Democrat Governor vows to focus voting power of Puerto Rican “diaspora” in states to oppose Republican incumbents who voted for President’s tax reforms
Governor’s High Wire Political Gambit
The Governor of Puerto Rico is a Democrat at the national level, but back home in Puerto Rico he is a leader in the bipartisan alliance of Republicans and Democrats in the pro-statehood party. That is why it raised eyebrows among political observers when Governor Ricardo Rossello not only joined the Democratic opposition to the Trump tax reform bill, but vowed to retaliate against Republicans who voted for the new tax law.
It is easy to oversimplify the political context in which the Governor opposed reform ending tax shelters under federal internal revenue code provisions treating Puerto Rico as foreign. Since Puerto Rico is a domestic American jurisdiction with a population of 3.5 million U.S. citizens, treating it as foreign to create a tax loophole for mainland corporations was a brazenly contrived manipulation of tax policy.
Of, course, it came as no surprise the Governor was joined by vested special interest stakeholders also opposing tax reform bill provisions closing the Puerto Rico loopholes. His allies included influential lobbyists for giant U.S. pharmaceuticals and other companies stashing billions annually from profits of Puerto Rico subsidiaries in off-shore accounts to avoid federal taxes.
The surprise came after Republicans passed the Trump tax reform law, when Governor Rossello declared political war on Washington as we know it in the Trump era. Rossello is now calling over 5 million ethnic Puerto Ricans living in states of the union to punish Congressional Republican incumbents in the 2018 mid-term elections. The Governor pledged to organize large concentrations of ethnic Puerto Rican voters in states like Florida, New York, Pennsylvania, New Jersey and Illinois to support challengers in close races for Congress.
Only Time Will Tell How Reforms Impact Puerto Rico
By eliminating tax haven benefits that benefitted mainland companies doing business in Puerto Rico for decades, Republicans hope to repatriate huge profits in off-shore accounts. The expectation being this will stimulate the U.S. economy, including Puerto Rico. Whether invested in new job creating businesses, or paid as dividends to shareholders, the goal is to increase capital flows.
The argument against Republican tax reforms advanced by the Governor and corporate lobbyists is that Puerto Rico and the local economy – already on life support – will be abandoned by many tax sheltered companies if federal subsidization in the form of tax savings ends. Senator Marco Rubio is among those in Congress with deep understanding of Puerto Rico affairs who doubts many if any companies will stay or leave based only on loss of tax saving loopholes.
Rubio also points out that the original justification for the tax shelters was to create jobs. Instead, the program was abused by companies that were able to write off tens of billions annually while creating too few jobs to justify disproportionate benefits to mainland parent corporations.
Rubio seems to believe that instead of attacking Republicans for what is now law the focus should be on bipartisan support for the federal investment necessary to rebuild and modernize Puerto Rico. If federal recovery planning and assistance is adequate to the task, re-inventing Puerto Rico will create opportunities for old and new companies greater than the benefits of tax loopholes being closed.
Statehood or Perpetual Territory?
The problem faced by Governor Rossello in enlisting Puerto Ricans to join his crusade is that treatment of Puerto Rico as foreign for some but not all federal and local taxes is a policy of the anti-statehood local “commonwealth” party in Puerto Rico. The “commonwealth” party’s federal tax evasion scheme for Wall Street was adopted by Congressional Democrats 65 years ago.
As a legendary Democrat and U.S. Senator from New York, Daniel Patrick Moynihan defended the tax shelters based on selective treatment of Puerto Rico as foreign. Moynihan made the fatalistic argument that bad tax policy was necessary to prop up the “commonwealth” regime.
When President Clinton first asked Congress in 1995 to end this obvious abuse of tax policy, over dinner at the White House Moyhihan admitted treatment of Puerto Rico as foreign was a strategy to delay and if possible avoid a decision on Puerto Rico’s future status. As reported in a book by Bob Woodward, Moynihan told Clinton that if the tax shelters were shut down, “We will have to offer statehood to Puerto Rico.”
Dependence by the “commonwealth” regime of territorial government on local revenues from companies subsidized by federal tax savings led to imprudent fiscal policies that including out of control debt financing of state-like local government services. The so-called “commonwealth” regime based on federal tax shelter subsidies tried but failed to deliver state-like standard of living.
Instead “commonwealth” was federally subsidized “autonomy without accountability” that failed to enhance home rule. That is why the “commonwealth” regime of territorial government ended in bankruptcy for Puerto Rico in 2017, even before two disastrous hurricanes struck.
Reinventing Puerto Rico
Now the Congress must decide how to re-invent Puerto Rico. Tax shelters that propped up a failed “commonwealth” regime of dependency and fiscal insolvency makes continued territorial status a dead end in which the mistakes of history will be repeated.
In that context, the tax shelter scheme defended by the Governor can be understood as federal subsidization for a failed model of dependency. Do the Governor and the Democrats in Congress really want to defend tax shelters for evasion of federal taxes by U.S. companies in the 2018 elections?
But the Governor is right about one thing. If the real long term solution is to be statehood, Republicans need to stop being for statehood in their party platform but afraid to use a majority in Congress to do anything about it.
Since the U.S. citizens of Puerto Rico will continue to vote for statehood, Congress needs to recognize bankruptcy of the territorial regime and hurricane destruction as realities that require a decision consistent with democratic self-determination to make future statehood federal law and policy. Since there is not enough government money for full recovery, the certainty of future statehood is the only way to mobilize enough private sector investment to drive the logic recovery and state-like development.
Instead of tax shelters that treat PR like a dependent foreign colony, we need Congress to declare statehood can and will be attained. Then we can begin as a nation to treat PR like a state in as many ways as possible. That will lead to transition from territorial dependency to admission as a state paying its way in the union. Investing in continued territory status is a policy doomed by failure for 119 years.
Tax Policy and Political Status
If the Governor makes loss of tax shelters in Puerto Rico a partisan issue in the election, and convinces 5 million voters what the Republicans did was wrong, it could help Democrats in races. Maybe enough to shift control of Congress to Democratic Party leadership, which itself has promised but never delivered on democratic self-determination on future political status. If the Governor is successful and Democrats win control of Congress, the duty to do right by Puerto Rico will then fall to the Governor and his party in Washington.
The twist in that plot is that the tax shelters the Governor wanted to preserve have failed for 70 years to produce growth in jobs or the economy that is sustainable without federal tax gimmicks. More fundamentally, Congress retains discretion to treat Puerto Rico as foreign for tax purposes only as long as it remains a federal reservation and territorial dependency, or if Congress declares its future political status will be real sovereign foreign nationhood.
Whether controlled by Democrats or Republicans, if Congress recognizes self-determination and statehood is chosen democratically by the U.S. citizen voters of Puerto Rico, the only federal taxation policy not prejudicial to eventual future statehood is uniform taxation on an equal footing with the states. That is the historical path taken by Congress for 32 territories that became states between 1796 and 1959.
In 2012 and 2017 the majority of U.S. citizens in Puerto Rico voted for statehood. That does not mean Congress cannot deliberate on the terms for admission and conditions for honoring its promise of equality and freedom. But it does mean that granting U.S. citizenship to 3.5 million Americans in the territory creates a historical and constitutional presumption of statehood in the future .
But with each year that passes it becomes a lot harder for both Republican and Democrats to explain why statehood was granted to French speaking economically backward Louisiana the same year the British burned the White House to the ground. It will require the Democrats if in power to explain why Spanish speaking New Mexico was admitted when it was an underdeveloped territorial reservation in 1912, but Puerto Rico remains a territorial colony after 119 years.