Saturday, December 16, 2017

Salvador Casellas and the battle to save the Puerto Rican economy

By on December 5, 2017

May 28, 1974

Teodoro Moscoso received an urgent telephone call from Resident Commissioner Jaime Benítez in Washington.

Benítez was furious. He had just read a May 22 press release from the House Ways and Means Committee listing amendments to the U.S. Tax code already approved by the committee.

He was stunned to see that among them was the elimination of section 931. How could they do this to him without even informing him? How could they do this to Puerto Rico?

This would destroy the Puerto Rican economy!

Moscoso, who in 1973 had reluctantly agreed to return to run the Economic Development Administration, Fomento, called Gov. Rafael Hernández Colón, who in turn called for an emergency meeting at La Fortaleza.

Benítez, expressing his outrage, called Ways and Means Chairman Wilbur Mills, who agreed to allow Puerto Rico to appear before the committee on May 30. Benítez flew to Puerto Rico.

At the La Fortaleza meeting on May 29, it was agreed to send the young Treasury secretary, Salvador Casellas, to testify the next day. He had a vital mission, to convince the committee to reconsider an action already taken and give the Puerto Rico government time to send documentation and make a formal presentation to prove that eliminating section 931 would not be bad for Puerto Rico – it would be mortal.

Puerto Rico had just suffered a devastating economic blow. On Oct. 6, 1973, the Yom Kippur War broke out as Egypt and Syria attacked Israel, the fourth Arab attack since 1948.

The oil embargo followed by spiraling increase in the price of oil affected the entire world economy, but nowhere more than in Puerto Rico – totally dependent on oil for energy. And just as bad, the direct threat to the backbone of the island economy, the 49 petrochemical and oil-related industries.

As Casellas flew to Washington that night, he didn’t know how bad the oil crisis would affect the economy. But he knew it would be bad. And it was. By 1976, unemployment would shoot up to 21.9 percent, and Puerto Rico would lose the entire petrochemical industry

And now this! He was nervous, he had never appeared before Congress, and he knew it was true, losing 931 would be fatal.

Casellas, 39, was a successful corporate lawyer, graduated from Georgetown and Harvard, classmate of Hernández Colón at the University of Puerto Rico Law School. After his surprise victory in the 1972 elections, the governor had asked him to run Fomento. He declined, but accepted running Treasury, although it meant a big economic sacrifice for him and his young family.

Why Casellas and not Moscoso and Benítez on this vital mission? Moscoso and Benítez needed time to prepare for Congress, but I guess that Casellas’ personality was a factor. He looked and talked like an old-world European gentleman, perfectly polite, soft-spoken, articulate, well-organized, logical, an effective communicator, one knew exactly what his point was, and why.

And he was Treasury secretary, historically Moscoso’s and Fomento adversary. Moscoso relentlessly driving for tax benefits to attract industries; Treasury driving to increase tax revenue. But Casellas described himself as a “true believer” in Fomento.

Section 931 was vital to Fomento. What attracted industry was tax exemption. Since 1900, Puerto Rico was exempt from federal taxes. In the 1920s, thinking mostly of U.S. investments in the Philippines, Congress approved section 931, which allowed firms, under certain conditions – they had to liquidate their overseas operations – to repatriate their profits to the mainland tax-free.

In the late ’40s, when Moscoso and Fomento started using 931, finding legal means to meet these conditions, it proved enormously successful in attracting industries launching Puerto Rico’s economic takeoff, its “economic miracle.”

But it was at times under attack in Congress as a tax “loophole.” Back in 1962, the House eliminated it. Gov. Luis Muñoz Marín rushed to the Senate and convinced it to reinstate it.

Now on his way to Washington, Casellas was determined to again use a fundamental argument. The real issue was not whether it was a “loophole,” but the nature of the Puerto Rican economy, the nature of Puerto Rico itself. Will it depend on “the dignity of a job” or “the dependence of welfare.”

The day after the hearing, May 31, the governor sent a long, sharply worded memo with the economic consequences, but also the same argument: “It is our fundamental aim to create work and dignity for Puerto Ricans in Puerto Rico. We do not want our people to become basket welfare cases, dependent on Federal handouts as the only way to survive.”

This argument had worked with Muñoz in 1962, and it worked again. On June 3, the governor, Moscoso, Benítez and Casellas testified and Mills was convinced, commenting that the Puerto Rico case proved that eliminating some loopholes created worse problems than those created by the loopholes.

Then Puerto Rico got lucky.

Mills suggested that Moscoso and Casellas meet with the chief of staff of the Joint Committee on Internal Revenue Taxation, Lawrence N. Woodworth, who told them that he had an “idea.” Moscoso brought along an old copy of a British “tax bearing” system to promote overseas investment. Woodworth said this was precisely what he had been thinking about.

For the next year Casellas and Woodworth met with U.S. Treasury officials and finally came up with something much better than 931: U.S. investments would get a “credit” for their tax liability: in effect, full exemption on repatriated profits.

In 1976, Moscoso, Benítez and Casellas were back before Congress to support what was now section 936. Puerto Rico was now deep into the energy crisis, the economy falling 6 percent in two years.

Section 936 saved the island economy.

Casellas had one more battle. This one against Moscoso. Reverting to tax collector, he wanted a 10 percent “toll gate” on repatriated 936 funds. He finally convinced the governor.

To no one’s surprise, 936 proved even more effective than 931. Attracting giant high-tech electronic and other industries, 936 converted Puerto Rico into one of the world’s largest producers of pharmaceutical products. By the 1990s, there were $15 billion in 936 funds deposited in island banks and other institutions.

Judge Salvador E. Casellas (Screen capture of www.prd.uscourts.gov)

In the early morning hours of November 22, 2017, Casellas died at the age of 82.

He had returned to his law practice and in 1994 was appointed as federal judge in San Juan.

He died with Puerto Rico in the throes of a never-ending nightmare: a decade of economic decline, the debt and fiscal crisis, the government bankruptcy, the federal takeover under the fiscal board, Hurricane Irma, the devastation of Hurricane María.

Again, he could have asked, “And now this?”

Again Congress is in the process of a U.S. tax reform that would be a mortal blow – finally killing what is still the foundation of the island economy, manufacturing.

Casellas played a key role in saving the island economy in 1974-76. His exceptional personal qualities, so admired by his many friends, were a key factor.

He will be missed. The battle to save the Puerto Rican economy never ends. Today  more than ever.

–A.W. Maldonado was a reporter and columnist for The San Juan Star, executive editor of El Mundo, and publisher and editor of El Reportero.

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