Mission Possible: Can Gov’t Ignite The Economy?
Editor’s note: The following article originally appeared in the September 14 print edition of Caribbean Business.
SAN JUAN — Although Gov. Ricardo Rosselló’s trip to Washington, D.C., was stalled by the threat of the island’s devastation by Irma, the most powerful Category 5 hurricane to have originated in the Atlantic, he will soon be back to reality dealing with Puerto Rico’s devastated economy that has been more than a decade in the making.
While the federal government is working to help the island recover from Irma, by sending personnel from the Federal Emergency Management Agency and other federal agencies to coordinate efforts in Puerto Rico, these are temporary measures and more needs to be done on a permanent basis. For example, the Department of Homeland Security has waived Jones Act regulations for seven days to ensure enough fuel supplies reach areas affected by hurricanes Harvey and Irma, including Puerto Rico and the U.S. Virgin Islands. The waiver allows less expensive foreign ships to transport petroleum in the affected areas.
The help Puerto Rico needs to bring about long-term economic development rests squarely with members of Congress, who would rather deal with the national budget, tax reform and the gimmicks of President Trump.
The local government recently created the group Frente por Puerto Rico to lobby Congress with specific requests regarding the inclusion of the island in healthcare-fund allocations, tax reform and economic development matters. Hurricane Irma did not deter them, as soon after they met with representatives from 40 offices in the U.S. House and Senate to raise awareness about the importance of including the island when assigning healthcare funds due to the $1.3 billion fiscal cliff it faces in 2018.
During these first rounds of lobbying, members of the front insisted on the importance of the $296 million allocation granted through the omnibus spending bill for the Puerto Rico Medicare program during the current fiscal year (2017-2018), but informed members of Congress that this amount is insufficient to cover the costs of the government’s health plan, which requires at least an additional $600 million by the end of the fiscal year.
Puerto Rico Federal Affairs Administrator Carlos Mercader, who is the head of Frente por Puerto Rico, indicated that due to the island’s territorial condition, the island only receives $1.1 billion to $1.3 billion annually to pay for the government’s Mi Salud health plan. This means the funds Puerto Rico receives are limited to this amount and are not proportional, as is the case with the states, to the medical needs of the population.
Following controversial congressional debate over repealing the Affordable Care Act, Congress is expected to vote on reauthorization of the State Children’s Health Insurance Program (SCHIP), which could provide an immediate solution to finance the government’s health plan. The SCHIP program was designed to provide health insurance to children whose families cannot afford a private health plan, but do not qualify for Medicaid.
“We are requesting an immediate increase to the cap Puerto Rico receives for SCHIP to the roughly $1.6 billion requested by the federal executive [branch] in its budget proposal for fiscal year 2018,” Mercader said.
However, stateside media reported Trump’s budget plans include cutting SCHIP by at least 20% over the next two fiscal years and slashing Medicaid, which covers millions more children. Therefore, the fate of Puerto Rico’s request is up in the air.
Mercader told Caribbean Business that, nonetheless, Congress will tackle the reauthorization of the SCHIP program by the end of the month and he expects Puerto Rico to benefit from the bill based on remarks made by House Speaker Paul Ryan. “There is ample knowledge of the problem,” he said.
When Frente por Puerto Rico was created, the governor expressed confidence the atmosphere in the federal capital will be receptive to proposals on Puerto Rico. This is because members of his administration have made efforts to eliminate the perception that the mere approval of the federal Promesa law and the creation of the fiscal control board to straighten out Puerto Rico’s finances were sufficient to address the island’s economic crisis.
However, Congress already knows that. Promesa created a congressional task force to find ways to grow Puerto Rico’s economy. A report issued by the task force in late 2016 told Congress to start fixing Puerto Rico’s Medicaid-funding disparity early this year as a way to avoid the fiscal cliff.
The task force determined that Medicaid in Puerto Rico is underfunded compared to the U.S. states. Medicaid underfunding “has been a meaningful factor contributing to Puerto Rico’s fiscal condition,” the task force said. Reaching the Medicare cliff could be detrimental because Puerto Rico can no longer borrow money in the capital markets.
Puerto Rico will be “compelled either to drop hundreds of thousands of current enrollees from the Medicaid program (harming quality of life and spurring outmigration) or to reallocate funds from other areas,” the task force stated in its report, which also recommended changes to Medicare Parts A, B, C and D to better suit the needs of the island.
Little movement in Congress
Resident Commissioner Jenniffer González earlier this year introduced several bills to address Medicare inequalities. She submitted U.S. House Resolution (HR) 261 to obtain equality under Part B of Medicare and U.S. HR 797, which would eliminate matching requirements in territories to enable the use of Medicare funds under Part D that covers medicine. Currently, for every dollar Puerto Rico spends on providing Medicaid coverage for prescription drugs to low-income Medicare beneficiaries, it must draw down 55 cents from its allotted funding, up to a certain annual limit, and is responsible for the remaining 45 cents. The bills have been in the U.S. House Subcommittee on Health since February.
“Both have a 1% chance of being enacted,” said a source with knowledge of the matter.
After receiving more than 450 submissions from the private and public sectors as well as creditors, the task force identified at least 40 different programs that allocate funding on a competitive basis or use a formula that treats Puerto Rico differently from the states, and called for changes in the programs to enable the island to benefit more effectively from them. It also noted that Puerto Rico pays $3.5 billion in different federal taxes.
The task force, for instance, recommended that Congress amend Section 24 of the Internal Revenue Code (IRC) to authorize otherwise eligible families in Puerto Rico with one child or two children to claim the additional child tax credit, with the amount of the credit equal to the amount of annual federal payroll taxes paid by the family or $1,000 per qualifying child, whichever is lower. González introduced HR 798 for Puerto Rico to have “child tax credit equity,” but the bill has not moved since it was introduced in February.
Other recommendations made by Congress include making the full amount of the rum cover-over payment to Puerto Rico and the U.S. Virgin Islands permanent, rather than be subject to yearly tax-extender legislation, which has not happened yet. It also recommended extending Section 199 to Puerto Rico so companies can get a deduction equal to 9% of the taxable income they derive from “qualified production activities” within the U.S. That deduction ended in January. While González introduced HR 1403 to make the deduction permanent, the bill has been in the House Ways & Means Committee since March.
The task force also asked Congress to include Puerto Rico in Section 181 of the IRC so it can generate economic activity and employment opportunities through film, television and theatrical production, and noted that the ability to showcase local culture and scenery before global film and television audiences can significantly stimulate tourism. A check done by Caribbean Business found none of these initiatives have moved forward.
The U.S. Department of Energy also does not appear to have drafted an energy plan for the island as proposed by the task force and required by Promesa, according to a review done by Caribbean Business.
The federal government did take steps to support the redevelopment of the former Roosevelt Roads U.S. Naval Base, but the measures were undertaken before the task force’s report suggested it. In August 2015, the U.S. Small Business Administration (SBA) designated the base as a Historically Underutilized Business Zone to allow small firms located within the former base to better compete for contracts to supply the federal government with goods and services.
In addition, in June 2016, the federal government designated the base as one of 22 “Promise Zones” throughout the U.S. Promise Zones are federal-local partnerships in which economically-distressed areas receive priority access to federal investments and other forms of federal assistance.
While the U.S. government has had conversations with companies interested in starting operations at the base, these federal actions have failed to increase new business investments to the base.
Focus on tax reform
Almost a decade after the total phaseout of Section 936 tax credits for subsidiaries of U.S. companies operating on the island, the Task Force advocated that Congress provide U.S. companies that invest in Puerto Rico with more competitive tax treatment as long as appropriate guardrails are designed to ensure job creation.
Income earned by the active business operations of U.S. corporations in Puerto Rico is considered foreign-source income. Federal tax on active corporate income earned in Puerto Rico by foreign subsidiaries of U.S. corporations—known as controlled foreign corporations (CFCs)—can be deferred until these earnings are “repatriated” to the United States in the form of dividend distributions to the U.S. parent corporation. However, federal tax on the income earned by foreign branches of U.S. corporations is not deferrable. A foreign subsidiary is a legal entity separate from its parent company, while a foreign branch is an extension of a domestic company. Most, but not all, U.S. corporations with active business operations in Puerto Rico are organized as CFCs.
As a result, the task force recommended that Congress make Puerto Rico integral to any future deliberations over tax reform legislation.
Congress is expected to take over tax reform later this year. Entities like the Puerto Rico Manufacturers Association and the Private Sector Coalition have been lobbying Congress to make good on the recommendations of the task force and they remain optimistic.
Manufacturers Association Executive Director Francisco García said the organization and the Private Sector Coalition are slated to present a joint proposal with the government to support the economic development of Puerto Rico as fast as possible. “We are looking for the alternative of a financial distressed zone that can be combined [with other initiatives] to attract international and U.S. enterprises,” he said.
Eyes on small business
The task force devoted several pages in its report, calling for the enhancement of small-business programs and access to procurement programs for the island’s small-business sector.
U.S. Rep. Nydia M. Velázquez (D-N.Y.), who is the lead Democrat on the House Small Business Committee, recently introduced the “Puerto Rico Small Business Assistance Act” designed to spur small-business growth and entrepreneurship in Puerto Rico.
Velázquez and González followed it up with letters to the SBA expressing the need to expand contracting opportunities for small businesses in Puerto Rico. The bill remains in the House Small Business Committee. González has filed bills to bring more funding for small business.
“As resident commissioner, we cannot vote, and that limits the things we can do,” she said, adding that if Puerto Rico had voting representatives in Congress, it would be able to make a difference.
One of the criticisms levied against Promesa when it was enacted was that lawmakers had failed to put in the bill initiatives for economic development.
The former staff director for the House Subcommittee on Mineral & Energy Affairs, Bill Cooper, who led the drafting of Promesa, recently said at an Associated General Contractors forum that focusing on the task force for Puerto Rico, created under Promesa as a way for Puerto Rico get out of the fiscal crisis, was a “misplaced call.”
He said that whenever there is legislation containing provisions for a study or for the creation of a task force, as was the case with Promesa, it is because there was no agreement on substitute provisions, strongly suggesting the panel’s creation was a public relations tactic to give the impression that Congress is moving economic initiatives for the island.
“So the consolation is a task force,” he said.
While the undeniable truth is that Congress has failed to enact economic initiatives for Puerto Rico, Mercader said Cooper’s remarks were irresponsible. “That is tantamount to saying that what was done, does not work. That it does not exist. But Congress did a job and it is there,” he said about the task force report.
“If Congress reached certain conclusions on how to deal with Puerto Rico, I would rather use it as a tool to push for measures…. If he [Cooper] does not want to give it importance, so be it,” Mercader said.
Patience is a virtue
Although the fiscal crisis in Puerto Rico, by all accounts, is expected to get worse, stirring change in federal policy for Puerto Rico will take time.
In the 1990s, Washington, D.C., faced financial and economic challenges similar to those confronting Puerto Rico. While Congress initially responded in 1995 by creating a control board to manage D.C.’s finances, the work of the control board was aided significantly by subsequent legislation enacted in 1997.
The bill, entitled the “National Capital Revitalization & Self-Government Improvement Act,” increased the District’s Medicaid reimbursement; provided for the federal government to assume D.C.’s unfunded pension liability; transferred financing of the District’s courts to the federal government; transferred responsibility for D.C.’s felons to the Federal Bureau of Prisons; and authorized the District’s CFO to enter into private contracts for the collection of taxes.
Companion tax legislation included District-specific tax benefits designed to encourage economic growth, including: a $5,000 first-time homebuyer tax credit; designation of certain census tracks as “Enterprise Zones” with 0% capital gains on investments within the zone; a wage credit for employers hiring District residents in Enterprise Zones; and an increase in the amount of tax-exempt development-bond financing available to help local businesses.
González said that since she took office, she has been taking the recommendations of the task force and turning them into legislation, just as she did with the Medicare parity bills. She said the work in Washington is often impaired by the fact that Puerto Ricans go with different voices to Congress and cancel each other out. “If we don’t go with one voice, we can put things at risk,” she said, adding that Puerto Ricans are in agreement on numerous things, such as granting incentives to local companies.