The Puerto Rico corporate tax question

The Government Accountability Office published a report estimating the economic advantages and costs Puerto Rico would have if it enters statehood. The biggest cost would be that Puerto Rico citizens would be required to pay federal income tax on their domestic earnings. Currently they pay federal income tax on income they earn outside of Puerto Rico.

The GAO estimates that If Puerto Rico had been a state in 2010, the estimated income tax paid by individual taxpayers would have ranged from $ 2.2 to $ 2.3 billion. The report also estimates changes in federal entitlement benefits that would flow to the island. In many cases there would be additional federal funds for the island.

The critical piece of the puzzle would be the change in income taxes for Puerto Rico corporations and subsidiaries of U.S. corporations that do business on the island. These corporations are a big contributor to Puerto Rico general fund revenues. Puerto Rico corporations are currently treated as foreign corporations under U.S. tax law. Here is what the report says (page 115):

Now, here is where Microsoft comes in:

Based in Humacao, Puerto Rico, Microsoft Operations Puerto Rico (MOPR) is responsible for producing all optical media sold by Microsoft in the Americas. This fast-growing complex has a complement of 250 employees and produces 250,000 disks a day.

El Nuevodia lays out what this means:

In 2012, the Senate Chairman of the Subcommittee on Investigations, Democrat Carl Levin (Michigan), presented a report stating that between 2009 and 2011, Microsoft was able to keep out of the hands of the U.S. Treasury about $21 billion by transferring certain property rights to their intellectual subsidiary in Puerto Rico.

Muniland’s multi-purpose plumbing


There has been a lot of reporting about the more than 90 retail-size trades made in the $3.5 billion Puerto Rico general obligation bond that was issued March 11. The official statement for the deal says that transactions may not be done in amounts below $100,000 unless Puerto Rico is raised to investment-grade from junk.

I’m not sure if dealers were knowingly breaking the rules, too lazy to read the bond’s documents or thought that regulators would not be paying attention when they executed the trades. It could have been small regional dealers executing the illegal trades or maybe even the brokerage operation of one of the underwriters. Dealer identities on trades are never made public, so there is no way of knowing.

Transmission America

While Congress and President Obama dither over replenishing the nearly depleted Highway Trust Fund, a more fundamental part of America’s fabric is quietly being strengthened. While derelict bridges garner headlines, it is our fragile power grid that can inconvenience tens of millions of Americans when power goes out in a summer heat wave. The federal government is taking the lead as an Edison Electric Institute report says:

Recognizing the importance of transmission to the nation’s economy, security and quality of life, the Administration recently announced the first ‘Quadrennial Energy Review,’ building off of its Blueprint for a Secure Energy Future, instructing the heads of twenty-two executive departments and agencies to collaborate on a year-long review of transmission and distribution infrastructure.

The Edison Electric Institute report details the extensive private investment that is being made in the backbone of our economy. EEI reports:

The risks of municipal default and bond insurance: Part 2

When I put up a post about bond insurance and default rates last week, I expected pushback from proponents of municipal insurance. I got some.

Events in the last seven years show anecdotal evidence for and against municipal bond insurance. The bankruptcies of Jefferson County and Detroit and the workout of Harrisburg, Pennsylvania demonstrate the value of a bond insurer that makes full interest and principal payments for defaulted bonds. Investors undoubtedly benefit from this continuity of payments.

In contrast, we have the financial collapse of 2008, when most bond insurers were downgraded below the level of the issuers they had insured. The issuers started trading on their underlying ratings, and as far as I know, they were not refunded for the insurance premiums they had paid upfront. In a big financial crisis, bond insurance is a bust.

Is muniland doping the data?

Puerto Rico and New Jersey may have played with the numbers recently to put a better gloss on their weak finances. They seem to be “doping” the data.

For example, Puerto Rico (with assistance from the Bureau of Labor Statistics) has revised six years of employment data to cast a positive upward revision to its economy. This had spillover effects on the broad economic measures of the island. From Puerto Rico’s Government Development Bank:

The payroll employment benchmark revision not only impacted the average level of payroll employment, it also changed its average growth rate for previous years.

Detroit’s wildly accelerating bankruptcy process

The technocratic governor of Michigan, Rick Snyder, and the emergency manager he appointed to restructure Detroit, Kevyn Orr, spoke at an event sponsored by the Manhattan Institute for Policy Research this week. Their relentless positivity contrasted with the creditor mess they had left behind in Detroit.

Orr insisted, as he has in other media appearances, that Detroit creditors must rapidly concede to proposed settlement terms so that the largest bankruptcy case in American history can be concluded. Bloomberg reported:

Detroit Emergency Manager Kevyn Orr said time is running out for creditors to reach an agreement with the city on a plan to resolve the biggest U.S. municipal bankruptcy by reducing $18 billion in debt.

The risk of muni default and bond insurance

Standard & Poor’s raised its ratings on two municipal bond insurers, Assured Guaranty and MBIA’s National Public Finance. Reuters reports:

Standard & Poor’s upgraded bond insurer MBIA Inc on Tuesday, saying it expects the company to gain market share and resume its prior role as a strong player in guaranteeing U.S. municipal debt.

The agency raised MBIA’s rating to A- from BBB and upgraded National Public Finance Guarantee Corp, the company’s main unit for insuring municipal bonds, to AA- from A…

Puerto Rico wants to return to the market for another $2 billion

I talked with Erin Ade of RT about Detroit and Puerto Rico. The interview starts at 3:40.

Meanwhile, on Thursday Caribbean Business reported that Puerto Rico intends to return soon to the market to borrow another $2 billion.

The government is planning a $1.5 billion deal through its Sales Tax Financing Corp (Cofina by its Spanish acronym) and a $500 million deal through its new Municipal Financing Corp (Cofim by its Spanish acronym) financing vehicle, according to Caribbean Business sources.

Is Illinois getting weaker?

Illinois has queued up contestants for the governor’s race this fall. The New York Times reports:

Bruce Rauner, a multimillionaire businessman making his first run for political office, won the Republican nomination for governor of Illinois on Tuesday, setting up what is expected to be one of the nation’s most contested races for governor this fall.

Mr. Rauner, little known to Illinois voters before an intense run of television commercials, is expected to bring a serious challenge to Gov. Pat Quinn, a Democrat seeking a second full term in office. Although control of Springfield, the capital in President Obama’s home state, has been solely in the hands of Democrats for more than a decade, a fierce contest is anticipated, in part because of the economic picture in Illinois, given the state’s poor credit ratings and high unemployment rate compared to other states.

Did Michigan kill Detroit?

After studying Detroit’s wrecked finances for several years, it was never clear if the city has been collecting the taxes it was entitled to within the law. Now a new report from the Michigan Municipal League suggests that the state gobbled up a portion of Detroit’s share of the state sales tax, adding severe stress to an already weak budget.

I wrote last year:

Detroit has no local sales tax, according to the Michigan state website. Michigan has no city, local, or county sales tax. The state sales tax rate is 6 percent.

The state collects a sales tax of 6 percent and sends it back to the city. For 2012, the state passed $172 million in sales taxes to Detroit, or 11.4 percent of general and governmental funds of $1.5 billion (page 47).

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