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HOUSE OVERSIGHT HEARINGS ON SEC. 936 FUND INVESTMENT

Executive Summary

HOUSE OVERSIGHT HEARINGS ON SEC. 936 FUND INVESTMENT in the Caribbean Basin region will continue, House Ways & Means/Oversight Subcommittee Chairman Pickle (D-Tex.) told an April 3 hearing on the issue. Pickle noted that his subcommittee is concerned that Puerto Rico is not upholding a pledge to Congress to promote investment in other Caribbean Basin Initiative (CBI) countries, even though the Puerto Rican banking system holds approximately$10 bil. in qualified reinvestment funds collected from Sec. 936 companies. The Oversight Subcommittee's inquiry does not focus specifically on pharmaceutical investors in Puerto Rico under Sec. 936 of the tax code or on participants in the "twin plant" program. However, Pickle's concern could lead to changes in the tax exemption provision. The chairman indicated he may consider revisiting the entire Sec. 936 issue. The tax credit program has been reconsidered by Congress twice before; the last time was in the 1985-86 tax bill. However, only minor changes were made at that time. Treasury Department Assistant Secretary for Tax Policy Kenneth Gideon testified that the pharmaceutical industry receives the greatest benefit from the tax credit of all U.S. industry participants, citing a report issued by his department early last year. The report estimates that pharmaceutical firms receive a 265% tax benefit, or $265 in tax credit for every $100 paid in wages in Puerto Rico, Gideon noted. Treasury's data is based in part on tax return information for 1983. Another threat to the Sec. 936 credits could come from a Senate bill (S 712) to phase out the credits over a six year period ("The Pink Sheet" Dec. 4, T&G-6). The bill provides for a referendum in 1991, in which citizens of Puerto Rico could vote for statehood, independence, or to retain commonwealth status. Senate Finance Committee hearings on the bill are scheduled for April 26. The House Interior/Insular Affairs Subcommittee held hearings on the concept of a plebiscite in March, but so far no bill has been introduced in the House. * The Congressional Budget Office, in a recently released report on "Reducing the Deficit: Spending and Revenue Options," calculated that repealing the Sec. 936 tax credit over the next five years (1991-1995) would result in $11 bil. in additional U.S. tax revenues. Noting that "critics of the credit argue that a better-targeted subsidy, such as a wage credit, would be a more cost-effective way to promote employment" in Puerto Rico, CBO pointed out that replacing the current credit with a wage credit could save the U.S. Treasury $1.6 bil. over the 1991-1995 period. When asked whether the Treasury Department would consider reproposing a wage credit, Gideon commented that Treasury has no plans to "revisit" that issue. Treasury proposed a wage credit, unsuccessfully, in 1985. The Pharmaceutical Manufacturers Association is sponsoring research on drug company investments in Puerto Rico to support the tax credit program ("The Pink Sheet" Jan. 15, T&G-9). Scheduled to be completed by September, the research will attempt to update statistics on the effect of the incentive. PMA has contracted with Price Waterhouse to examine the economic impact of Section 936 and with the Hudson Institute to review national security implications of the provision.
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