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1975/03/25 - Governor Rafael Hernandez-Colon of Puerto Rico
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1975/03/25 - Governor Rafael Hernandez-Colon of Puerto Rico
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This file contains information pertaining to Puerto Rico's economic and financial affairs.
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James Cannon's Meetings Files
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The original documents are located in Box 43, folder "1975/03/25 - Governor Rafael
Hernandez-Colon of Puerto Rico" of the James M. Cannon Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 43 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
6PM - Meeting with Governor
Rafael Hernandez-Colon of
Puerto Rico
Tuesday, Mrach 25, 1975
March 25, 1975
MEMORANDUM
RE: Puerto Rico's Claim for Rebate of U.S. Excise Taxes on
Gasoline
The basic law governing the relationship between the
Commonwealth of Puerto Rico and the United States is the
Puerto Rican Federal Relations Act, Pub. L. 600, 64 Stat. 319,
enacted in 1950 "in the nature of a compact". Section 9 of
the Federal Relations Act, which traces its origin to the
Jones Act of 1917, 39 Stat. 951, provides that "all taxes
collected under the internal revenue laws of the United
States on articles produced in Puerto Rico and transported
to the United States or consumed in the Island shall be
covered into the Treasury of Puerto Rico. This "rebate"
provision is one of the cornerstones of the fiscal relation-
ship between Puerto Rico and the United States.
For many years, U.S. Internal Revenue taxes collected
on Puerto Rican rum and tobacco sold in the U.S. have been
rebated to Puerto Rico under this provision. Since 1956
substantial volumes of gasoline refined in Puerto Rico have
been transported to the U.S. for consumption, but the U.S.
Treasury Department has never rebated the 4c per gallon
manufacturers excise tax, 26 U.S.C. § 4081. For fiscal years
1957-1974, Puerto Rico is due approximately $352 million in gas-
oline tax rebates. Prospectively, the amount of rebates would
be in the range of $25-35 million per annum.
Puerto Rico's claim for rebate of such taxes was formally
instituted by the Governor's letter to Secretary William E.
Simon of September 13, 1974. Subsequently, the Governor met
with Secretary Simon and later with Assistant Secretary
Hickman and staff. Counsel for the Commonwealth filed two
detailed briefs with the Treasury Department explaining the
Congressional purpose, as exemplified by the statutory language
and legislative history, that Congress intended all taxes
similar to the gasoline tax to be rebated to Puerto Rico.
Secretary Simon wrote to the Governor on December 9, 1974
denying the Puerto Rican claim but inviting further discussions
- 2 -
of the subject. Such discussions occurred and additional legal
memoranda were submitted to Treasury by Commonwealth counsel.
Following this, however, Secretary Simon wrote a second letter
to the Governor, dated February 11, 1975, again expressing the
view, that notwithstanding the merit of the arguments advanced
on behalf of Puerto Rico, the claim should be denied. But
before rejecting the claim, however, Secretary Simon referred
the matter to the Justice Department, Office of Legal Counsel,
where it is now pending.
Essentially, the Treasury lawyers have made two contentions:
(1) that the administrative construction of the rebate statute
was to the effect that only taxes imposed upon manufacturers were
to be rebated and that sales taxes were not to be rebated; (2)
that Congress earmarked gasoline tax revenues for the Highway
Trust Fund and thereby could not have intended such taxes attri-
butable to Puerto Rican gasoline to be rebated. Treasury feels
this is particularly so in light of the fact that Puerto Rico
has received certain benefits from the Highway Trust Fund.
The Commonwealth has endeavored to demonstrate that neither
of Treasury's grounds for denial are valid. While the gasoline
tax is levied on the "sale" by the manufacturer rather than on
the act of manufacturing itself, as theoretically is the case
under the rum and tobacco taxes, for all practical purposes --
legal, administrative and economic -- the incidence and effect
of the gasoline tax is no different from the rum and tobacco
taxes.
While Puerto Rico's limited participation in the Highway
Trust Fund may affect the way one views the equities of this
claim, it has absolutely nothing to do with Puerto Rico's legal
rights to rebate of gasoline taxes. Puerto Rico has received
approximately $150 million in benefits from the Highway Trust
Fund since its inception. Puerto Rico is not included in the
interstate program from whence the majority of the benefits
flow. It undoubtedly would be possible to work out some
reasonable accommodation should it be the view of the U.S.
government that it is inequitable for Puerto Rico to receive
rebate of gasoline taxes and at the same time to participate
partially in the federal highway program.
THE WHITE HOUSE
WASHINGTON
Date: 3,25,75
TO:
Jmc
FROM:
WARREN K. HENDRIKS, JR.
COMMENTS: unless you disert The
to meet with I
Governor alone
suggest Jim falk
also attend.
He welplan
to be her as
6:00 pm. unless he
hears differently.
FOR
THE WHITE HOUSE
WASHINGTON
March 25, 1975
MEMORANDUM FOR:
JIM CANNON
FROM:
JIM FALK 97
SUBJECT:
Your Meeting with Governor Rafael
Hernandez-Colon of Puerto Rico
The principal issues expected to arise are outlined below:
1.
Economic Matters
The Governor received a report of January 22 from T.N. Hurd
which recommended certain additional taxes on property and
luxury items as well as an increase in University tuition on
the revenue side and budget cuts on the spending side to
reduce the FY '75-'76 fiscal deficit.
The Governor met with the Domestic Council and OMB about 2
months ago seeking additional Federal aid. The response to
the Governor from Paul O'Neill is attached at Tab A.
2.
Meeting with the Vice President
The Governor has requested and I have proposed a meeting for
him with the Vice President this week at the convenience of the
Vice President.
A copy of my memorandum to Ann Whitman is attached at Tab B.
He indicates he wants to talk about fiscal and economic matters
and has requested about 40 minutes.
A copy of a recent letter from the Governor to the President is
attached at Tab C.
- 2 -
3.
Ad Hoc Status
.
A recent series of articles has been running in the Washington
Post on Puerto Rican status and the third in the series appeared
in today's paper.
Jose Cabranes, speaking for the Governor, is quoted as say-
ing that a new Federal bureacracy may be needed to deal with
Puerto Rican issues.
This proposal should not be responded to until the work of
the Ad Hoc committee is further along.
.
The Governor will likely propose that a White House official
head a committee for Puerto Rican affairs. The Domestic
Council staff would support such an idea at an appropriate
time.
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
DEC 5 1974
Honorable Rafael Hernandez-Colon
Governor of Commonwealth of Puerto Rico
La Fortaleza, San Juan, Puerto Rico
Dear Governor Hernandez-Colon:
Wally Scott, Frank Zarb and I all appreciate the opportunity to have met
with you and the Resident Commissioner on October 17, to discuss the
economic situation in Puerto Rico. We also appreciate the opportunity to
comment on the most thoughtful study which you presented at our meeting.
The study vividly demonstrates the adverse impact on the economy of
Puerto Rico of price increases, particularly for petroleum products, which
have occurred over the last year. The steps which you have taken that are
outlined in the study represent an impressive agenda to lessen the impact
of the current economic situation.
Similarly, we on the Federal level have developed an agenda for the fight
against inflation - an agenda which, like yours, includes budgetary re-
straint. Although I cannot provide you at this time with definite estimates
of the impact that this budgetary restraint will have on the Commonwealth,
I will address the specific recommendations made in your study and, where
possible, will indicate how we are attempting to reconcile the requirements
for fiscal discipline with the needs of the Commonwealth.
In connection with the discussion of the Puerto Rico budget, your study
notes that Puerto Rico does not participate in General Revenue Sharing
and, thus, cannot substitute these funds for reductions in categorical
Federal programs. Although Puerto Rico does not participate in General
Revenue Sharing, the Commonwealth could be considered to receive the ultimate
measure of revenue sharing in the return to the Commonwealth of all Federal
income tax and customs duties collected in Puerto Rico. The estimated
revenues of $171 million from these sources in fiscal year 1975 are most
likely considerably higher than what the Commonwealth would receive were it
to be included in the General Revenue Sharing formula.
At this time, we cannot provide the assurance requested in the study that
$1.5 million will be made available for the Corps of Engineers to start
construction on the Portugues Bucana project. It may be necessary to
propose deferral of some public works projects in order to achieve the
$300 billion outlay ceiling. The status of Portugues Bucana will be
addressed in connection with overall needs, but you can be assured that
this request will be given careful consideration.
2
The request in the study that the Economic Development Agency (EDA) provide
$5.1 million in public works grants has been discussed with that agency. EDA
officials indicate that the $3 million potentially available for public works
projects in Puerto Rico is the result of favorable action on two projects at
pre-application conferences. EDA presently does not have any formula type
allocation of its funds, except for the very limited funding now being re-
quested to implement the new supplementary grant allocation to States. Ac-
cordingly, all eligible recipients must compete for the available resources.
To the extent that Puerto Rico proposes projects that are more worthy than
the competition, it could receive additional funding.
The study cites a need for increased SBA and FmIIA loan funds to be channeled
into the food production and distribution sectors in order to meet the grow-
ing demand which is expected to result from implementation of the Food Stamp
program. We share your concern on this issue and hope that the accelerated
schedule for implementation of the Food Stamp program, which the Commonwealth
proposed, will not have an adverse impact on the economy of Puerto Rico.
The Commonwealth's relative position regarding SBA loans appears to be excel-
lent. In fiscal year 1974, the total number of SBA loans declined 68 per
cent, while the number in Puerto Rico increased 22 per cent. Similarly, the
situation for FmllA loans looks favorable. The Commonwealth's loans are ex-
pected to increase in fiscal year 1975 from $27 million to $#5 million, in-
cluding an increase of 50% in farm ownership and farm operating loans to
$4.5 million.
The proposal in the study that business and industrial loans be made to the
Commonwealth for the purpose of being reloaned to small farmers unfortunately
cannot be adopted. FmliA is prohibited by law from making loans which would
subsequently be reloaned by the borrower to other borrowers. The request
that the FmHA interest rate for business and industrial loans be reduced
below the rate on Federal notes also cannot be adopted. The interest rate
formula for this program is statutorily prescribed, and it is designed to
produce an interest rate to borrowers that approximates market rates. The
ongoing farm ownership and farm operating loan programs at 5% and 8-1/2%
respectively are designed to serve small farmers of the kind discussed in
your study.
In regard to the recommendations on housing, a major review of Federal
housing policy has indicated that the Nation's housing needs can be met
more effectively, efficiently, and equitably under a revised public housing
leasing program than under the Homeownership Assistance program which makes
families eligible with the same income level as were cligible under the
Section 235 program and the conventional public housing program. Accordingly,
the Lower Income Housing Assistance program is being relied on to provide
housing assistance in lieu of these programs. Most of the commitments under
this program will be for construction of new housing units. Puerto Rico's
housing needs will be carefully considered by HUD in the processing of
applications for the new Lower Income Housing Assistance Program. The
GERALD FORD LIBRARY
3
recently enacted Emergency Home Purchase Assistance Act does not designate
Puerto Rico as a high cost area. However, the Act does allow support for
conventional mortgages of up to $42,000.
Obviously, the housing problems of Puerto Rico and many other areas must
ultimately be resolved by the private housing industry and indeed the Federal
component must remain only a supplement to the private effort. We do ap-
preciate the information on the housing needs of Puerto Rico.
The study concludes with some comments regarding Federal human resources
programs and recommends that special attention be given to Puerto Rico
and that ameliorative measures be devised. Two such ameliorative measures
include:
- The conversion from commodity distribution to the Food Stamp
Program should provide significant additional assistance to
the low-income population of Puerto Rico. We are confident
that, while the scheduled phased-conversion to food stamps
during 1974-75 has been abandoned in favor of complete inple-
mentation by November 1, 1974, the economic assessment of feasi-
bility has proved positive; thus, minimizing concerns of possible
adverse impacts due to bottlenecks in the commercial food dis-
tribution system.
- The National Employment Assistance Act (NEAA), proposed by
President Ford in his recent address on the economy, should
provide significant assistance to the Cormonwealth. Should the
triggering conditions be met, Puerto Rico would be eligible for
both extended unemployment insurance benefits (an additional 10
weeks for covered employees, 20 weeks for uncovered) and for
participation in the Community Improvement Corps. At the national
6 per cent unemployment rate trigger, Puerto Rico could receive
about $28 million out of the $500 million to be made available
under the Community Improvement Corps.
In conclusion, we appreciate the opportunity both to have met with you and
also to have reviewed the study which you submitted. Such dialogue with
knowledgeable and responsible people like yourself is indispensable to good
government. If we can provide additional information on Federal programs
affecting Puerto Rico, please let us know.
Warmest regards,
cc: Official File-HRD/IM
Sincerely,
Director's Copy Mr. Edtheredge
Mr. O'Neill
Mr. Meyer
II.
01Net17
Mr. Fischer
Mr. Tryck
Paul H. O'Neill
Mr. Rotherham
Mr. Speshock
Associate Director for
Mr. Barry
Mr. Hanna
Mr. Smolkin
Human and Community Affairs
Mr. Parras
HRD/IM:JRotherham:fv 11-14-74
GERALD FORD LIBRARY
Mr. Landis
Mr. Hamm
B
THE WHITE HOUSE
WASHINGTON
March 19, 1975
MEMORANDUM FOR:
ANN WHITMAN
FROM:
JIM FALK 97
SUBJECT:
Proposed Meeting for the Vice President
with Governor Hernandez Colon of Puerto
Rico
Governor Colon has requested a meeting with the Vice President during
the week of March 24 at the convenience of the Vice President. His staff
indicates that he wants to talk about fiscal and economic matters and re-
quests approximately 40 minutes.
In recent correspondence, the Governor has indicated that Puerto Rico is
feeling the impact of inflation to a greater degree than is generally felt in
the U.S. He indicates that 60% of Puerto Rican families are below the poverty
level with incomes that are less than $4,000 and that their efforts to curb
inflation are not very effective because Puerto Rico imports over 75% of
what it consumes.
Recommendation: That his request be approved.
Approve
Disapprove
COMMONWEALTH OF PUERTO RICO
OFFICE OF THE GOVERNOR
LA FORTALEZA, SAN JUAN
FEB 20 1975
The President
The White House
Washington, D. C. 20500
Dear Mr. President:
Thank you for your letter concerning the steps being
taken by the Federal Government to check inflation and your
request that the States and the Commonwealth of Puerto Rico
undertake their own share of actions.
We in Puerto Rico are feeling the impact of inflation
to an even greater degree than in generally felt in the United
States. Sixty percent of our families are below the poverty
level with incomes of less than $4,000. The consumer price
index for wage earners in Puerto Rico increased by 30 per
cent in 1974. Our efforts to curb inflation are offset because
we import over 75% of what we consume. We are affected by
the increase in prices on the mainland and by the dramatic rise
in the price of the oil we import which comes mainly from
Venezuela.
In addition, Puerto Rico has been very hard hit by reces-
sion. Our major exports are to the United States. Any slow-
down in the United States economy affects the export of these
products and causes a reduction in employment. Unemployment
in Puerto Rico is now approximately 14%. This number is an
official figure which does not include a large number of un-
skilled young people who are not seeking jobs at present.
-2-
The Commonwealth Government already has adopted and
implemented a vigorous and diversified program to lessen and
mitigate the effects of inflation.
Due to the economic circumstances particular to Puerto
Rico, actions of the Commonwealth have focused primarily on
containing unemployment and promoting industrial and agricultural
production. The most significant measures taken in order to
reduce unemployment include an emergency public work training
program; subsidies for low and middle income housing; and an
acceleration of public works. In order to curb inflation and
the effects it has primarily on middle and low income families
our government has established a subsidy for electricity users
which maintain a low level of consumption. Also, the Consumer
Affairs Department is actively taking actions for controlling prices
on essential consumer goods. Other measures have been taken
to increase industrial production and improve food distribution
systems.
The increase in government expenditures for financing em-
ployment and anti-inflation programs, combined with the reduction
in Treasury revenues has caused a strain on the resources of
the Commonwealth. As a result, we have had to raise taxes on
property, gasoline, corporations, liquor, cigarrettes and other
items. In spite of our efforts we are feeling the effects of a
severe economic recession.
I have carefully considered the measures proposed in your
letter and have submitted them to my Finance Council. I have
given instructions so that the measures be studied on how they
might be implemented in Puerto Rico.
We appreciate your interest and help. You can count on
our fullest cooperation in the common cause against inflation
and recession.
Respectfully years
Rafael Hernández Colón
March 27, 1975
MEMORANDUM FOR:
JIM FALK
FROM:
JIM CANNON
SUBJECT:
Meeting with Governor
Hernandez-Colon of Puerto Rico
The attached material from Lynn Coleman follows our meeting with
Governor Colon Tuesday afternoon.
Would you and Norm Ross please review this material and provide
ma with your analysis as well as any recommendations or suggestions
for further action.
Many thanks.
of
Attachment
a
as
FORD is LIBRARY 070839
ATTORNEYS AT LAW
1701 PENNSYLVANIA AVENUE, N.W.
SUITE 1120
HOUSTON OFFICE
WASHINGTON, D. C. 20006
LONGON OFFICE
FIRST CITY NATIONAL BANK BUILDING
47 CHARLES STREET, BERKELEY SQUAPE
TELIAC 202 298-5350 TELEX. 89690
HOUSTON, TEXAS 77002
MONDON. wix 723, ENGLAND
TEL:AC 713 238-2222
TEL:OI 491-7235
CABLE ADDRESS: VEWS
TELEX:24140
TELEX:782 143
March 26, 1975
Honorable James Michael Cannon
Executive Director and Assistant
to the President for Domestic Affairs
The White House
Washington, D. C. 20500
Re: Meeting with Governor Hernandez-Colon of
Puerto Rico on March 25, 1975
Dear Mr. Cannon:
On behalf of the Governor of Puerto Rico, I enclose a
memorandum which briefly describes Puerto Rico's economic
and fiscal crisis. I also enclose a copy of a recent report
to him by Mr. T. N. Hurd.
The Hurd report provides a description of Puerto Rico's
current economic problems, the extreme fiscal difficulties
of the Commonwealth government together with a discussion of
possible solutions. As you will appreciate from reading the
report after the Governor's presentation yesterday, many of
the steps mentioned in this report have already been taken.
However, even with implementation of drastic cost cutting
and new tax measures, as Mr. Hurd concludes, a substantial
revenue-expenditures gap will remain in fiscal 1976 which, as
a practical matter, can only be met by increased federal
assistance. In this connection, I invite your attention to
pages 16-17 of the Hurd report.
I enjoyed very much having the opportunity to meet you
yesterday and look forward to working with you and your staff
on a solution to these problems.
Sincerely
yours
LRC:slg
Jynn Lynn R. Coleman R. Colemn
Enclosures
BERMLO FORD
CONFIDENTIAL
TO: Hon. James Michael Cannon
FROM: Governor Rafael
Executive Director and
Hernandez-Colon
Assistant to the President
for Domestic Affairs
RE: Puerto Rico's Economic
DATE: March 26, 1975
and Fiscal Crisis
The Crisis
Puerto Rico is undergoing its severest economic recession
since Operation Bootstrap was started 30 years ago. Unemploy-
ment has shot up to an official level of 17%. Government
resources have fallen, creating a gap for the next fiscal year
of over $300 million in a budget of $1.4 billion.
The Reasons
The basic reasons for Puerto Rico's economic plight are
three:
(1) We are totally dependent on imported oil as our only
source of energy. We are without oil, gas, or coal of our own.
(2) The stateside recession has substantially affected
the Mainland demand for products of the bootstrap factories
and has weakened tourism.
(3) As we purchase over 60% of our products from the
Mainland, we have also been importing Mainland recession.
What This Forces Puerto Rico To Do.
FORD is 07VN35 LIBRARY
-- Over the past two years we have been forced to
legislate new taxes or increases to existing taxes in order
March 26, 1975
Page 2
to generate nearly 20% of the revenues for our budget. To
my knowledge, no tax effort of this magnitude has ever been
made by the Federal Government or by any state government
over a two year period.
-- Automatic salary increases for next year for teachers
and government employees must be repealed by legislation.
- The government will not purchase any new equipment at
all during next fiscal year.
-- The hours of work of government employees will be
reduced in order to meet the requirements of the new federal
minimum wage law.
- In addition to all of this, each government agency's
budget will be cut by 11%.
-- To illustrate the effect of this 11% cut on one of our
agencies --- the Department of Education --- the following
measures which will have to be taken:
1. Stop all purchases of equipment, textbooks,
and educational material.
2. Stop all training programs including leaves
of absence and scholarships -- both for students
and teachers.
3. Postpone opening of 17 new schools built
this year.
4. Stop all medical services for students.
FORD LIBRARY
Page 3
5. Close down the educational radio and
television station.
6. Close down the community education program.
7. Cut in half all travel expenses.
8. Reduce, by nearly half, the adult education
program.
9. Lay off about 6,000 employees (not less than
4,000 classroom teachers will have to be laid off). -
10. The possibility of closing schools that are
now in operation is very real and, of course, the
lay off of school lunch employees will also mean
that thousands of children will be deprived of
this essential service.
Federal Response
Puerto Rico does not participate in Federal revenue-
sharing programs. Thus, it has no Federal "cushion" in a
time when its own revenues are falling sharply. Unlike the
Federal government, it cannot engage in deficit spending.
Its borrowing authority is stretched virtually to the limit.
The Federal government can help by:
(1) Assuring that Puerto Rico is given a fair share
of Federal spending, both for capital improvement and on-
going programs, in all of the anti-recessionary measures
being considered by Congress.
FORD ERAL LIBRA
Hon. James Michael Cannon
March 27, 1975
Page 4
(2) Reaching agreement with Puerto Rico on the rebate
of excise taxes collected on gasoline refined in Puerto Rico
and shipped to the U.S. Mainland, both in the past and
prospectively.
GEBRA FORD
THE WHITE HOUSE
WASHINGTON
April 18, 1975
MEMORANDUM FOR:
DICK JIM DICK CANNON
FROM :
SUBJECT :
Meeting with Governor Hernandez Colon
of Puerto Rico
I think Parsons should follow this one.
Attachment - Meeting with Governor Hernandez Colon
of Puerto Rico briefing paper.
THE WHITE HOUSE
WASHINGTON
April 16, 1975
MEMORANDUM FOR:
JIM CANNON
FROM:
JIM FALK F
SUBJECT:
Meeting with Governor Hernandez Colon of Puerto Rico
BACKGROUND
I have reviewed the material submitted by the Governor and Congressman Jaime
Benitez through Lynn Coleman following our meeting with them. I have reviewed
the issue with Norm Ross and have also spoken with Dick Parsons about it.
It is my understanding that once Justice reviews the issue, a memorandum will
be provided to the Treasury Department. At that time a policy review may well
be appropriate.
In the interim, Jaime Benitez, the Resident Commissioner, has requested an oppor-
tunity to meet with the Vice President and if such a meeting is approved, I recom-
mend that you participate.
THE ISSUE
Will the Federal government reach a voluntary agreement with Puerto Rico on
the rebate of taxes on gas refined in Puerto Rico and shipped to the United States
mainland, both in the past and prospectively? In the alternative, litigation will
probably result.
RECOMMENDATION
That no Domestic Council action be taken pending an opinion by the Justice Depart-
ment Office of Legal Counsel as to the legality of the Puerto Rican request.
CC: Dick Parsons
Norm Ross