Territories Transitions to Statehood

by Howard Hills

More perfect union comes after not before statehood

Under the current “unincorporated territory” status Congress can and does apply some but not all federal taxes that must be enforced uniformly or not at all in the states. The shrinking anti-statehood minority faction warns that during any period of “incorporation” leading to statehood the uniform taxation provision will apply, even before Puerto Rico is represented in Congress or economically strong enough to bear the burden of new federal taxes.

These scare tactics also promote the false idea that Congress has no authority to phase in federal taxes not already applicable in Puerto Rico before and after admission to statehood. Yet history shows that federal taxes in a new state can be phased in to balance new tax burdens with increased benefits of federal programs and services, or even to delay some federal taxes until after federal benefits are phased in.

Alaska Case Study

Separately from the Alaska Statehood Admissions Act, in 1959 the Congress passed an “Omnibus Act” that included provisions for “economic adjustment” as well as fiscal stability in government budgeting to support Alaska’s political transition from territory status to statehood.

The history of federal economic measures to support political status change for Alaska is documented by the GAO’s Comptroller General Report to Congress, “Experiences of Past Territories Can Assist Puerto Rico Status Deliberations,” March 1980 (GGD-80-26). At pages 28-29 it reads:

“Alaska’s Omnibus Act…maintained arrangements existing during the territorial times. For example, a higher ceiling for federal mortgage insurance was authorized because construction costs exceeded those in other parts of the country. Recognizing this situation, the Congress continued the exception after statehood. Alaska’s exemption from certain federal taxes was also retained. A Senate report traced the history of this tax exemption which in 1956 was justified ‘…by the fact that Alaska (and Hawaii) were far removed from the States and that transportation between the States and those two territories involved travel over the high seas and/or a foreign country.’”

In addition to gradualism phasing in tax uniformity, the Congress made the following uniformity exceptions for Alaska:

  • Unobligated prior fiscal year federal funds were transferred to the new state government
  • State takeover of some federal functions during territorial period was passed in
  • Traditional federal land grants to new states for schools and infrastructure expanded dramatically to accelerate economic growth
  • Instead of typical gradualism immediate eligible for equal federal grants, programs and services for education, health, environment
  • Income security benefits were immediately available
  • Federal airports transferred to state

Puerto Rico – Alaska Comparison/Contrast

Economic adjustment in Alaska was deemed necessary because despite unprecedented natural resources most wealth production and profits had been exported outbound with the natural resources. As a result the territory had not demonstrated the sustainable prosperity to ensure costs of statehood could be borne immediately. Congress also recognized that federal territorial policy benefitting vested interests profiting from the territorial status quo had unduly and detrimentally delayed political and economic development in Alaska, justifying remedial economic adjustment to help accelerate readiness to assume all benefits and burdens of statehood.

Puerto Rico was exploited by giant mainland corporations unfairly harvesting windfall profits from federal tax shelter schemes that prevented strategic diversification of the territory’s economy. Similarly, Alaska’s territory status was exploited by Wall Street syndicates operating a mining and fishing empire based in San Francisco and Seattle.

In the case of Alaska, the J.P. Morgan – Guggenheim controlled banking and finance interests on Wall Street retained Washington lobbyists to ensure their subsidiaries were favored in permitting and regulating mining and fisheries by the early military government and later the Department of the Interior. The federal presence in the vast territory twice the size of Texas was limited to 13 civilian bureaucrats to ensure outside corporate interests could operate freely and aggressively without local or outside competition.

The unfair advantage of the Wall Street syndicates in Alaska was similar to non-eligibility of local companies in Puerto Rico for tax shelter benefits conferred by Congress for “corporate welfare” benefitting big mainland companies and subsidiaries in Puerto Rico. Just as local fishing operators were denied permits in waters reserved for San Francisco based boat operators, local companies in Puerto Rico did not get the same exemptions form local taxes that mainland companies got from federal taxes in Puerto Rico.

In an historical irony of significant proportions, the economic corruption by Wall Street in Alaska produced a political earthquake in Washington that shook Puerto Rico. President Taft’s administration was rocked by national scandal over the so-called Pinchot-Ballinger scandal about corruption in permitting coal mining in Alaska. That led to Taft’s rift with Teddy Roosevelt, whose resulting Bull Moose third party candidacy enabled Wilson to defeat Taft’s re-election bid.

Before the White House, Taft had been Governor of the U.S. Territory of the Philippine Islands, where U.S. citizenship was denied as part of a policy leading to independence. Later as Chief Justice of the U.S. Supreme Court the bitter taste of his undoing over Alaska shaped Taft’s dark mood toward Puerto Rico. He believed it had been a mistake to grant citizenship to Alaska and Hawaii, and regretted the court’s rulings that citizenship constituted incorporation leading to eventual statehood. Accordingly, Taft imposed his will and the court ruled conferral of U.S citizenship by Congress in 1917 did not end unincorporated territory that previously applied only to non-citizen populated territories.

In the aftermath of that 1922 ruling authored by Taft the local anti-statehood party developed the proposal for “autonomous state” status that derailed progress toward real statehood or independence for 75 years. That led to the advent of the federal corporate welfare tax shelter scheme and emergence of the lobbying firm Black, Manafort and Stone, bankrolled by the mainland companies reaping tax savings, as the de facto representatives of Puerto Rico in Congress.

If instead Puerto Rico had been deemed incorporated in 1922 on the same basis as Alaska and Hawaii then Puerto Rico would have become the 51st state in the 1950’s, or soon thereafter. Now as Puerto Rico seeks statehood it can be compared to Alaska in another way.

Just as already insolvent Puerto Rico now needs federal assistance to recover from Hurricane Maria to be economically viable for statehood, Alaska was deemed to face “dire projections” and “financial shortfalls” in 1960, and pulled out of economic nose dive after a catastrophic 1964 earthquake triggered massive federal disaster relief.

Indiana Case Study

On April 19, 1816, President James Madison signed into law “An act to enable the people of the Indiana Territory to form a constitution and state government, and for the admission of such state into the Union on an equal footing with the original states.

Section 3 of the act provided that in addition to federal infrastructure projects typically carried out to promote economic development of new states, the federal government would give the government established under the statehood constitution adopted in the territory grants for economic development projects.

The source of the funds was a percentage of the proceeds from the sale of federal lands in the territory and new state. Three fifths of the proceeds went to the states and two-fifths went to the federal government for its economic development projects.

In the case of Puerto Rico, without authorization much less appropriation of federal funds, the Indiana precedent could be adopted to articulate a policy under which Congress would consider the equities of balanced phase in of both taxation and federal assistance to states.

Measures consistent with the Indiana precedent for both federal and Puerto Rico governments can treat Puerto Rico differently than other states during a prescribed transition. If objected to by other states then Congress need only accelerate phase in of both burdens and benefits.

In the Indiana case there was no suggestion that this is in the nature of reparations. Rather, it was seen as a way to promote recovery from special circumstances. In the case of Indiana, the territory had suffered economic impacts due to its rejection of the economic benefits of slavery by making the territory and new state free of future slavery.

Economic adjustment tools

Congress has the power to manage the transition to statehood to achieve uniformity in a manner that best serves national and state interests. To preserve equilibrium between the benefits and burdens of statehood during the phase in of a more perfect union, the gradual introduction of new federal programs and services synchronized with the gradual introduction of federal taxation in within the discretion of Congress.

Uniformity of taxation between new state and existing states is not license to deny equal rights and benefits under protection of law. Similarly, providing support for a new state in the form of measures not provided to other states is within the authority of Congress as deemed necessary and proper to accomplish the orderly and successful transition to statehood.

Thus, it was deemed a sustainable separate and different treatment of the new state of Indiana to provide federal grants that were not available to other states through a fiscal mechanism totally unique to needs of the territory as it crossed the threshold for entry into the union.

In the case of Indiana the anti-slavery movement took on and prevailed politically over the pro-slavery movement in the territory. Perhaps it was at least in part a reward for stopping future institutionalization of slavery under statehood that Congress provided in the enabling act for grant assistance to support economic development during the transition to statehood.

In any event, Indiana, which was a remnant of the Ohio territory after it became states, represents a policy of economic adjustment grants from the proceeds of federal land sales, to offset the impact of statehood and the new state’s lack of readiness to bear the burdens of transition to statehood.

Most federal economic adjustment measures for new states typically are adopted after statehood is achieved. Enabling and admissions acts typically address retention or disposition of federal property rights and prevent state taxation of federal land or the sale thereof.

Congress also often provides after statehood for federal public works projects to promote economic development of the new states and its integration into national infrastructure for transportation and commerce.

Like several territories that became states, Puerto Rico faces significant economic development challenges that can be resolved only through participation in the national economy and federal economic policy as well as programs on an equal footing with the states.

Accordingly, it is appropriate for Congress to consider federal and Puerto Rico government measures and polices based on phased parity sustaining gradual introduction of burdens and benefits of statehood.

Howard L. Hills served in the Executive Office of the President, National Security Council and U.S. Department of State managing legal and diplomatic affairs in support of U.S. foreign policy and national security.  Hills also served as lead counsel on territorial status policy in Congress, the federal courts and in U.N. Security Council proceedings. For his service Hills was awarded the Defense Superior Service Medal, Defense Meritorious Service Medal and Joint Services Commendation Medal. Hills previously also served as a Peace Corps lawyer in the U.S. administered United Nations Trust Territory of the Pacific Islands, Deputy Legal Counsel to the House of Representatives in the Commonwealth of the Northern Mariana Islands, and Assistant Executive Director of the Guam Legislature’s Law Revision Commission. Hills has been in private legal practice since leaving public service.

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