CONCERNED ABOUT PUERTO RICO

POLITICO
By BERNIE BECKER
10/02/2019
With help from Brian Faler
and Aaron Lorenzo

HAVE THE MONEY FOR THAT? Puerto Rico has long been an interesting tax case — part of the U.S., but its residents don’t owe taxes to the IRS.

On top of that, the island hasn’t been shy in throwing around tax breaks in an effort to give its struggling economy a jolt, including excusing transplants from paying taxes on capital gains and dividends until 2035 and offering a 4 percent tax rate to companies that move to Puerto Rico and then offer export services to the U.S.

And therein might lie the problem, as Pro Tax’s Brian Faler reports. Rep. José Serrano (D-N.Y.), a key appropriator who was born in Puerto Rico, inserted a provision into the latest IRS budget bill that would require the agency to reveal how many people got lured to the island by all those tax breaks.

Serrano says it’s not fair that average Puerto Ricans are shouldering the island’s debt burden while corporate interests and wealthy people are getting tax deals. But a new group, Concerned Residents of Puerto Rico, has sprouted up to battle against that effort. George Callas, a former longtime GOP tax aide on the Hill, is working for the group and says Serrano’s efforts are akin to stripping Puerto Rico of the right to make its own fiscal policies and potentially violating the privacy of taxpayers who are using the commonwealth’s tax breaks by unmasking them.

POPULAR AMONG THOSE IN THE KNOW: More on the less surprising part — about half of the respondents to a National Federation of Independent Business survey called the pass-through deduction very important, and another 30 percent dubbed it somewhat important. That made the deduction among the more popular features of the Tax Cuts and Jobs Act, H.R. 1 (115), according to the questionnaire. Brad Close, NFIB’s senior vice president of public policy, also pointed to respondents’ widespread use of tax savings from the new law on raising employees’ pay, investing in new business equipment, hiring new workers and paying down debt as positives, too.

Now, for the downside: Only about a third of respondents knew about the 20 percent tax break, which Close said shows that advocates in Congress and groups like the NFIB need to improve education on the deduction for small businesses. “They’re doing well, this law is working for them,” he said. A little more than a third of respondents said they paid about the same in federal income taxes after the new law passed as they did in 2017, and about the same share said they paid less. Nearly 6 percent said they paid a lot less. Looking ahead to the deduction’s scheduled sunset after 2025, four out of five said uncertainty wouldn’t affect their current or future business plans or they didn’t know. Close said he expects that more concern would arise nearer the expiration date.

Speaking of downside: A reminder that the pass-through deduction had and has plenty of critics in the tax wonk set from across the ideological spectrum. “The pass-through provisions reward past investment (which is pointless), are extremely regressive (with 44 percent of the benefits going to households with income above $1 million), and employ what appear to be arbitrary and capricious definitions and boundaries,” William Gale of the Urban-Brookings Tax Policy Center wrote in a recent entry for an American Enterprise Institute series on the impact of the TCJA.