program that the Commonwealth gets than the program for helping low-income residents of the States buy food.  Yet, it still would decrease funding.

About $1.93 billion would be spent on the Puerto Rico Nutrition Assistance Program next fiscal year.  This year, the basic program cost $1.894 billion but another $167 million was provided under the terms of the 2009 Recovery Act. 

If the Commonwealth were a State instead of a territory, the national Supplemental Nutrition Assistance Program would provide about $2.6 billion to help low-income families in Puerto Rico buy food.

Puerto Ricans voted against the Commonwealth’s territory status and for statehood among the alternatives in a plebiscite under local law held along with the 2012 elections. 

Islanders also, however, very narrowly elected a “Commonwealth” party governor and “Commonwealth” party majorities in both houses of the Legislative Assembly who refuse to honor the people’s self-determination decision.

Because of this, President Obama proposed and the Congress agreed to funding for another plebiscite on the options that would resolve the question of the territory’s ultimate status — statehood, independence, and nationhood in an association with the U.S. that either nation could end.

The current territory status or any other “Commonwealth” proposal cannot be an option because a territory status cannot prevent citizens of Puerto Rico from petitioning their national government — the U.S. Government — for statehood or nationhood.  







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