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Friday, August 3, 2012

Senate Finance Committee Approves Tax Extender Legislation That Benefits Puerto Rico

Committee Chairman pledges to work with other Senators to reform rum cover-over program

Yesterday, the Senate Committee on Finance approved the Family and Business Tax Cut Certainty Act of 2012, which extends—through December 31, 2013—a number of important provisions for Puerto Rico, following intense advocacy efforts by Resident Commissioner Pedro Pierluisi and Governor Luis Fortuño with Committee members. Together, these provisions will inject hundreds of millions of much-needed dollars into the Island’s economy.

Specifically, the bill extends the additional federal grant of $2.75 per proof gallon (ppg) that is provided to the government of Puerto Rico and the government of the U.S. Virgin Islands pursuant to the rum “cover-over” program. Currently, under section 7652 of the Internal Revenue Code, $13.25 of the amount the U.S. Treasury Department collects on rum that is produced in Puerto Rico or the U.S. Virgin Islands, and then sold in the 50 states, is granted to the treasury of the producing territory. $10.50 ppg of that amount is authorized by permanent law, but the additional $2.75 ppg must be periodically reauthorized as part of a tax extenders package such as the one approved yesterday by the Senate Finance Committee. The additional $2.75 ppg expired on December 31, 2011, but yesterday’s bill would reauthorize the provision so that it applies retroactively from January 1, 2012 through December 31, 2013.

“The primary purpose of the cover-over program is to help the territories execute public infrastructure projects and provide essential government services, like health care, public safety, education, and land conservation. Extension of the $2.75 per proof gallon will ensure that both territories have more funding for these purposes,” said Pierluisi.

“I am very pleased that the bill approved yesterday extends the additional $2.75 per proof gallon, which is worth approximately $60 to $65 million for Puerto Rico annually. I am a strong supporter of the rum cover-over program and we are fighting hard to make sure that funding remains at $13.25, rather than $10.50, per proof gallon. I want to thank Senator Bob Menendez from New Jersey, Senator Jeff Bingaman from New Mexico, Senators Bill Nelson and Marco Rubio from Florida, and Chairman Max Baucus from Montana for their support,” the Resident Commissioner added.

In addition, Senators Menendez and Bingaman have been working with Congressman Pierluisi to impose reasonable limits on the amount of cover-over funding that can be used by each territory government to subsidize its rum producers, and both Senators spoke on the record with Chairman Baucus about this issue during yesterday’s hearing.

Chairman Baucus stated: “This is obviously a problem. It has got to be resolved. And we have to find something to reform the program and I do pledge to work with you, Senator Menendez, to find a solution. I want to assure my colleagues that I will work with them to determine the best approach, how to strike that right balance. This issue has arisen for a while now and I would just like to resolve it at the first appropriate date. If we can’t do it now, then I certainly hope to do so very soon.”

For his part, Senator Menendez said: “The status quo is simply unacceptable and it is happening on our watch and we have to find a solution to this issue to make the cover-over program work for the people of the territories, which it was intended to do.”

Senator Bingaman, who chairs the Senate committee with jurisdiction over the territories, said he agreed “that the status quo is not acceptable. These deals . . . are siphoning off revenues that are needed by these territories to fund public services, and they set a terrible precedent that I think we need to deal with. So, I am persuaded that whatever funds the federal taxpayers are providing are actually used, need to be used, to help the people in these territories. I think that is good policy for Puerto Rico, that is good policy for the U.S. Virgin Islands.”

Following the Committee markup, Pierluisi stated: “This is not a fight between Puerto Rico and the USVI, despite the efforts by some to cast it in those terms. We are neighbors and we are friends, and nothing can change that. Simply put, this is a fight between good public policy and bad public policy. It is bad policy to have a federal grant program for the two territories where each territory turns around and gives nearly 50 percent of that much-needed money to its rum producers instead of using it to benefit its people. It is good policy to impose reasonable limits on such subsidies. I am confident that, sooner rather than later, the necessary policy changes will be made.”

In addition to the cover-over provision, today’s bill extends—though December 31, 2013—the Section 199 domestic production activities deduction in Puerto Rico. This provision was firstextended to the Island in 2006, thanks to the efforts of then-Resident Commissioner Fortuño.

Section 199 allows a company to receive a deduction equal to 9% of the taxable income that the company derives from “qualified production activities” within the United States. This effectively reduces the top federal tax rate that most companies will pay on such income from 35% to slightly less 32%. “Qualified production activities” include manufacturing, as well as electricity and water production, film production, and domestic construction.

The deduction is available only to U.S. companies that operate in Puerto Rico in branch form, not to companies that operate as controlled foreign corporations. Like the $2.75 ppg extension, the bill reauthorizes the Section 199 deduction retroactively, so that it applies from January 1, 2012 through December 31, 2013. The Joint Committee on Taxation estimates that the benefit to Puerto Rico companies of extending this provision is $358 million over two years.

“This is another important provision that Governor Fortuño and I worked hard to retain, and I again want to thank the Senate Finance Committee for responding positively to our outreach. Section 199 is a key provision for numerous U.S. companies in Puerto Rico. This provision encourages business investment in Puerto Rico and therefore creates jobs on the Island,” said the Resident Commissioner.

Finally, the bill includes another provision of importance to Puerto Rico. It extends—through December 31, 2013—the Vow to Hire Heroes tax credit, which Pierluisi worked to extend to Puerto Rico in December 2011. Under this provision, federal income tax credits are provided to companies that hire unemployed veterans. Thanks to the Resident Commissioner’s efforts, companies and veterans in Puerto Rico and the other U.S. territories fully benefit from the credit.

Specifically, the bill passed in 2011 provides for the Puerto Rico government and the federal government to sign an agreement whereby the Puerto Rico Treasury Department will offer the tax credit through the local tax system and obtain reimbursement from the U.S. Treasury Department for the lost revenue. The bill approved yesterday extends the provision so that itapplies to any company that hires veterans in 2012 or 2013.

According to the U.S. Census Bureau, there are over 12,000 unemployed veterans in Puerto Rico.