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Congressional Panels Review Expired Tax Provisions that had Benefited Puerto Rico

Two provisions of Federal tax law concerning Puerto Rico that expired last December 31st will be reconsidered Thursday by the U.S. Senate committee handling tax legislation.

Senate Finance Committee Chairman Ron Wyden (D-OR) today also proposed extending the provisions from this past January 1st through December 31st, 2015.

The Puerto Rico related provisions are among 46 of 55 expired temporary sections of tax law that Wyden proposed extending.

The provisions have been temporary and extended for many years, and Wyden also said that this is the last time that the tax code sections should be extended.  He suggested that, after this, the provisions be made permanent or left to expire through a comprehensive reform of Federal tax law.

The chairman of the U.S. House of Representatives committee, Ways and Means Committee Chairman Dave Camp (R-MI), yesterday announced that his committee will hold a hearing on the provisions April 8th.

But Camp, who will retire from Congress at the beginning of January, has also said that he wants to determine this year which provisions should be made permanent and which should not be revived as a first step in a reform of the Federal tax system. 

The staff of the Congress’ Joint Committee on Taxation estimated that one provision would save companies based in the States manufacturing in Puerto Rico $222 million in Federal income taxes.  It also estimated that the other provision would result in grants of $336 million to the insular governments of Puerto Rico and the U.S. Virgin Islands.  The grants come from Federal excise taxes on rum distilled in the two territories and in foreign countries.

Puerto Rico receives about three-fifths of the grants.  The shares of the two territories are based on the amounts of rum each produces.

The provision that benefits manufacturers in Puerto Rico based in the States is the application to the territory of the Domestic Production Deduction. It allows companies in the States that manufacture directly in the territory — versus through ‘controlled foreign corporations’ as most do — to exclude nine percent of the profits from their taxable income. The exclusion 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.  When the U.S. Senate Finance Committee originated the deduction and applied it to income from Puerto Rico in 2003, Resident Commissioner Anibal Acevedo Vila said that he did not want it to be applied. Income from Puerto Rico was excluded in the final legislation that became law.

Acevedo supported the effort of Governor Sila Calderon to instead have all income from the territory exempted from Federal taxation. Their total tax exemption effort was rejected by the Senate committee, the chairman of the House Ways and Means Committee, the Treasury Department, and the White House.

Acevedo’s successor, Luis Fortuno of the statehood party, succeeded in getting income from Puerto Rico qualified but only on a temporary basis because the then chairman of the Ways and Means Committee wanted to reform the Federal tax system and did not want to create new permanent provisions of tax law before a reform.

Camp has proposed a reform that would eliminate the Domestic Production Deduction. But his reform would also lower the corporate income tax rate to 25%, about seven percent below the current rate with the Domestic Production Deduction.

The expired provision that has generated grants to Puerto Rico and the U.S. Virgin Islands of Federal excise taxes on rum has given the territories an additional $2.75 per proof gallon of the $13.50 tax.

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

The increase has given the territories $13.25 of the $13.50 tax. A House Ways and Means Committee chairman wanted the Federal government to keep 25 cents of the tax to underscore that the territories did not have a right to the revenue, as some ‘commonwealthers’ in Puerto Rico and others had claimed.

President Clinton initiated the temporary increase.

President Obama’s budgets for this fiscal year and next year have not suggested extending the two provisions.

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