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SEC. 936 "PHASE-OUT" UNDER PUERTO RICO STATEHOOD

Executive Summary

SEC. 936 "PHASE-OUT" UNDER PUERTO RICO STATEHOOD, as proposed by Sen. Johnston's (D-La.) status referendum bill, "could satisfy the requirements of the Uniformity Clause" of the U.S. Constitution, according to the Justice Department's analysis of S 244. The analysis was presented during a Feb. 7 Senate Energy Committee hearing on Chairman Johnston's bill. If Puerto Rico became a state or independent nation, the bill proposes a five- year phase-out of the Sec. 936 tax credits for companies with plants in Puerto Rico. Continuing Sec. 936 credits for a transitional period to statehood had raised Constitutional questions because the clause specifies that "duties, imposts and excises shall be uniform among states." However, according to the analysis, the Justice Department believes "that retention and phase-out of the Sec. 936 preference as a transitional measure could satisfy the requirements of the Uniformity Clause, if supported by adequate congressional findings that such a transitional period was necessary to take into account localized problems unique to Puerto Rico -- particularly, the economic dislocation that would result to an already economically depressed state from a sudden and immediate termination of the Sec. 936 benefit -- and if narrowly tailored to the goal of avoidng such severe dislocation." Due to concerns about uniformity, the bill would delay statehood for five years; the Bush Administration favors immediate admission. Justice did not have other comments specifically about the Sec. 936 tax credits provisions of Johnston's measure. If Puerto Rico were to become a commonwealth, the bill would raise the amount of income a plant would have to derive from business in Puerto Rico in order to qualify for the credits ("The Pink Sheet" Feb. 4, p. 5). Attorney General Richard Thornburgh gave on opening statement to the committee to "once again stress that this President wholeheartedly supports a referendum that allows the people of Puerto Rico to determine what their continuing relationship with the United States shall be." While offering several recommendations concerning the legality or substance of specific portions of the bill, Thornburgh said his "comments are intended to improve the bill and should not detract at all from the Administration's strong support." Johnston's legislation provides a detailed description of proposed federal program changes under either independence, statehood or commonwealth, and says Congress is committed to take steps toward implementation once Puerto Rico voters have expressed their preference. Thornburgh raised several issues at the hearing, among them his concern about the need to clarify that the committee's deliberations "constitute proposals for implementing legislation that may be changed in some important particulars," and are not in any way self-implementing. Johnston agreed that the language might be further refined. He said his goal was to state as strongly as possible a "moral" commitment to act on the referendum's outcome, short of being legally binding. Both statehood and independence would produce net revenues to the Treasury as the bill currently is drafted. Commonwealth is more of an even package, but the Senate Finance Committee has been asked to look at some further modifications to Sec. 936 or other tax policies to offset added food stamp benefits that the Agriculture Committee wants to include. Sen. Nickles (R-Okla.), who has shown the most reluctance in the committee towards the referendum and, in particular, the possibility of statehood, raised concerns that statehood would cost more than currently projected. Noting that the bill includes special limits on eligibility and spending for several programs such as Medicaid, food stamps and Aid to Families with Dependent Children for Puerto Rico, Nickles predicted that a Puerto Rico senator or representative would find a sympathetic reception in Congress to removing those limits.
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