Controversial bid to restore federal tax shelters in U.S. territories

Tax policy snafu complicates territories agenda in new Congress

Stacey Plaskett is the non-voting Delegate in the U.S. House of Representatives, elected by the American citizens of the U.S. Virgin Islands (USVI). She recently proposed an amendment to federal tax law restoring tax shelters in Puerto Rico and other U.S. territories. According to a letter from the Puerto Rico Senate President to Plaskett dated December 12, 2018, the proposed corporate tax break would enable U.S. corporations in the 50 states that also operate in the territories to pay one-tenth of the federal taxes that would otherwise apply to corporate earnings.

The letter to Plaskett from Puerto Rico Senate President Thomas Rivera Schatz pointedly notes that Congress repealed and phased out the same tax shelter model Plaskett is proposing under federal fiscal reform legislation in 1996. In his powerfully articulated letter, Senate President Thomas Schatz persuasively opposes restoration of earlier “corporate welfare” tax breaks in Puerto Rico:

“…the previous tax privileges…produced a bubble of economic and financial appearances that only benefitted exorbitant corporate profits and banks, but to the detriment of the equality of political and economic rights of the 3.5 million American citizens in Puerto Rico…the levels of poverty…surpassed 50%…unemployment rates fluctuated between 14% and 21%.”

The Senate President also pointed out that the special interest federal territorial tax loopholes Plaskett advocates are not constitutional in states due to federal tax uniformity principles. That means restoring local dependency on tax breaks only legally valid in unincorporated territories denied a path to equal rights under the Constitution is incompatible with self-determination in Puerto Rico, where majority rule favors statehood.

In an unambiguous message defending Puerto Rico’s right to determine its own fate, Schatz seeks comity between territories by respectfully admonishing Plaskett with this statesman-like request to observe reciprocal protocols:

“I would not presume to speak for what is best for the Virgin Islands. By the same token, I request that you respect the wishes of the representatives of your fellow Americans in Puerto Rico. Resident Commissioner Gonzalez-Colon is the official spokesperson for our territory on such Federal matters.”

Special tax breaks

The tax avoidance scheme Plaskett proposes was presented in the Rules Committee rather than the tax-writing or territorial policy committees. Lobbyists for corporations seeking return of the “good old days” when billions in taxes were avoided annually have been looking for someone to sponsor a new territorial tax credit for years, and now Plaskett wittingly or not is their champion.

Those tax sparing rules were phased out over ten years under reforms agreed to in 1996 by President Clinton and House Speaker Newt Gingrich. The 1996 territorial tax reform laws ending the tax shelters exploited extensively in Puerto Rico were based on a bipartisan determination that it was “corporate welfare” being abused by companies in state.

Large U.S. corporations were evading federal tax and deriving profits disproportionate to any economic benefits in the territory. Plaskett’s amendment not only would restore the controversial tax haven provision in Puerto Rico, but would also extend the new restored tax breaks to USVI and the American territories of Guam, American Samoa and the Northern Mariana Islands.

It is historically documented that the “Section 936” tax haven scheme terminated from 1996 to 2006 was used by Congress in the case of Puerto Rico to justify denial of equal citizenship rights and equal economic opportunity through full and fair participation in the national economy. It is not surprising Puerto Rico would seek to preempt any federally imposed tax policy forcing Puerto Rico to re-live the failure of that policy in the past.

Ironically, it was at least in part because of that history that a coalition of progressive liberal Democrats that includes leading 2020 Democratic Party presidential candidates recently announced opposition to “tax breaks for the rich” in Puerto Rico.

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