In speech on the Senate floor today, Senate Finance Committee Chairman Orrin Hatch (R-UT) outlined his concerns regarding several proposals designed to address Puerto Rico’s fiscal and economic problems and emphasized that Congress must first have access to clear and comprehensive information regarding the territory’s financial health before taking federal action.
“We need everyone involved to be upfront and willing to work together,” said Hatch. “That goes for members of Congress, the administration, and the government of Puerto Rico. Everyone needs to come clean about the current state of affairs, the specific needs and amounts requested, and the actual costs of any legislative or administrative proposal, and whether they want to offset costs or simply incur more federal debt.”
Senator Hatch explained that “we’re seeing an ongoing debate about what the federal government can or should do in order to help the American citizens residing in Puerto Rico.” He added that the debate boils down to four questions:
- Should the federal government allow Puerto Rico access to Chapter 9 of the Bankruptcy Code or to even broader debt-resolution tools?
- Will providing fresh tax incentives to Puerto Rico help boost the island’s economy by creating jobs and stimulating growth?
- Should Congress increase federal resources to help ease Puerto Rico’s strained healthcare system?
- Should we take steps to exempt Puerto Rico from burdensome federal regulations – including labor, transportation, and energy regulations – that may be contributing to the territory’s ongoing economic struggles?
With respect to Chapter 9 access, Sen. Hatch expressed concerns about changing bankruptcy law retroactively, a concern bankruptcy experts have dismissed. He also noted that some bondholders may have relied on Puerto Rico’s exemption from Chapter 9 as the reason they bought bonds, although historically, the selling point of Puerto Rico bonds has been their triple tax exempt status.
The Senate Finance Committee Chairman also noted that proposals in Congress to allow residents of Puerto Rico to claim the Earned Income Tax Credit and the refundable portion of the Child Tax Credit on the same basis as other U.S. taxpayers have increased in popularity in recent months. The Obama Administration has also indicated support for a similar approach. Hatch added that because Puerto Ricans do not pay any personal federal income tax on Puerto Rico sourced income, offering these refundable tax credits wouldn’t reduce their tax burden “because you can’t reduce a tax burden that is already zero.”
“In other words,” he explained, “these tax credits would ultimately be cash payments offered directly to lower-income residents of Puerto Rico.”
All refundable tax credits have a cash component, as they are intended to serve as cash refunds to any U.S. citizen in any state that has no tax liability but does have a job. This has been the appeal of refundable tax credits for low-income working Puerto Ricans – having access to them would provide equality with other low-income working U.S. citizens s in the 50 states who similarly have a tax credit greater thantheir tax liability
“Long story short, Mr. President,” said Sen. Hatch, “most of the tax-related proposals to the Puerto Rico situation leave much to be desired. That’s not to say we shouldn’t do anything in this area. There are, quite likely, tax incentives we could offer to better incentivize growth and labor force participation, and perhaps investment, in the Puerto Rican economy. I think it would be safe to say that Republicans would be open to such a discussion. But, to date, I haven’t seen anything that resembles a serious solution that focuses on the tax code.”
Third, Sen. Hatch rejected health care policy proposals as a way to improve Puerto Rico’s economy, explaining that “[w]e will very likely have to consider ideas to alter the means by which we allocate federal health funds to Puerto Rico. However, if we decide to go that route, it is essential that we move forward in a fiscally responsible manner. To date, I have yet to hear any concrete thoughts from proponents in Congress or from our federal health agencies about how this can be done.”
Finally, Hatch addressed the possibility of providing Puerto Rico with relief from various federal regulations.
“We’ve heard a number of ideas in this area, including reforms or exemptions from regulations governing labor markets, shipping, energy costs, and others. While I am inherently sympathetic to proposals to scale back federal regulations, the issues here are very complex, and would become very political in a hurry.”
“In short,” concluded Sen. Hatch, ” there are no easy answers.”
Sen. Hatch ended his remarks with a plea for more data on Puerto Rico’s fiscal and economic problems and actions to ensure that Puerto Rico changes its “clearly unsustainable” fiscal course:
[R]egardless of how we move forward, we need to have a clearer picture of what’s going on in Puerto Rico. We need to have the fiscal facts regarding the island’s indebtedness, funding levels, and needs. Yet, to date, we have not seen any recent audited financial statements from Puerto Rico. Instead, we are being asked to rely on statements and cash-flow analysis commissioned by the government of Puerto Rico. As of right now, finances in Puerto Rico remain extremely opaque and difficult to monitor. Congress should demand independent verification of the territory’s finances before moving forward on any kind of relief package.”
“Moreover, while we’re hearing horror stories of inadequate cash flow and a liquidity squeeze in Puerto Rico, it’s difficult to ascribe much urgency to the situation when we are still seeing and reading about relatively large outlays for questionable expenses. Indeed, it is hard to believe an entity is in danger of running out of cash when it is paying for a broad public relations and lobbying campaign and when officials are talking about protecting hundreds of millions of dollars in year-end bonuses for government employees.”
“No matter what we do with regard to debt restructuring, tax policy, healthcare policy, or regulatory relief, the solution will ultimately be meaningless if we don’t take steps to ensure that Puerto Rico doesn’t simply continue on the fiscally irresponsible path that brought them here in the first place.”
Hatch emphasized that as the Chairman of the Senate committee with jurisdiction over our tax code and most of the relevant health programs, he is “more than willing to work with [his] colleagues on both sides of the aisle to find a bipartisan path forward,” but that first, “[e]veryone needs to come clean about the current state of affairs, the specific needs and amounts requested, and the actual costs of any legislative or administrative proposal, and whether they want to offset costs or simply incur more federal debt.”
By and large I agree with Senator Hatch … afterall I am a moderate Republican who believes in limited government and fiscal responsibility.
That said when even Grover Norquist supports Chapter 9 for Puerto Rico it’s pretty clear that it’s not a “bailout”. It’s a legal mechanism, and from the fiscal conservative viewpoint it is a alot better than a complete total bailout.