- The Washington Times - Sunday, October 6, 2002

Senate Majority Leader Tom Daschle has led the attack in trying to tie Republicans to the corporate scandals at Enron, WorldCom and elsewhere. He has harshly criticized U.S. companies that set up offshore shells in island tax havens like Bermuda to avoid U.S. taxes.
But Daschle himself is now promoting just what he has criticized in quietly pushing a corporate welfare scam that was too dirty even for Bill Clinton.
The proposal would permanently exempt from taxation 90 percent of the profits earned by the subsidiaries of U.S. firms in Puerto Rico. Indeed, the proposal would even allow U.S. companies to "borrow" the profits of Puerto Rican subsidiaries free of interest or taxes for as long as they want. This would leave the profits from Puerto Rican subsidiaries completely free of tax.
If enacted, Mr. Daschle's plan would cost the Federal Treasury $4.6 billion in lost revenue next year, $18.3 billion over the first five years, and $32.1 billion over 10 years. So we are not talking chump change here.
The proposal would effectively bring back one of the most notorious corporate welfare ripoffs in U.S. history. Now being phased out, it is referred to as Section 956, which is the Internal Revenue Code Section embodying it. The provision was originally adopted in 1976, and exempted U.S. Puerto Rican subsidiaries from taxation, expanding earlier preferential tax subsidies going back decades.
The problem is that these tax preferences have cost U.S. taxpayers a fortune, but have done little to benefit the people of Puerto Rico. Studies showed the preferences cost taxpayers about 10 percent more in lost revenue than the wages paid to employees of the Puerto Rican subsidiaries. In other words, American taxpayers were effectively paying the wages of the workers of the Puerto Rican subsidiaries, and losing an additional 10 percent to boot.
Moreover, a 1992 GAO study examined the high profile pharmaceutical companies who received two-thirds of the benefits of these tax preferences over the years. The study concluded that the revenue lost to these subsidiaries was almost 3 times as much as the wages paid to the workers.
The end was near when Puerto Rican subsidiaries were found costing U.S. taxpayers $330,000 for each worker hired, more than 10 times the average wage paid to those workers.
The drug companies insist that tax benefits like Section 956 are essential to their continued presence in Puerto Rico, and the island's economy would collapse without them. But those companies employ only 2 percent of the Puerto Rican work force. Moreover, most of these will not leave even without the tax preferences, because they are too well-established there now and moving and losing all of their current work force would be too costly.
Indeed, despite the tax preferences, the Puerto Rican economy stagnated in the late 1970s, with growth below 2 percent year after year. In the early 1980s, unemployment reached 22 percent, before stabilizing at around 15 percent, about double the U.S. rate, through the early 1990s.
The tax preferences were so ineffective because U.S. corporations ended up moving capital to Puerto Rico to take advantage of the loophole. But Puerto Rico is not a low-wage location. Since it is a U.S. territory, the federal minimum wage applies there.
So the Puerto Rican subsidiaries minimized their hiring of local workers. They often contracted out any labor-intensive work to the low-wage workers of the nearby Dominican Republic. This practice ultimately supported a Dominican work force of 250,000 laborers, about 2 times the number of Puerto Rican workers hired due to the tax preferences.
All this was too much even for Bill Clinton. He proposed eliminating the tax preferences in 1993, and won congressional approval to scale them back substantially. In 1996, he led Congress to adopt a complete phaseout over 10 years.
But Mr. Daschle would bring this scandalous corporate welfare boondoggle back to life, even though he supported and voted for Mr. Clinton's proposals in the 1990s. Newspapers in Puerto Rico are reporting that Mr. Daschle has promised the pro-tax scam lobbyists that he will attach his outrageous proposal very quietly to some bill going through the Senate.
Why would Mr. Daschle want to do this? Well, the big corporate fat cats benefiting from these tax breaks are notorious for spreading big campaign contributions around to those who will support their cause. And Mr. Daschle needs big bucks to preserve his razor-thin Senate majority.
Indeed, the public records show that the pharmaceuticals alone have given almost a million dollars to the Democratic Senatorial Campaign Committee in this election cycle.
Enron and WorldCom were small potatoes compared to this.

Peter Ferrara is a former associate deputy attorney general of the United States.


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