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Puerto Rico's commonwealth status under fire
The Washington Times / March 31, 1996

By Larry Luxner

SAN JUAN, Puerto Rico -- In July 1898, Gen. Nelson A. Miles, vowing to bestow upon the impoverished people of Puerto Rico "the blessings of the liberal institutions of our government," landed his 16,000 U.S. troops at the sleepy fishing village of Guanica, along the island's southern shore. That fateful event marked the end of Puerto Rico's short-lived autonomy, launched the Spanish-American War -- and sparked a never-ending debate over Puerto Rico's political status.

Earlier this month, the debate took on an added dimension when Don Young (R-Alaska), chairman of the House Resources Committee, introduced a bill calling for a congressionally mandated plebiscite by the end of 1998 -- a full 100 years after the landing at Guanica. Under the so-called U.S.-Puerto Rico Political Status Act, co-sponsored by House Speaker Newt Gingrich (R-Georgia), voters would choose between two paths to full self-government: statehood or independence. If either receives a majority of votes, that choice would have to be reaffirmed twice more over a 10-year transition period.

Unrelated to the Young bill, however, are efforts by the Clinton administration and many Republican members of Congress to abolish Section 936 -- the U.S. tax loophole that keeps Puerto Rico's economy humming and provides low-cost financing to neighboring Caribbean islands. The demise of 936 could seriously undermine the positions of those who back continued commonwealth status for Puerto Rico's 3.7 million inhabitants.

Though a lot can change between now and 1998, the Young bill as it's now written doesn't include the status quo among the options. And that's just fine with the ruling New Progressive Party, which wants to make Puerto Rico the 51st state, and the Puerto Rican Independence Party, which dreams of a Republic of Puerto Rico free of U.S. political and economic dominance.

"This legislation finally recognizes what most of us knew already, [that] the only options that can remove the stigma of U.S. colonialism and guarantee all Puerto Ricans equality and dignity are statehood or independence," said Charles Rodriguez, majority leader of the Puerto Rican Senate. "I agree 100% with the bill's findings that the 1993 plebiscite left unresolved Puerto Rico's political status. It clearly recognizes Congress's constitutional responsibility to advance that process by defining actual status options open to us."

At Congressional hearings held last week in San Juan, leaders of the island's three major political parties -- all running for governor in November -- argued their respective cases. Unlike the U.S. mainland, where social and economic issues define the Democratic and Republican parties, political status is the main determinant in Puerto Rico. The pro-statehood New Progressive Party of incumbent Gov. Pedro Rossello is currently ahead in the polls, with about 45% of the electorate, followed by San Juan Mayor Hector Luis Acevedo of the pro-commonwealth Popular Democratic Party, with 30%, and Sen. David Noriega of the Puerto Rican Independence Party with 6%. Some 11% of voters are undecided.

If the vote takes place, it wouldn't be the first time islanders had a say in their future status. In 1953, Puerto Ricans voted overwhelmingly to become a U.S. commonwealth, a status that retains U.S. citizenship for the island's inhabitants but exempts them from paying federal income tax. A second referendum in 1967 affirmed commonwealth status. And even though the island's current governor, Pedro Rossello, is an avid statehooder, the November 1993 plebiscite showed that a slight majority of Puerto Ricans were still opposed to statehood (the actual vote was commonwealth 48.6%, statehood 46.5% and independence 4.5%) -- with pro-commonwealth activists calling their status "lo mejor de dos mundos -- the best of both worlds."

Indeed, one of commonwealth's biggest strengths derives from Section 936, the backbone of Puerto Rico's factory-based economy.

Under Section 936 of the U.S. Internal Revenue Code, companies that manufacture in Puerto Rico are partially exempt from income tax on profits earned from those operations. This complicated loophole, designed to create jobs and relieve Puerto Rico's massive unemployment problem, today accounts for 40% of the island's $24 billion gross domestic product. Thanks to 936, some 2,000 factories now operate here, churning out everything from Microsoft floppy disks and Hanes underwear to Carefree chewing gum and Star Kist tuna -- all destined for the huge American market.

Most Washington lawmakers, however, see the program as a $3 billion-a-year drain on the U.S. Treasury, and are trying to have it phased out entirely over the next five to 10 years. While those efforts are temporarily stalled by the budget battle between Congress and President Clinton, the tax loophole -- which is the cornerstone of Puerto Rico's pharmaceutical, apparel, electronics industries -- could very well be doomed long before Young's proposed plebiscite ever takes place.

"All conditions such as 936 that promoted colonialism are no longer functional," claimed Ruben Berrios, president of the Puerto Rican Independence Party, in an interview here. "Commonwealth status has far outlived its usefulness to the United States."

Both Rossello and the island's non-voting delegate in Washington, Carlos Romero Barceló, view Section 936 as an impediment to statehood, and have openly called for its replacement with wage credits and other mechanisms -- sparking outrage from groups such as the Puerto Rico Manufacturers Association. The PRMA warns that without 936, dozens of apparel companies which have operated in Puerto Rico for years would flee the island -- leaving 30,000 people unemployed.

"Unwarranted harm to Section 936 will bring havoc upon our economy," warned PRMA President Samuel Landol in a recent letter to President Clinton. "This tax incentive is essential for maintaining progress in Puerto Rico; it is a proven job-creating stimulus and not corporate welfare. Without jobs, the only alternative for Puerto Ricans is migration, which we must reject."

Landol's grim prognosis doesn't even consider the impact on neighboring Caribbean islands, which view Section 936 as a key source of financing for infrastructure and manufacturing investment.

Francisco J. Uriarte, Rossello's assistant secretary of state for Caribbean affairs, conceded that the death of 936 "would immediately affect the ability of Puerto Rico's financial system to extend additional CBI financing" through the Caribbean Basin Initiative.

"This whole situation has created an uncertainty that has put all projects on hold," he said. "lt's understandable. People don't want to go through the whole process of structuring 936-related investments because they might have to restructure the whole package tomorrow."

He added that "people don't understand the relationship between Section 936 and the CBI financing program. They don't know that Puerto Rico is working very hard to retain benefits for the region and further economic development."

Since the program's inception in 1987 by anti-statehood Gov. Rafael Hernández Colón, Puerto Rico's CBI financing program has promoted more than 180 projects in eligible CBI countries, creating 37,000 jobs and resulting in total investment of $2.1 billion. Of that, some $1.2 billion has been funded through direct CBI loans or bond issues from Puerto Rico's Caribbean Basin Projects Financing Authority, or CARIFA.

But if QPSII -- qualified possession source investment income -- is eliminated by Congress as it has threatened to do, "even loans that were granted three years ago will cost more in interest," says Section 936 expert Antonio J. Colorado Jr., executive director of Caribbean/Latin American Action, a private-sector lobby. "The government of St. Lucia, for instance, had to amend its laws to be able to sign the tax exchange agreement. Without 936 funds, they'll have to pay about 1% higher interest. When you're talking about a $100 million project, it's very significant."

But apparently not that significant to lawmakers in Washington.

Asked recently what his colleagues on Capitol Hill thought about the possible death of Section 936, Rep. Philip M. Crane, chairman of the House Subcommittee on Trade, just laughed. "The overwhelming majority of members of Congress haven't the foggiest notion what you're talking about," he said. "It's totally irrelevant to them."

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