“Once again, the Obama administration has shown that it understands the needs of Puerto Rico and that it is receptive to our message that Puerto Rico jobs are American jobs,” Resident Commissioner Pedro Pierluisi said. “I thank the president for including us in his proposals, and I will work with my colleagues in Congress to seek their enactment into law.”
A coordinated push by Pierluisi and Gov. Luis Fortuño for Puerto Rico’s inclusion in the proposals included letters to the White House and meetings with key administration officials.
In a meeting last week, Obama’s senior economic advisor Jason Furman pledged to Pierluisi that Puerto Rico and the other territories would be fully and fairly included in the administration’s forthcoming tax proposals.
Three main tax proposals were unveiled Monday when Obama sent his proposed budget to congress, all of which treat Puerto Rico and the other territories equally to the states.
First, the administration has proposed a new tax credit for 2012, aimed primarily at small businesses, that would give employers who hire new workers or increase wages for existing workers a tax credit equal to 10 percent of up to $5 million in new wages paid — that is, up to $500,000 per company. Employers in Puerto Rico and the other territories are expressly included in this proposal. In Puerto Rico, the island Treasury Department (Hacienda) would provide the credit through its local tax system and get reimbursed by the U.S. Treasury Department.
Second, the administration has proposed providing a tax credit to companies who move business operations to this country from abroad. Specifically, companies would get a credit against income taxes equal to 20 percent of the expenses paid to “insource” a U.S. trade or business. Insourcing is defined as eliminating or reducing a business conducted outside of the U.S. and expanding, starting up, or moving the business to the U.S. to the extent that this results in creating U.S. jobs. Under this proposal, Puerto Rico would be considered part of the U.S. and companies that relocate to Puerto Rico from abroad could claim the credit.
Third, the administration proposed a new Manufacturing Communities Tax Credit to encourage investment in communities that have suffered a substantial job loss event, like a plant or base closure. In the case of Puerto Rico, these credits would presumably be allocated to the local Department of Economic Development & Commerce (DDEC), which in turn would provide them to companies who invest in areas of the island that have experienced major job losses.
“The White House had assured us that Puerto Rico would be included in the tax proposals to increase U.S. employment and manufacturing, and today we can confirm that the proposals in the budget will benefit the territory to the extent that they benefit the rest of America,” Fortuño said.
Rum rebates, corporate rates in the mix
The president’s budget also proposes to extend two existing tax programs that benefit the territory.
One allows companies that manufacture on the island as domestic operations (instead of as controlled foreign corporations) to deduct 9 percent of their income from the amount subject to taxation. This lowers their tax rate from 35 percent to just over 32 percent. The provision was established through legislation that Fortuño sponsored as resident commissioner. It would provide companies in Puerto Rico with tax savings estimated at $61 million in federal fiscal year 2013 and $41 million in fiscal 2014.
The other proposal would continue to grant the territory $13.25 per proof gallon of federal tax collections on rum produced in the island and in foreign countries instead of $10.50 per proof gallon. It would grant Puerto Rico an estimated $96 million in federal fiscal year 2012 and $24 million in fiscal 2014. These amounts are on top of the $370 million that Puerto Rico is estimated to receive in fiscal 2013 under current law.
Island officials still pushing for PRIPA
Fortuño and Pierluisi continue to make the case for the 933A tax proposal as a way to help spur investment on the island and create American jobs.
“The Puerto Rico Investment Promotion Act would provide an incentive for investment in Puerto Rico that the United States could otherwise lose to foreign countries,” the governor said. “The aim of this legislation is in line with our national economic goals and the president’s insourcing tax initiatives, which is why we continue to make the case in Congress to include the 933A proposal on any legislation that moves forward on U.S. tax policy issues.”
The Puerto Rico Investment Promotion Act (H.R. 3020) would create a new section in the U.S. tax code entitled 933A which would allow companies organized in Puerto Rico to elect to be treated as U.S. corporations under rules similar to those that apply to individual residents of the territory. Under these rules, individuals are taxed in the same manner as residents of the states and D.C. on their worldwide income but not on their local source income.
The PRIPA legislation was crafted by Fortuño, Pierluisi and leading tax experts in Puerto Rico and Washington, D.C. Introduced by Pierluisi, the bill has 11 bipartisan cosponsors and has been referred to the U.S. House Ways and Means Committee, the committee responsible for U.S. tax policy.
Budget faces tough path through Congress
U.S. Treasury Secretary Timothy Geithner told Congress Tuesday that the president’s new $3.8 trillion spending plan would impose new taxes on only 2 percent of the nation’s wealthiest families and the alternative would be to seek more painful cuts in other government programs such as defense, Social Security and Medicare.
Geithner defended the new budget plan in the face of intense attacks from GOP members of the Senate Finance Committee. Republican Sen. Orrin Hatch of Utah told Geithner that the administration’s spending plan would give the country a “permanently larger, European-inspired government.”
But Geithner said deeper spending cuts now would damage economic growth and push more Americans into poverty at a time when the economy is still struggling to recover from a deep recession.
Geithner told the committee that the administration hopes to send Congress next week a framework for making changes in the country’s corporate tax structure.
He said the administration would not offer detailed legislative language but rather broad principles for corporate tax reform. He said the administration would propose eliminating a number of current business tax breaks in an effort to lower the corporate tax rate.
The nominal U.S. corporate tax rate is 35 percent, the highest in the world after Japan, but few companies pay that much after taking various deductions.
Obama has proposed lowering that tax rate but has not said by how much it should be lowered. The president has also proposed ending tax breaks for U.S. companies moving jobs or profits to foreign countries while suggesting tax breaks for businesses that move jobs back to the United States.
Geithner did not offer any hints about what recommendations the administration will make on corporate rates in its submission to Congress.
Congress may put off the tough decisions on the budget until after the November elections, but the spending document will certainly be used as a campaign document for Obama and a key target for Republicans running against Democrats.
Republican Mitt Romney, who is campaigning for the GOP nomination to challenge Obama in the fall, called the budget Obama released Monday “an insult to the American taxpayer.” GOP candidates Rick Santorum, Newt Gingrich and Ron Paul are all advocating bigger spending cuts to control the deficits, and all the GOP candidates oppose Obama’s tax increases.
“The president’s budget is a gloomy reflection of his failed policies of the past, not a bold plan for America’s future,” House Speaker John Boehner, R-Ohio, said Monday after the budget was released. “The president offered a collection of rehashes, gimmicks and tax increases that will make our economy worse.”
Republicans are arguing for deeper spending cuts and a frontal assault on the biggest drivers of the deficit, the soaring costs of Medicare and Medicaid, whose already sizable costs are projected to double in future years as baby boomers retire.
Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, said Monday that he expected the Republican-controlled House would in coming weeks pass an alternative to the Obama budget that would gain control of the deficit, not by raising taxes but by curtailing Medicare and Medicaid.
“President Obama’s irresponsible budget is a recipe for a debt crisis and the decline of America,” Ryan said.
Obama’s cuts in Medicare and Medicaid avoid cuts in benefits and instead make modest trims in payments to health care providers. In contrast, the Republican House last year approved Ryan’s plan, which would essentially transform Medicare into a voucher system in which future seniors would get a fixed amount to buy medical insurance.
The Obama budget proposes spending $3.8 trillion in the 2013 budget year, which begins Oct. 1. It would achieve $4 trillion in deficit cuts in part through restraining the growth of many government programs, adhering to the agreement Congress approved in August for spending caps to achieve $900 billion in deficit reduction over a decade.
Obama’s plan also proposes additional deficit reduction in order to avoid $1.2 trillion in across-the-board cuts scheduled to take effect next January.
But the president relies on $1.5 trillion in tax increases, mainly by allowing the Bush-era tax cuts to expire on families making more than $250,000 per year, imposing additional taxes on those making more than $1 million per year and eliminating various corporate tax breaks.
The tax increases all have been rejected by Republicans.
With both parties holding entrenched positions, it is very likely that no solution will be found before the November elections, with both sides preferring to use the debate to score political points.
If that occurs, Congress will probably be back in Washington after the November elections for a lame-duck session to resolve the battle over taxes and spending cuts.
Lawmakers are facing end-of-the-year deadlines when the Bush-era tax cuts on all taxpayers expire and across-the-board spending cuts will go into effect if lawmakers can’t agree on $1.2 trillion in further deficit reduction over the next decade.
The Associated Press contributed to this report.