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[Column] Think Strategically: Facing an Uncertain Fate

By on November 15, 2017

Federal Tax Reform Bill

The Republican Congress took the first steps to advance a tax reform bill through the legislative process. Capitol Hill will continue to grab everyone’s attention over the next few weeks, especially those affected by the proposed reform, like Puerto Rico, which is facing, with its territorial tax system, that U.S. corporations on the island be taxed as if in a foreign jurisdiction. This specific part of the bill would add a 20% tax for earnings from these businesses and would severely affect the operations of most of the Act 73 companies operating here.

Any change to this sector would affect 46.9% of Puerto Rico’s GNP as well as revenues at the Treasury Department, which are already affected by decreased liquidity and Hurricane María.

The House version of the bill was approved by its tax-writing Ways and Means Committee, while some changes to the original law were made in the committee, a slew of changes will be made by the House Rules Committee before the bill goes to a vote. These changes are designed to please members whose votes are needed to pass the bill.

Gov. Ricardo Rosselló has been in Washington most of the week presenting options that would allow Puerto Rico’s manufacturing to continue and improve competitiveness. According to the House Republican leadership, the bill may be approved Thursday, Nov. 16. As of today, the chances for passage are good.

In the Senate version of the bill, it is expected it will pass the committee next week and  the full Senate as early as the week of Nov. 27.

Passing the Senate’s bill by early December is crucial to getting a bill signed into law this year.

There are many differences between the two bills. In the Senate’s version, there are more tax brackets for individuals and the estate tax is kept. Both bills eliminate the state and local tax deductions.

Much more to come.

Tax Uncertainty Affects Markets

Usually, capital market reaction offers some insight of investor sentiment. This week, most markets have been quite volatile with the prospects of the Republican tax reform. The Dow Jones Industrial Average started the week trading at 23,595 and ended it at 23,409, for a net loss of 186 points.

As tax reform is being analyzed and debated, most stock trading is the result of industries that may benefit from the reform and those that may be negatively impacted.

Puerto Rico Update: Gov. Rosselló Seeks $94 Billion in Federal Aid

Gov. Rosselló has requested $94 billion from Congress in additional federal aid to help recovery efforts from the catastrophic hurricane. After 56 days, Puerto Rico’s power generation had reached 50%, until a powerline failure temporarily lowered that percentage Wednesday morning, and access to drinkable water is north of 90%. These vital resources have made a complicated economic situation worse and are putting significant pressure on our economy as thousands of businesses unable to open. Most will never reopen.

A breakdown of the $94.4 billion request follows:

Funding Request $ Use of Proceeds
$31.06 Billion Repair 472,000 homes
$17.78 Billion Electric grid
$14.94 Billion Healthcare
$30.5 Billion FEMA

In a letter released Monday, Gov. Rosselló requests President Donald Trump an allocation of $31.06 billion to rebuild homes, $17.78 billion to repair the Puerto Rico Electric Power Authority’s (Prepa) grid, $14.94 billion for healthcare needs and $30.5 billion for FEMA to use in an array of programs.

With no comparison of similar scale and scope of the catastrophe the island faces in the aftermath of Hurricane María, Puerto Rico requested an emergency supplemental appropriations bill that addresses our unique unmet needs with strength and expediency.

The new request came about before the governor testified to Congress about the recovery efforts and the Whitefish Energy controversy. In the hearing held by Natural Resources Committee Chairman Robert Bishop (R-Utah), Gov. Rosselló explained in detail the process of federal response after the hurricanes, fielded questions from a dozen or so committee members that ranged from access to power, water, Army response and Federal Emergency Management Agency (FEMA) support, to what was done well and what was done wrong.

In our opinion, the governor delivered his message well. In the critical areas of questioning was the exemption of the Stafford Act for funds to rebuild infrastructure in a more resilient fashion instead of to its original state, as provided by the law.

The most difficult line of questioning was the transparency and ability of Puerto Rico to administer federal funds. This in addition to the Prepa director’s admission before a Senate hearing that there were missteps in awarding the WhiteFish contract.

What is the Stafford Act and What needs to Change?

The Stafford Act is designed to bring an orderly and systematic means of federal natural disaster assistance for state and local governments in carrying out their responsibilities to aid citizens.

The law gives FEMA the responsibility for coordinating government-wide relief efforts. The Federal Response Plan includes contributions from 28 federal agencies and non-governmental organizations, such as the Red Cross.

Over the years, the act has been criticized because it does not provide enough latitude for FEMA to respond to devastating hurricanes such as Sandy, Katrina and now Irma and María. The most significant criticism is the law’s requirement to rebuild to the same state before the disaster. For example, Prepa’s infrastructure would have to be restored in the same obsolete manner it was before the hurricane. It is for this reason that Gov. Rosselló is requesting the exemption.

Puerto Rico’s Economic Development in Peril with Federal Tax Reform

Puerto Rico’s long-term economic recovery will also depend on whether our residents stay to rebuild or move to the U.S. mainland. With hundreds of thousands of residents having moved since the storm, the governor also warned that Congress could exacerbate this trend and further damage the economy if it levies new taxes on Puerto Rico to cover the cost of the broader U.S. cuts now under debate.

“If Congress does not consider Puerto Rico in tax reform, it will lead to the exodus of companies that currently generate 46.9% of Puerto Rico’s gross domestic product, the loss of jobs on the island and exacerbate the outward migration of island residents moving to the mainland,” a statement from the governor’s office accompanying the letter reads.

Final Word: There is no greater sorrow than to recall happiness in times of misery

56 Days and counting without power

As Puerto Ricans suffer due to current living conditions, thousands of families have decided to move stateside. We estimate that by the time all is said and done, 600,000 to 750,000 residents will have left the island.

However, the most damaging has been that most of the island has been without power for a better part of two months. As we approach the unbelievable 60-day mark, we wonder when our lives will come back to normal, when our businesses will rebound, when daily routine won’t involve getting fuel for the generator or ice for the coolers.

Talking to some friends the other day, we concluded that had someone made a movie with a similar plot, we would have all laughed long and hard.

In conclusion, we quote Dante Alighieri: “There is no greater sorrow than to recall happiness in times of misery.”

–Francisco Rodríguez-Castro is president & CEO of Birling Capital Advisors LLC


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