This week in the Puerto Rico Report…

This week in the Puerto Rico Report…

In case you missed it…

Puerto Rico Seeks to be a Tax Haven — But with Less Tax Than Foreign Havens

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Puerto Rico is “catching up to Ireland and Singapore” as a tax “shelter,” according to the territory’s Secretary of Economic Development and Commerce — who seemed to view the Commonwealth becoming more of a tax haven as a positive development.

There’s one big difference between the Puerto Rico tax haven and taxation of Americans in foreign countries, however. The tax exemption that Secretary Alberto Bacó Bagué is marketing to rich residents of the States avoids Federal taxes on gains from selling stocks and bonds — a very valuable benefit that foreign tax havens cannot offer.

The New York Times reported today that, “Since the beginning of the year, the island has gone on a campaign to promote” the tax avoidance in an effort to get wealthy residents of States — particularly major traders of financial securities — to move to the territory.

The primary incentive for moving is a new ability to avoid any taxation of gains from stocks and bonds bought and sold while a Puerto Rico resident and only pay a 10% tax on sales of securities bought while a resident of the States.

In the States, the individuals would be liable for a 23.8% Federal capital gains tax and any State taxes.

The Commonwealth’s effort has gotten some 10 executives of financial firms to relocate to Puerto Rico. Bacó says that talks are underway for some 40 more to move — about a third managers of hedge funds (private investment funds limited to well-to-do investors).

The Times report said that those who have moved already are “under-the-radar millionaires” but that Bacó’s real objective is billionaires.

The article quoted a small investment company founder as saying that he would save hundreds of thousands of dollars a year in taxes. Billionaires could save hundreds of millions.

Bacó “is planning a road show on the [U.S.] East Coast next month to woo financial and law firms as well as wealthy individuals,” the newspaper reported.

The capital gains loophole became a much bigger issue this year as the Federal capital gains tax increased from 15% to 23.8% for upper-income individuals, and Puerto Rico began using its no or low gains tax policy to attract wealthy residents of the States.

The Times wrote, “Puerto Rico is a super-charged version of Florida, which does not tax individuals on ordinary income.” But residents of Florida pay Federal capital gains taxes whereas new residents of Puerto Rico do not. (Individuals who have lived in the islands during any of the past 15 years, however, have to pay the territory’s 10% gains tax.)

The article recalled that a previous Federal incentiveexempting from taxation income attributed to manufacturing in Puerto Rico by companies based in the States “ended after Congress said that the incentive had bilked taxpayers” in the States.

Tax avoidance measures are possible because of Puerto Rico’s territory status often called “commonwealth” after the formal name of the islands’ local government.

Federal and other respected economic analysts found that the tax breaks for companies that manufactured in Puerto Rico which were repealed benefitted companies more than the islands and were abused by come corporations. The Commonwealth intended the new tax loophole for rich sellers of stocks and bonds who move to the territory to benefit them more than Puerto Rico.

Puerto Ricans voted against “commonwealth” status and for U.S. statehood last November.

Puerto Rico Governor’s Aide Wrong on Jobless Rate

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The secretary general of Puerto Rico’s “commonwealth” party Monday erroneously claimed that actions of Governor Alejandro Garcia Padilla had lowered the territory’s unemployment rate to 14.6% in January and that this was the lowest rate since January 2008, according to newspaper El Nuevo Dia.

Jorge Suárez Cáceres made the assertions in an attack on Puerto Rico’s resident commissioner in Washington, DC, Pedro Pierluisi (statehood party-D), who is expected to be Garcia’s main challenger in the 2016 election.

Suárez was picked to be the party’s chief executive by Garcia, who is the party’s president.

Garcia took office in January. Instead of decreasing, the islands’ jobless rate increased in January from 14.4% to 14.6%, according to the U.S. Bureau of Labor Statistics. (It increased from 14.3% after Garcia’s election.)

In January 2008, the rate was 10.9%.

Given the partisan context of Suárez’s jobless rate contentions, one would think that instead of January 2008, he meant January 2009, the month that Pierluisi’s running mate for governor in 2008 and 2012 took office as governor. But Puerto Rico’s unemployment rate then was also lower than this January. It was 14%.

It would be extraordinary if Garcia could have substantially affected Puerto Rico’s unemployment rate during his first four weeks in office. And it is not unusual for politicians to exaggerate. But Puerto Rico’s unemployment problem is of longstanding and the facts of the territory’s jobless rate are on record.

The important truth is that Puerto Rico’s economy has generally stagnated or degraded during the past few decades. The income gap with the States has grown.

The insular economy is unlikely to change substantially unless Puerto Rico becomes a U.S. State or a separate nation. It has few tools that it can legitimately use for improvement under the current territory status.

Puerto Ricans are — consciously or not — ‘voting with their feet’ for statehood by moving to the States to an extent that the population is now decreasing. As U.S. citizens, they can move freely in any U.S. area.

A plebiscite among those who remain last November voted against the current status and for statehood.

School Lunches in Puerto Rico

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Since the 1960s, schools in all 50 states and in Puerto Rico have provided affordable hot lunches for children and subsidized the meals of children who needed that help.

2012 study determined that the costs of providing school lunches for Alaska and Hawaii were greater than related costs in the 48 contiguous states, but the researchers said that they were unable to get the information needed for Puerto Rico. The factors identified as increasing costs for providing food in Alaska and Hawaii included a number of considerations related to geography:

  • Increased transportation costs for foods
  • Limited options for locally grown foods
  • Limited access to food donations
  • Limited access to cooperative buying or farm-to-food options

Hawaii and Alaska both receive higher payments per student than the 48 contiguous states, but Puerto Rico’s reimbursement is the same as that for the 48 states. Puerto Rico subsidizes breakfast and lunch completely for all students; 91.4% of students are eligible for free lunches, according to the study, and all the schools have been identified as “severe need” schools.

While the 2012 study had some limited information for Puerto Rico, two earlier studies were referenced, and neither had included any data for Puerto Rico. It seems possible that the lack of information for Puerto Rico might be connected with the fact that Puerto Rico’s school lunch reimbursement doesn’t reflect the challenges of their geography, but it may simply be that Puerto Rico is not a state.

Recently, the Hon. Gregorio Kilili Camacho Sablan of the Northern Mariana Islands introduced legislation intended to determine whether  the U.S. Department of Agriculture is appropriately reimbursing schools in its possessions, including Puerto Rico, for school lunches. Sablan reminded the Congress that they had already given the Secretary of Agriculture authority to adjust reimbursement rates for schools off the mainland. Sablan continued:

The Secretary has used this authority to set adjusted—and place-appropriate rates—for both Alaska and Hawaii, where transportation and other factors add to the cost of providing meals in the schools. In the other insular areas—the Northern Mariana Islands, Guam, American Samoa, Puerto Rico, and the U.S. Virgin Islands—however, where distance and reverse economies of scale can increase costs just as in Alaska and Hawaii, schools are reimbursed at the standard national rate that applies throughout the continental U.S.

Sablan expressed a belief that there are significant differences in the cost of food in the continental U.S. and in its possessions, just as there are between the contiguous 48 states and the newer states of Alaska and Hawaii:

Those of us who shuttle between our duties in Congress and the insular areas we represent are familiar with the costs of food and other services both here and at home. We know that there are differences. And, if these differences mean that children in our areas are receiving less food or less nutritious food or no food at all because the current reimbursement rates are inadequate, then we need that information. By the same token— though this is not my expectation—if the federal government is overpaying, then Congress needs to know that, as well.

The legislation calls on the Secretary of Agriculture to report to the Committee on Agriculture of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate on the differences in costs and whether those costs are at variance with the reimbursement.

Columbia Law School Expert Analyzes Puerto Rico Plebiscite Vote

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Columbia Law School professor Christina Duffy Ponsa haspublished a thoughtful essay about the November 6th Puerto Rico Plebiscite.  A nationally recognized expert on the constitutional implications of American territorial expansion, Ms. Duffy Ponsa’s analysis is a concise, easy read on the implications of the recent vote.  She wrote:

On November 6, while a majority of the American electorate was casting its ballot for four more years, a majority of the electorate in the U.S. territory of Puerto Rico was casting its ballot for not one more minute. In a plebiscite addressing Puerto Rico’s troubled relationship with the United States, 54 percent of the voters called for an end to the island’s current “commonwealth” status—a status falling somewhere in between statehood and independence, though where exactly it falls, no one seems to know. . . . And among those who proceeded to choose an alternative, a robust majority of 61 percent opted for statehood. It was an historic vote: The island’s first-ever majority vote in favor of joining the Union as the 51st state.

Yet the results of the plebiscite immediately gave rise to controversy, with statehood opponents complaining that the ballot was flawed both procedurally (they didn’t like its two-step structure) and substantively (they didn’t like how it defined the political status options). These criticisms came as little surprise: Commonwealth supporters have made an art of objecting to any process that could potentially yield a victory for statehood—including earlier processes involving just one step and different definitions of the options. Indeed, both the two-step process and the definitions this time around were consistent with recommendations in reports produced by both the Bush White House Task Force on Puerto Rico and the Obama White House Task Force on Puerto Rico. Moreover, the critics have not helped their cause by throwing in a smattering of less plausible complaints. (For instance, because the governor-elect doesn’t support statehood himself, the plebiscite didn’t count. Or it might look like statehood won, but statehood actually lost—perhaps they’re reading the results upside down?)

Even so, their objections have thrown sand in the gears, and a true resolution to Puerto Rico’s “status problem” likely remains a long way off. This, too, is unsurprising: Puerto Rico’s legal and political relationship with the United States has from the start been the source of stormy and contentious debate. Annexed by the United States after the war with Spain in 1898, Puerto Rico has been a “territory” of the United States for nearly 115 years, and since 1917, persons born in Puerto Rico have been U.S. citizens at birth. Because the island is not a state of the Union, however, these 4 million U.S. citizens have no voting representation in the federal government: no presidential vote, no Senators, and no Representatives except for one non-voting “Resident Commissioner” in the House. (They also don’t pay federal income taxes, but they do pay other federal taxes, and very high local taxes to boot.) Little wonder that a majority of Puerto Ricans want an end to the island’s current status.

What they want instead, though, is a thornier question. In 1993, “commonwealth” and statehood split the vote 48 percent-46 percent (that’s right—virtually no Puerto Ricans support independence), and in 1998, a majority of 50.3 percent succeeded mainly in confusing matters by voting for “None of the Above”—a result that led to nothing except more of the same. Now, a clear majority among those who expressed a preference chose statehood. While statehood supporters are not sanguine about what comes next, they hope that at the very least, the result of this most recent plebiscite will be remembered as the beginning of the end of Puerto Rico’s colonial condition.

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