A call to help Puerto Rico
Treasury Secretary Jacob J. Lew terms the crisis confronting the island commonwealth “immediate and real,” Michael Hiltzik writes.
Treasury Secretary Jacob J. Lew strove to light a fire under congressional leaders Tuesday by terming the fiscal crisis confronting Puerto Rico “immediate and real,” with dire consequences for the island commonwealth’s 3.5 million citizens as well as investment markets nationwide.
Puerto Rico defaulted Monday on most of a debt payment of roughly $ 400 million; an additional $ 1.3 billion in bond payments are due July 1, and the island’s administration has made clear that it can’t meet the obligation. The island has been shut out of the debt markets, while creditors await action on legislation that would restructure its debt under the supervision of an independent oversight board.
Without congressional action, Lew told an audience at the Milken Institute Global Conference in Beverly Hills, Puerto Rico could face the unraveling of “what we know of as normal life in an American community.” He was interviewed by Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and former chief economist to Vice President Joe Biden.
Among other topics touched on in their talk were tax reform and the Treasury’s recent decision to place an image of the abolitionist and suffragist Harriet Tubman on the $ 20 bill.
The “fundamental obstacle” to achieving tax reform, Lew said, is the notion that personal and business tax reform has to happen in tandem. Lew has been a strong advocate for reforming corporate income taxes, in part to combat “inversions,” through which U. S. companies reincorporate overseas purely to avoid U. S. taxes, while keeping their operations in the U. S.
Regulations issued by the Treasury this year succeeded in quashing a $ 160billion merger between Pfizer and Allergan, through which Pfizer would have changed its legal domicile from New York to Allergan’s home in Ireland. But Lew said regulations are only stopgaps: “I don’t believe it can be permanently shut down without legislation.”
He also spoke up for changing rules allowing assets with large embedded capital gains to be passed on to heirs tax- free. Typically, stocks and other appreciated assets can be bequeathed at a “steppedup basis,” which eliminates capital gains tax liability and revalues assets at their market price at the time of inheritance, a difference that can be worth millions of dollars.
“Salaried people don’t have any way of getting out of their taxes,” Lew said. The inequities in the tax code are underscored when “people see generations of wealth being passed on and not getting taxed.”
He also suggested that the tax rates on capital gains should be brought more in line with rates on ordinary income. Currently, the maximum tax on capital gains is 20%, compared with 39.6% for ordinary income.
As for the decision to place an image of Tubman on the front of the $ 20 bill, relegating President Andrew Jackson to the back, Lew said the images on currency help “tell stories about our history.”
“I have not been in a store or on the street when someone has not come up to me and thanked me,” he said.
The Puerto Rico crisis has been building for years. The island has been in recession since 2006, when a federal program offering incentives to businesses to relocate there expired. As American citizens, Puerto Ricans have few difficulties leaving the island to work on the mainland, further crippling its economy.
Puerto Rico papered over the shrinkage in its economy by heavy borrowing, issuing bonds that were exempt from local, state or federal taxes. Despite those exemptions, its most recent bond issue still required a high interest rate of 8%.
The consequence, Lew said, is that with 3.5 million residents and debt of $ 70 billion, Puerto Rico’s today “is in a league of its own” as a creditor. Congressional action is required, he observed, because Congress in 1984 barred its municipalities from seeking Chapter 9 bankruptcy, a rescue used by Detroit and other strapped cities. Only Congress can legislate a crucial debt restructuring.
Just Monday, Lew wrote congressional leaders to reinforce a warning he issued in January that without action, “Puerto Rico’s fiscal, economic and humanitarian situation would continue to deteriorate.” Since then, he wrote, bipartisan discussions have taken place but no legislation has been passed. “Meanwhile, the crisis in Puerto Rico has deepened.”
Thus far, however, Congress hasn’t responded to the crisis with any urgency, in part because municipal credit markets haven’t appeared rattled by the island’s default.
Leaders on Capitol Hill now say they hope to have a bill ready before July 1.