Think Strategically: The Journey Within
Federal tax reform
Republican tax reform plans have quickly advanced in Congress, with the House having already approved its bill and the Senate pushing its own legislation. The lower chamber’s approval provides momentum to pass reform before the Christmas break. The next step will be a vote in the Senate after the Thanksgiving Holiday. This may be more difficult to pass since the Republican leadership has only a two-vote majority in the upper chamber. Despite this, we remain cautiously optimistic that the bill may become law by year’s end.
The two bills have several differences, but distinct similarities.
The House passed its tax bill along party lines Thursday, with most Republicans in favor but with 13 from states that would be negatively impacted by proposed limits on state and local tax deductions opposing it. All Democrats opposed it.
Impact on Puerto Rico’s manufacturing base
One of the areas excluded from the House version was a consideration for current tax incentives for controlled foreign corporations. However, House Speaker Paul Ryan is anticipating “improvements” for Puerto Rico when tax reform legislation working its way through Congress reaches a Senate-House conference committee to hammer out a single version to send to President Donald Trump.
In a joint statement issued with Resident Commissioner Jenniffer González shortly after the lower chamber’s passage of H.R. 1, the Tax Cuts & Jobs Act, on Thursday afternoon the Wisconsin Republican pointed to the possibility of additional tax incentives for Puerto Rico. We do not have any details of what “improvements” the speaker may introduce, so we remain concerned about the prospects and impact to 46.9% of Puerto Rico’s gross domestic product that the elimination of these incentives will have on our economy, with the following issues to consider:
- The local economy has experienced a secular deceleration in economic growth since the mid-1970s.
- Up to the late 1990s, the local economy’s cycle significantly correlated with the U.S. business cycle.
- Since then, their growth paths have diverged.
- The underlying reasons leading to the Great Recession in 2008 are fundamentally different from those that led to the start of Puerto Rico’s recession in 2006.
- The government’s role is no longer that of stimulating the economy. Its recent actions lead the economy in the opposite direction. The International Monetary Fund (IMF) projects contractions in the economy until 2021.
Since the island is right in the middle of rebuilding efforts after hurricanes Irma and María, Congress has been sending aid, and hundreds of members of Congress have visited Puerto Rico to assess the damage wrought. So we hope they truly understand the impact this may cause.
“One of those ways is through additional tax incentives so that our fellow U.S. citizens in Puerto Rico can have all the possible resources to rebuild their lives and their economy. We intend to make improvements to our tax reform legislation as it relates to Puerto Rico when we go to conference,” Ryan and González said in their joint statement.
Rosselló said the Puerto Rico government’s efforts to integrate the island into federal tax reform would focus on incorporating amendments into the Senate’s legislation. “Our proposal, which we are calling for to be considered in the conference committee process to align the House and Senate bills, would create jobs and wealth in Puerto Rico as part of the United States rather than eliminate them as the bill approved would,” Rosselló stated.
“If the Congress takes this action without taking into consideration Puerto Rico, it will lacerate the economy, which would go against the purposes of the PROMESA law, legislated precisely by this Congress. This action discriminates against the 3.4 million American citizens that live in Puerto Rico,” the governor added.
Puerto Rico Manufacturers Association President Rodrigo Masses, who was in Washington, said the legislation could have a “catastrophic impact” on the island’s economy, putting at risk 70,000 jobs and 35% of the Puerto Rico government’s budget. He added that the tax reform’s attempt to “de-incentivize” manufacturing outside the United States also “attacks manufacturing activities that take place in Puerto Rico.”
The Senate Finance Committee advanced its version of the tax bill with hundreds of changes made during the markup process to address senators’ concerns. The tax bill will be the Senate’s top priority in December, with many issues from many areas of the economy in focus.
We will continue to follow how the Senate’s bill progresses. In our view the real custodian of the final bill is the Senate.
Puerto Rico Update: Prepa executive director resigns
The resignation of the Puerto Rico Electric Power Authority’s (Prepa) executive director comes after weeks of criticism after the Whitefish Energy contract scandal, and so late in the mess that even though expected he should have been allowed to resign since Hurricane Irma. The Rosselló administration was performing well until this crisis derailed its progress and impacted Puerto Rico’s credibility in Washington at the worst possible moment. However, we welcome the fact that the governor wants to remain in control of the recovery.
“There was a series of distractions, and the decision was made to go in a different direction,” Rosselló said.
Prepa has been operating under Title III of the Promesa federal law, which is similar to bankruptcy, and its response has been criticized after the hurricane destroyed its fragile grid.
Then Prepa Director Ricardo Ramos answered intense questioning before U.S. Senate and House committees about the $300 million contract awarded to Whitefish Energy Holdings to fix the grid after the storm. The company had little qualifications to perform such a monumental task.
The contract, which was ultimately canceled, became the focus of the congressional investigation.
Chairman Rob Bishop, a stalwart Republican and head of the Natural Resources Committee, was critical of Rosselló at a hearing on the need to close what he called a “credibility gap.”
Our Puerto Rico cannot afford any doubts in Washington, as the government requested $94 billion in federal aid it says it needs to rebuild. However, on Friday the White House asked Congress for a $44 billion aid package that includes funds for Texas and Florida, a far cry from the amount needed, considering the damage sustained in Texas, Florida, Puerto Rico and the U.S. Virgin Islands.
“The Trump Administration’s request does not come close to meeting the needs of victims of recent natural disasters,” said Sen. Patrick Leahy, the Vice Chairman of the Appropriations Committee. “This is wholly inadequate and downright insulting, especially for the people of Puerto Rico who, eight to 10 weeks after hurricanes Irma and Maria, are struggling to get the lights back on and are looking to Congress for help.”
White House Press Secretary Sarah Huckabee Sanders immediately defended their position, stating “the assessment of Puerto Rico’s situation isn’t complete, and the administration anticipates making additional requests for funding.”
Why did the White House only request $44 billion in aid?
The White House requested $44 billion in congressional hurricane aid, including funds for Texas and Florida, while most of Puerto Rico’s needs would be addressed in a future request.
By delaying its full request for Puerto Rico aid, the White House’s move Friday may diminish the chances that Congress will provide that assistance in a December funding bill. The White House said damage assessments hadn’t been completed for Puerto Rico and the USVI, and a further request is planned.
Texas would get less funding than it says it needs. Texas Gov. Greg Abbott, a Republican, asked for $61 billion for damage from Hurricane Harvey. Florida officials asked for billions in aid for the state’s citrus industry.
Final Word: The Journey Within
60 days and counting without normalcy
The journey each Puerto Rican has been on surviving the aftermath of Hurricane María, and it made me remember a book my grandfather gave me about Palm Island, which is 8 kilometers off of Townsville, Queensland, Australia, and was named by Captain Cook in 1770 and established in 1918 to replace a mission destroyed by a hurricane. By the 1930s, it became a convict settlement for Aborigines.
Palm Island is particularly disadvantaged. Its unemployment rate is said to be as high as 95 percent. It has high levels of alcoholism, domestic violence and child abuse. An average of 17 people live in its dilapidated housing. There is also high youth suicide rates and murders.
Why do we compare Puerto Rico with Palm Island? Simply because Puerto Ricans continue to suffer with the disruption to living conditions in the aftermath of the hurricane and many of the thousands of families that decided to remain here continue without power and running water, and in the mountainous inland, there are families without food and water at all. We are 3.4 million American citizens, and we wonder if our citizenship is as equal as that of those stateside?
As we reached 60 days without power on Sunday we feel powerless and some have lost the will to fight. However, under this shared hardship, I have seen many people, who even though their business has been affected, have dedicated themselves to helping those who are less fortunate. Such is the case of the Motorrad Angels with the BMW Motorcycle Club of Puerto Rico, which has gone to communities that are not easily accessible by car to take and install water filters in Utuado, Juana Díaz, Jayuya, Barranquitas, Villalba, Morovis, Adjuntas and many other mountain towns.
In most of these trips, the #yonomequito group of Carlos López-Lay, Motorrad Angels/BMW Motorcycle Club of Puerto Rico, and the father-son team of Carlos Rodríguez-Castro and Carlos Rodríguez-Huspen among others and together have taken it upon themselves to do good without announcing their deeds. To those BMW Motorrad Angels and #yonomequito, our respect and gratitude.
British theologian and historian Thomas Fuller said: “The darkest hour is just before dawn.” Even though we are in our darkest hour, the dawn of a new Puerto Rico is quickly approaching.
–Francisco Rodríguez-Castro is the president & CEO of Birling Capital Advisors LLC.