The Senate voted to pass their version of tax reform in the early hours of Sunday morning, increasing anxiety among Puerto Rican government and business leaders. Both the Senate and House versions of tax reform consider Puerto Rico a foreign jurisdiction for tax purposes, despite its status as a Commonwealth under the U.S. flag with U.S. citizen workers. The House version of the bill would apply a 20% tariff on products exported to the U.S. from American manufacturing companies abroad, and the Senate bill would apply a 12.5% tax on the intangible assets of these corporations, such as intellectual property (patents, trademarks, etc.). Without further changes, Puerto Rico’s economy could lose up to 250,000 jobs.
Manufacturing accounts for approximately 46% of Puerto Rico’s Gross Domestic Product (GDP). In addition, around 80% of the top pharmaceutical and medical equipment U.S. consumers depend on is manufactured in Puerto Rico. Further, the Commonwealth is concerned that a change in how Controlled Foreign Corporations (CFCs) are treated under tax reform could impact the government’s revenues. At least 23% of Puerto Rico’s General Fund revenues depend on a 4% excise tax that these companies pay the Commonwealth (the companies are then reimbursed by the IRS).
Complicating matters even more, there seems to be a disparity in the solutions proposed by Governor Ricardo Rosselló and Resident Commissioner in Congress Jenniffer González. Rosselló has come out in favor of treating Puerto Rico as a domestic jurisdiction for the purposes of tax reform, and has even floated the idea of additional tax incentives for U.S. manufacturing companies in Puerto Rico. González seems to be taking a different approach, proposing Enterprise Zones and other ideas that do not address taxes on intangible assets and other components of the tax reform bill that most observers agree would decimate what is left of Puerto Rico’s economy. González says she is against the 20% product tariff, but has yet to offer alternatives.
Ryan appoints conference committee members from the House
The conference committee to address the differences between the House and Senate tax bills just got its House members. House Speakers Paul Ryan (R-WI) appointed the following House Republicans to the committee: Kevin Brady (R-PA), Chairman of the House Ways and Means Committee; Peter Roskam (R-IL), Chairman of Tax Policy in that committee; Rob Bishop (R-UT), Chairman of the House Natural Resources Committee; and Diane Black, Chairwoman of the Budget Committee. Other Republicans in the conference committee will be Greg Walden (R-OR), Chairman of the House Energy and Commerce Committee; John Shimkus (R-IL); Devin Nuñes (R-CA); Kristi Noem (R-SD); and Don Young (R-AK).
House Democratic Leader Nancy Pelosi (D-CA), appointed: Richard Neal (D-MA), Ranking Member in the House Ways and Means Committee; Sander Levin (D-MI); Lloyd Doggett (D-TX); Kathy Castor (D-FL); and House Natural Resources Committee Ranking Member Raul Grijalva (D-AZ).
Rumors persist that if the House-Senate conclave is unsuccessful, the House may vote on the Senate bill and pass it as is. This maneuver avoids any additional votes in the Senate, where the GOP cannot lose additional votes.
Christmas bonus payment raises concerns from some on the Hill
Governor Rosselló’s decision to pay Commonwealth government employees $100 million in Christmas bonuses—in the same year that the Island received a $4.7 billion loan from FEMA— is not sitting well with some lawmakers in Washington, D.C. The Governor says that Puerto Rico law requires him to make the bonus payment, and that it is a wise investment that will stimulate the beleaguered Puerto Rican economy.
Congressman Tom McClintock (R-CA) said in a statement, which is representative of the mood among some GOP lawmakers, that “Puerto Rico has demonstrated time and time again that its government is incapable of responsibly handling its finances. This is yet another such instance.”