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Executive Summary

SEC. 936 10-YEAR TRANSITION TO 100% WAGE CREDIT is being pushed as an alternative to the Clinton administration's proposed cuts by Puerto Rico's Resident Commissioner in Congress Carlos Romero-Barcelo. The proposal, which has not been formally introduced but which is being widely described in public commentary by the commissioner, calls for a 10-year transition period from an income-based tax benefit to a wage credit and for permitting a wage credit on 100% of payroll expenses. The plan is being developed to counter the proposal that was contained in the Clinton Administration's budget request. The Clinton plan would replace, over a three-year period, the current 100% tax exemption for island companies' income with a credit for up to 65% of wages. In a March 2 letter to President Clinton, Romero-Barcelo also asked for Medicaid help. The commissioner indicated that the federal government should be ready to assist the island economy should the changes in Sec. 936 credits negatively affect the job situation. Romero-Barcelo asked Clinton to compensate Puerto Rico by eliminating the current $79 mil. cap on federal Medicaid funding for the island. Lifting the cap would increase federal Medicaid spending by 0.5%, he said. Romero-Barcelo's mention of increased Medicaid expenditures insinuates that the increased tax revenues from a cutback on 936 may not be fully available to reduce the federal deficits. There may be new added federal expenditures required as a result of the 936 changes. Puerto Rican Gov. Pedro Rossello is expected to endorse similar legislation in his March 15 state of the commonwealth address. Sen. Pryor (D-Ark.) is leading the most aggressive attack on Sec. 936, having introduced legislation to replace the current tax credit system with a 40% wage credit over a five-year transition ("The Pink Sheet" Feb. 22, p. 5).

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