[Congressional Record Volume 143, Number 83 (Monday, June 16, 1997)]
[Senate]
[Pages S5695-S5698]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. D'AMATO (for himself, Mr. Moynihan, Mr. Chafee, Mr. 
        Breaux, Mr. Hatch, and Mr. Graham):

  S. 906. A bill to amend the Internal Revenue Code of 1986 to extend 
the economic activity credit for Puerto Rico, and for other purposes; 
to the Committee on Finance.


    THE PUERTO RICO ECONOMIC ACTIVITY CREDIT IMPROVEMENT ACT OF 1997

  Mr. D'AMATO. Mr. President, I rise today to join Senator Chafee, 
Senator

[[Page S5696]]

Moynihan, Senator Breaux, Senator Hatch, and Senator Bob Graham in 
introducing legislation that will induce investment and create 
employment in Puerto Rico. Puerto Ricans have been U.S. citizens since 
1917. Since World War I an estimated 200,000 Puerto Ricans have served 
in the U.S. Armed Forces. Yet, the Puerto Rican unemployment rate is 
more than twice the national average, its annual per capita income is 
less than half the national average, and well over 50 percent of its 
population live below the poverty line. We as a Congress must take 
action to bring Puerto Rico's economy up to the levels that we expect 
for all Americans.
  Under current law, section 30A of the Internal Revenue Code provides 
a targeted wage credit to companies during business in Puerto Rico 
based upon the compensation paid to their employees. It does not allow 
new business starts and the credit terminates in 2006. As a result, 
existing companies have little incentive to make new investments or 
replace depreciating plant and equipment. Job losses will occur as 
existing plants are shut down and these activities may be transferred 
to foreign locations. Net job growth can only occur if new firms start 
up and if expanding firms replace job losses. Manufacturing accounts 
for more than 40 percent of Puerto Ricos gross domestic product.
  This legislation expands section 30A to provide an employer tax 
credit for employees located in Puerto Rico that will also cover new 
businesses. This credit is based upon the compensation to their 
employees. The credit will only remain until economic conditions 
improve within Puerto Rico including an unemployment rate not to exceed 
150 percent of the U.S. average, per capita income is at least 66 
percent of the national average, and that the poverty level does not 
exceed 30 percent. The economic conditions for the tax incentives to 
end are modest but achieve significant economic progress for the people 
of Puerto Rico.
  This legislation serves U.S. fiscal interests. Without spurring job 
creation in Puerto Rico, the United States will be paying unemployment 
and welfare benefits to people that have a strong work ethic and 
impressive job skills. Puerto Rico has a labor force of 1.3 million 
people. Of this total approximately 190,000 are available for 
employment. We must do everything possible to help facilitate 
employment for these people.
  Even though Puerto Rico is located 1,600 miles southeast of New York 
City, the people of New York have a direct interest in the Puerto Rican 
economy. Puerto Rican subsidiaries of mainland companies purchase 
approximately $195 million per year worth of supplies and services from 
New York. Corporations headquartered in New York State that have 
invested in Puerto Rico employ over 39,000 persons in New York. If 
corporations are drawn to other regions where there are tax incentives, 
New York State will not only lose jobs but also significant amounts of 
income from goods and services.
  Mr. President, this legislation is a powerful economic development 
initative that is vital to Puerto Rico because of the many hurdles the 
people face in their struggle for development. The island faces much 
higher transportation costs than most States; an infrastructure which 
still needs billions in investment to bring it up to acceptable 
standards and it is faced with competition within the Caribbean and 
other locations which pay wages a fraction of Puerto Rico's.
  Mr. President, I urge my colleagues on both sides of the aisle to 
join us in cosponsoring this important legislation.
  Mr. President, I ask unanimous consent that the complete text of the 
bill be placed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 906

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Puerto 
     Rico Economic Activity Credit Improvement Act of 1997''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

     SEC. 2. MODIFICATIONS OF PUERTO RICO ECONOMIC ACTIVITY 
                   CREDIT.

       (a) Corporations Eligible To Claim Credit.--Section 
     30A(a)(2) (defining qualified domestic corporation) is 
     amended to read as follows:
       ``(2) Qualified domestic corporation.--For purposes of 
     paragraph (1)--
       ``(A) In general.--A domestic corporation shall be treated 
     as a qualified domestic corporation for a taxable year if it 
     is actively conducting within Puerto Rico during the taxable 
     year--
       ``(i) a line of business with respect to which the domestic 
     corporation is an existing credit claimant under section 
     936(j)(9), or
       ``(ii) an eligible line of business not described in clause 
     (i).
       ``(B) Limitation to lines of business.--A domestic 
     corporation shall be treated as a qualified domestic 
     corporation under subparagraph (A) only with respect to the 
     lines of business described in subparagraph (A) which it is 
     actively conducting in Puerto Rico during the taxable year.
       ``(C) Exception for corporations electing reduced credit.--
     A domestic corporation shall not be treated as a qualified 
     corporation if such corporation (or any predecessor) had an 
     election in effect under section 936(a)(4)(B)(iii) for any 
     taxable year beginning after December 31, 1996.''
       (b) Application on Separate Line of Business Basis; 
     Eligible Line of Business.--Section 30A is amended by 
     redesignating subsection (g) as subsection (h) and by 
     inserting after subsection (f) the following new subsection:
       ``(g) Application on Line of Business Basis; Eligible Lines 
     of Business.--For purposes of this section--
       ``(1) Application to separate line of business.--
       ``(A) In general.--In determining the amount of the credit 
     under subsection (a), this section shall be applied 
     separately with respect to each substantial line of business 
     of the qualified domestic corporation.
       ``(B) Exceptions for existing credit claimant.--This 
     paragraph shall not apply to a substantial line of business 
     with respect to which the qualified domestic corporation is 
     an existing credit claimant under section 936(j)(9).
       ``(C) Allocation.--The Secretary shall prescribe rules 
     necessary to carry out the purposes of this paragraph, 
     including rules--
       ``(i) for the allocation of items of income, gain, 
     deduction, and loss for purposes of determining taxable 
     income under subsection (a), and
       ``(ii) for the allocation of wages, fringe benefit 
     expenses, and depreciation allowances for purposes of 
     applying the limitations under subsection (d).
       ``(2) Eligible line of business.--The term `eligible line 
     of business' means a substantial line of business in any of 
     the following trades or businesses:
       ``(A) Manufacturing.
       ``(B) Agriculture.
       ``(C) Forestry.
       ``(D) Fishing.
       ``(3) Substantial line of business.--For purposes of this 
     subsection, the determination of whether a line of business 
     is a substantial line of business shall be determined by 
     reference to 2-digit codes under the North American Industry 
     Classification System (62 Fed. Reg. 17288 et seq., formerly 
     known as `SIC codes').''
       (c) Repeal of Base Period Cap.--
       (1) In general.--Section 30A(a)(1) (relating to allowance 
     of credit) is amended by striking the last sentence.
       (2) Conforming amendment.--Section 30A(e)(1) is amended by 
     inserting ``but not including subsection (j)(3)(A)(ii) 
     thereof'' after ``thereunder''.
       (d) Application of Credit.--Section 30A(h) (relating to 
     applicability of section), as redesignated by subsection (b), 
     is amended to read as follows:
       ``(h) Application of Section.--
       ``(1) In general.--This section shall apply to taxable 
     years beginning after December 31, 1995, and before the 
     termination date.
       ``(2) Termination date.--For purposes of paragraph (1)--
       ``(A) In general.--The termination date is the first day of 
     the 4th calendar year following the close of the first period 
     for which a certification is issued by the Secretary under 
     subparagraph (B).
       ``(B) Certification.--
       ``(i) In general.--The Secretary shall issue a 
     certification under this subparagraph for the first 3-
     consecutive calendar year period beginning after December 31, 
     1997, for which the Secretary determines that Puerto Rico has 
     met the requirements of clause (ii) for each calendar year 
     within the period.
       ``(ii) Requirements.--The requirements of this clause are 
     met with respect to Puerto Rico for any calendar year if--

       ``(I) the average monthly rate of unemployment in Puerto 
     Rico does not exceed 150 percent of the average monthly rate 
     of unemployment for the United States for such year,
       ``(II) the per capita income of Puerto Rico is at least 66 
     percent of the per capita income of the United States, and
       ``(III) the poverty level within Puerto Rico does not 
     exceed 30 percent.''

       (e) Conforming Amendments.--
       (1) Section 30A(b) is amended by striking ``within a 
     possession'' each place it appears and inserting ``within 
     Puerto Rico''.
       (2) Section 30A(d) is amended by striking ``possession'' 
     each place it appears.

[[Page S5697]]

       (3) Section 30A(f) is amended to read as follows:
       ``(f) Definitions.--For purposes of this section--
       ``(1) Qualified income taxes.--The qualified income taxes 
     for any taxable year allocable to nonsheltered income shall 
     be determined in the same manner as under section 936(i)(3).
       ``(2) Qualified wages.--The qualified wages for any taxable 
     year shall be determined in the same manner as under section 
     936(i)(1).
       ``(3) Other terms.--Any term used in this section which is 
     also used in section 936 shall have the same meaning given 
     such term by section 936.''
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 3. COMPARABLE TREATMENT FOR OTHER ECONOMIC ACTIVITY 
                   CREDIT.

       (a) Corporations Eligible To Claim Credit.--Section 
     936(j)(2)(A) (relating to economic activity credit) is 
     amended to read as follows:
       ``(A) Economic activity credit.--
       ``(i) In general.--In the case of a domestic corporation 
     which, during the taxable year, is actively conducting within 
     a possession other than Puerto Rico--

       ``(I) a line of business with respect to which the domestic 
     corporation is an existing credit claimant under paragraph 
     (9), or
       ``(II) an eligible line of business not described in 
     subclause (I),

     the credit determined under subsection (a)(1)(A) shall be 
     allowed for taxable years beginning after December 31, 1995, 
     and before January 1, 2002.
       ``(ii) Limitation to lines of business.--Clause (i) shall 
     only apply with respect to the lines of business described in 
     clause (i) which the domestic corporation is actively 
     conducting in a possession other than Puerto Rico during the 
     taxable year.
       ``(iii) Exception for corporations electing reduced 
     credit.--Clause (i) shall not apply to a domestic corporation 
     if such corporation (or any predecessor) had an election in 
     effect under subsection (a)(4)(B)(iii) for any taxable year 
     beginning after December 31, 1996.''
       (b) Application on Separate Line of Business Basis; 
     Eligible Line of Business.--
       (1) In general.--Section 936(j) is amended by adding at the 
     end the following new paragraph:
       ``(11) Application on line of business basis; eligible 
     lines of business.--For purposes of this section--
       ``(A) Application to separate line of business.--
       ``(i) In general.--In determining the amount of the credit 
     under subsection (a)(1)(A) for a corporation to which 
     paragraph (2)(A) applies, this section shall be applied 
     separately with respect to each substantial line of business 
     of the corporation.
       ``(ii) Exceptions for existing credit claimant.--This 
     paragraph shall not apply to a line of business with respect 
     to which the qualified domestic corporation is an existing 
     credit claimant under paragraph (9).
       ``(iii) Allocation.--The Secretary shall prescribe rules 
     necessary to carry out the purposes of this subparagraph, 
     including rules--

       ``(I) for the allocation of items of income, gain, 
     deduction, and loss for purposes of determining taxable 
     income under subsection (a)(1)(A), and
       ``(II) for the allocation of wages, fringe benefit 
     expenses, and depreciation allowances for purposes of 
     applying the limitations under subsection (a)(4)(A).

       ``(B) Eligible line of business.--For purposes of this 
     subsection, the term `eligible line of business' means a 
     substantial line of business in any of the following trades 
     or businesses:
       ``(i) Manufacturing.
       ``(ii) Agriculture.
       ``(iii) Forestry.
       ``(iv) Fishing.''
       (2) New lines of business.--Section 936(j)(9)(B) is amended 
     to read as follows:
       ``(B) New lines of business.--A corporation shall not be 
     treated as an existing credit claimant with respect to any 
     substantial new line of business which is added after October 
     13, 1995, unless such addition is pursuant to an acquisition 
     described in subparagraph (A)(ii).''
       (3) Separate lines of business.--Section 936(j), as amended 
     by paragraph (1), is amended by adding at the end the 
     following new paragraph:
       ``(12) Substantial line of business.--For purposes of this 
     subsection (other than paragraph (9)(B) thereof), the 
     determination of whether a line of business is a substantial 
     line of business shall be determined by reference to 2-digit 
     codes under the North American Industry Classification System 
     (62 Fed. Reg. 17288 et seq., formerly known as `SIC 
     codes').''
       (c) Repeal of Base Period Cap for Economic Activity 
     Credit.--
       (1) In general.--Section 936(j)(3) is amended to read as 
     follows:
       ``(3) Additional restricted reduced credit.--
       ``(A) In general.--In the case of an existing credit 
     claimant to which paragraph (2)(B) applies, the credit 
     determined under subsection (a)(1)(A) shall be allowed for 
     any taxable year beginning after December 31, 1997, and 
     before January 1, 2006, except that the aggregate amount of 
     taxable income taken into account under subsection (a)(1)(A) 
     for such taxable year shall not exceed the adjusted base 
     period income of such claimant.
       ``(B) Coordination with subsection (a)(4)(b).--The amount 
     of income described in subsection (a)(1)(A) which is taken 
     into account in applying subsection (a)(4)(B) shall be such 
     income as reduced under this paragraph.''
       (2) Conforming amendment.--Section 936(j)(2)(A), as amended 
     by subsection (a), is amended by striking ``2002'' and 
     inserting ``2006''.
       (d) Application of Credit.--
       (1) In general.--Section 936(j)(2)(A), as amended by this 
     section, is amended by striking ``January 1, 2006'' and 
     inserting ``the termination date''.
       (2) Special rules for applicable possessions.--Section 
     936(j)(8)(A) is amended to read as follows:
       ``(A) In general.--In the case of an applicable 
     possession--
       ``(i) this section (other than the preceding paragraphs of 
     this subsection) shall not apply for taxable years beginning 
     after December 31, 1995, and before January 1, 2006, with 
     respect to any substantial line of business actively 
     conducted in such possession by a domestic corporation which 
     is an existing credit claimant with respect to such line of 
     business, and
       ``(ii) this section (including this subsection) shall 
     apply--

       ``(I) with respect to any substantial line of business not 
     described in clause (i) for taxable years beginning after 
     December 31, 1997, and before the termination date, and
       ``(II) with respect to any substantial line of business 
     described in clause (i) for taxable years beginning after 
     December 31, 2006, and before the termination date.''

       (3) Termination date.--Section 936(j), as amended by 
     subsection (b), is amended by adding at the end the following 
     new paragraph.
       ``(13) Termination date.--For purposes of this subsection--
       ``(A) In general.--The termination date for any possession 
     other than Puerto Rico is the first day of the 4th calendar 
     year following the close of the first period for which a 
     certification is issued by the Secretary under subparagraph 
     (B).
       ``(B) Certification.--
       ``(i) In general.--The Secretary shall issue a 
     certification for a possession under this subparagraph for 
     the first 3-consecutive calendar year period beginning after 
     December 31, 1997, for which the Secretary determines that 
     the possession has met the requirements of clause (ii) for 
     each calendar year within the period.
       ``(ii) Requirements.--The requirements of this clause are 
     met with respect to a possession for any calendar year if--

       ``(I) the average monthly rate of unemployment in the 
     possession does not exceed 150 percent of the average monthly 
     rate of unemployment for the United States for such year,
       ``(II) the per capita income of the possession is at least 
     66 percent of the per capita income of the United States, and
       ``(III) the poverty level within the possession does not 
     exceed 30 percent.''

       (e) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 1997.
       (2) New lines of business.--The amendment made by 
     subsection (b)(2) shall apply to taxable years beginning 
     after December 31, 1995.

  Mr. MOYNIHAN. Mr. President, today I am joining Senator D'Amato, 
along with Senators Chafee, Breaux, Hatch and Graham, in introducing 
bipartisan legislation to improve the existing tax credit for providing 
employment in Puerto Rico.
  Economic conditions in Puerto Rico are cause for serious concern. 
Over half of the population lives below the poverty line. Puerto Rico's 
average annual per capita income of approximately $7,500 is less than 
one-third the national average. Its average unemployment rate is well 
over twice the national average of 4.8 percent for May 1997.
  In recent years, Congress has twice imposed significant tax increases 
on companies doing business in Puerto Rico, first in 1993 and again in 
1996. While it is unclear to what extent those tax changes will result 
in employer relocation or lost jobs, they undoubtedly have increased 
the vulnerability of the economy of Puerto Rico. Exacerbating this 
economic uncertainty, the tax changes are being phased in at the same 
time that Puerto Rico faces increased economic competition from low-
wage Caribbean countries and from Mexico.
  This legislation would respond to these serious problems by building 
on the temporary wage credit that is currently provided in the Internal 
Revenue Code. Employers generally would be eligible for a tax credit 
equal to 60 percent of wages and fringe benefit expenses for employees 
located in Puerto Rico. New as well as existing employers would be 
rewarded for providing local jobs. The credit would remain in effect 
until the attainment of specific

[[Page S5698]]

economic goals in Puerto Rico, which would trigger an automatic 
phaseout of the credit.
  I believe this investment in the long-term economic health and well-
being of Puerto Rico is imperative. It is our obligation to the people 
of Puerto Rico, who are U.S. citizens but not represented in the 
Senate, to take note and address the very serious plight of their 
economy.
  Mr. GRAHAM. Mr. President, I would like to join with my distinguished 
colleague, Senator Moynihan, the ranking member of the Finance 
Committee, along with both Republicans and Democrats on the Finance 
Committee to seek a restoration of job creation and economic growth 
incentives for U.S. businesses in Puerto Rico.
  Last year's tax legislation eliminated the longstanding incentive 
that applied in Puerto Rico: section 936. Efforts were made to replace 
section 936 with a new wage credit provision in section 30A, but even 
that provision is scheduled to expire. The legislation enacted did not 
provide for any tax benefits for new companies locating in Puerto Rico 
or existing companies expanding their operation on the island. The 
legislation we introduce today will make permanent wage credit benefits 
of section 30A to companies seeking to locate or expand their 
activities in Puerto Rico.
  Puerto Rico's economy is directly related to the economies of Florida 
and many other States. Most of the materials and many services used by 
manufacturing facilities in Puerto Rico are supplied from the States. 
Puerto Rico is also the center of economic activity for the entire 
strategic Caribbean region. Any downturn in the economy of Puerto Rico 
would have serious negative implications for the States that do 
significant business with the island as well as for the Caribbean Basin 
as a whole.
  The bill we introduce today would tie tax benefits directly to wages 
paid and investment made in Puerto Rico. It is targeted, efficient, and 
has the broad bipartisan support of the public and private sectors in 
Puerto Rico. It is a provision that we should act on now. We should not 
await a significant downturn in the Puerto Rico economy before taking 
action. It is clearly desirable and necessary to act this year if we 
are to increase economic conditions in Puerto Rico to levels consistent 
with those we should expect for all American citizens.
                                 ______