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    "title": "Puerto Rico - Compact of Permanent Union, November 7, 1975",
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    "ocrText": "The original documents are located in Box 7, folder \"Puerto Rico - Compact of Permanent\nUnion, November 7, 1975\" of the White House Special Files Unit Files at the Gerald R.\nFord Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nDigitized from Box 7 of the White House Special Files Unit Files\nat the Gerald R. Ford Presidential Library\nTHE WHITE HOUSE\nWASHINGTON\nNovember 7, 1975\nPat McKee:\nHere is a copy for Jim Cannon\nas requested.\nTrudy Fry\ncc: Jim Falk\nTHE WHITE HOUSE\nWASHINGTON\nNovember 6, 1975\nDear Marlow:\nYour dedication to the successful completion\nof the proposed \"Compact of Permanent Union\nBetween the United States and Puerto Rico\"\ndeserves the highest commendation.\nPlease accept my personal thanks for your\nhard work and the sacrifices you and your\ncolleagues had to make to complete this\nendeavor.\nYou have my assurance that this Compact will\nbe given a thorough review by my Cabinet.\nPlease express my sincere appreciation to\nyour fellow Commissioners from Puerto Rico\nand the United States.\nSincerely,\nJung Ford\nThe Honorable Marlow Cook\nAd Hoc Advisory Group on the\nStatus of Puerto Rico\n1016 Sixteenth Street, NW.\nWashington, D.C. 20036\nNovember 5, 1975\nRobert Linder -\nThe attached was edited by Paul\nTheis.\nPlease arrange for it to\nbe prepared in final form for the\nPresident's signature. Thanks.\nTrudy Fry\nGEBALE\nTHE WHITE HOUSE\nDRAFT\nWASHINGTON\nFRR\nNovember. 4, 1975\nDear Marlow:\nYour dedication to the successful completion of the proposed\n\"Compact of Permanent Union Between the United States and Puerto\nRico\" deserves the highest commendation.\nPlease accept my personal thanks for your hard work and the sac-\nrifices which all had to make to complete this endeavor.\nYou\nhave\nyou and your Colleagues\nmy.\nance\nLet me assure you and your colleagues that this Compact will\nbe given a thorough review by my Cabinet.\nPlease express my sincere appreciation to your fellow Commis-\nsioners from Puerto Rico and the United States.\nSincerely,\nGerald R. Ford\nThe Honorable Marlow Cook\nAd Hoc Advisory Group on\nthe Status of Puerto Rico\n1016 Sixteenth Street, N.W.\nWashington, D.C. 20036\nTHE WHITE HOUSE\nWASHINGTON\nNovember 5, 1975\nPaul Theis -\nThe attached letter was prepared\nby Jim Falk. We would appreciate\nyour prompt review.\nThanks.\nJim Connor\nP.S. Please return copy of the\nreport that is attached.\nTHE WHITE HOUSE\nDRAFT\nWASHINGTON\nFRR\nNovember 4, 1975\nDear Marlow:\nYour dedication to the successful completion of the proposed\n\"Compact of Permanent Union Between the United States and Puerto\nRico\" deserves the highest commendation.\nPlease accept my personal thanks for your hard work and the sac-\nrifices which alk had to make to complete this endeavor.\nYou have my ance\nyou and your Colleagues\nLet me assure you and your colleagues that this Compact will\nbe given a thorough review by my Cabinet.\nPlease express my sincere appreciation to your fellow Commis-\nsioners from Puerto Rico and the United States.\nSincerely,\nGerald R. Ford\nThe Honorable Marlow Cook\nAd Hoc Advisory Group on\nthe Status of Puerto Rico\n1016 Sixteenth Street, N.W.\nWashington, D.C. 20036\nNovember 7, 1975\nJim Falk:\nAttached are additional reports from the Departments\non the Puerto Rico report:\nDepartment of the Interior\nHUD\nTrudy Fry\nU.S. DEPARTMENT URBAN OF HOUSING * AND\nTHE SECRETARY OF HOUSING AND URBAN DEVELOPMENT\nWASHINGTON, D.C.. 20410\nNOV 6 1975\nMEMORANDUM FOR: James E. Connor\nSecretary to the Cabinet\nThe White House\nSubject: Report of the Ad Hoc Advisory Group on Puerto Rico\nThe report entitled \"Compact of Permanent Union Between Puerto\nRico and the United States\" has been circulated for review within\nthis Department. Since the document does not deal directly with\nissues which fall under this Department's purview, it would be\ninappropriate for us to make recommendations.\nCarla A. Hills\nOF THE INTERIOR\nUnited States Department of the Interior\nS.\nOFFICE OF THE SECRETARY\nMarch\n3,\n1849\nWASHINGTON, D.C. 20240\nNOV 7 1975\nDear Mr Mr Connor:\nThis responds to your memorandum of October 23, 1975, in which you\nhave requested my comments and recommendations concerning the Report\nof the Ad Hoc Advisory Group on Puerto Rico.\nThis Report, which in essence is a draft \"Compact of Permanent Union\nBetween Puerto Rico and the United States,\" represents an important\nstep toward a new relationship between the United States Federal\nGovernment and the Commonwealth of Puerto Rico. As noted in the\nLetter of Transmittal to the President and the Governor of the Common-\nwealth of Puerto Rico, the Compact represents the consensus of the\nAd Hoc Advisory Group, and as such is subject to several reservations\nby members of both the United States and Puerto Rican Delegations. I,\ntoo, have certain reservations on the Draft Compact as enumerated below.\nIn general, the Compact bestows all the benefits on Puerto Rico of a\npermanent union with the United States without imposing the attendant\nobligations and responsibilities. It appears to weaken the sovereign\nrelationship of the United States to Puerto Rico by granting Puerto\nRico certain exceptions that do not apply to the several states or\nterritories.\nSpecifically, Section 2 of the draft Compact would permit the Free\nAssociated State of Puerto Rico to participate in international\norganizations and conclude agreements with foreign countries covering\na wide range of subjects. This is contrary to the stand the Federal\nGovernment has taken with other U.S. territories such as Guam where\nthey have been denied permission to participate in international\norganizations. Granting Puerto Rico this privilege could redound to\nthe detriment of the Federal Government in future discussions with\nother U.S. territories regarding their relationship with the Federal\nGovernment.\nAMERICAN REVOLUTION INDENTENNAL\n1776-1976\n-2-\nSection 9, Common Market, expands on the international, sovereign\naspect of Puerto Rico under the Compact by having the \"Free Associated\nState of Puerto Rico\" accepted as an associated developing state\nwhich can participate in all the benefits from any regional or\nworldwide system of preferences for developing countries. This is\ncontrary to the fact of U.S. sovereignty and responsibility with\nrespect to the conduct of foreign affairs and should not be approved.\nAlso in this section, Puerto Rico would, while remaining in the U.S.\ncustoms territory, permit duty free imports of material for processing,\nprovided that not less than 35% in value is added in Puerto Rico before\nshipment to the United States market. While this value added provision\napplies in Guam and the Virgin Islands, both of these territories are\noutside the U.S. customs territory. Granting this privilege to Puerto\nRico would affect adversely the income Guam and the Virgin Islands now\nreceive from this value added benefit.\nThere is a need, as set forth in Section 10, for Puerto Rico to control\nto some degree the flow of immigration to the Island. The influx of\nlarge numbers of poor, uneducated and untrained aliens into an already\neconomically depressed area makes a difficult situation even more\nuntenable. However, application of the provisions of this section\nwould have to be monitored carefully by the United States Immigration\nand Naturalization Service to insure that the provisions of Section 10\nwere not abused or misused.\nIn the last analysis, this Report and recommended draft Compact pro-\nposing a new relationship between the United States Federal Government\nand its territory, Puerto Rico, should go forward to the United States\nCongress, but with the clear understanding that it is not a definitive\ndocument and is subject to debate, change and many compromises before\nit finally postulates a \"permanent\" relationship.\n10m Sincerely yours,\nSecretary of the Interior\nMr. James E. Connor\nSecretary to the Cabinet\nThe White House\nWashington, D. C. 20006\nGERALD\nNovember 6, 1975\nJIM FALK -\nAttached are the comments received from the\nCabinet on the Puerto Rico Report:\nAs others are received I will send them to you.\nAttached are the comments of:\nAgriculture\nTreasury\nHEW\nCommerce\nDefense\nTrudy Fry\nTHE WHITE HOUSE\nWASHINGTON\nOctober 23, 1975\nMEMORANDUM FOR\nTHE CABINET\nSUBJECT:\nReport of the Ad Hoc Advisory Group\non Puerto Rico\nAttached is the report of the Ad Hoc Advisory Group on\nPuerto Rico entitled 'Compact of Permanent Union Between\nPuerto Rico and the United States. 11 Prior to submitting\nthe report to the President, it would be appreciated if\nwe could have the comments and recommendations\nof the Departments concerned.\nIt would be further appreciated if your comments could\nbe received by this office by close of business Thursday,\nOctober 30, 1975.\nJAMES CONNOR\nSECRETARY TO THE CABINET\nAttachment\nCC Jem on Falk 10/30/75.\nOF DEFINS! DE ENSE\nOFFICE OF THE SECRETARY OF DEFENSE\nWASHINGTON, D.C. 20301\n(MITED STATES OF of AMERICA\n30 October 1975\nMEMORANDUM FOR Mr. James E. Connor\nMilitary Assistant to the Bd President\nSecretary to the Cabinet\nThe White House\nTHROUGH: Captain Leland S. Kollmonge USN\nThe report of the Ad Hoc Advisory Group on the Compact\nof Permanent Union between Puerto Rico and the United States\nhas been reviewed, and the Department of Defense has no\nobjection to the section pertaining to security and common\ndefense.\nFOR THE SPECIAL ASSISTANT:\nChun Throolas\nElmer T. Brooks\nLt Col, USAF\nMilitary Assistant\nAMERICAN REVOLUTION INCENTENNAL\n1776-1976\nHEALTH,\nDEPARTMENT\nOF\nAND\nTHE SECRETARY OF HEALTH, EDUCATION, AND WELFARE\nDEPARTMENT\nWASHINGTON, D.C. 20201\nU.S.A.\nNOV 4 1975\nMEMORANDUM FOR THE HONORABLE JAMES E. CONNOR\nSUBJECT: Report of the Ad Hoc Advisory Group on\nPuerto Rico: Response to your memorandum\nof October 23\nThe Ad Hoc Advisory Group on Puerto Rico has proposed\nfor consideration of the President of the United States\nand the Governor of Puerto Rico a Compact of Permanent\nUnion Between Puerto Rico and the United States that,\nif adopted, would substantially alter the relationship\nbetween the two governments. Several provisions of the\nCompact may be expected to bear directly on the manner\nin which Puerto Rico participates in programs that our\nDepartment administers.\nFor present purposes, we would respectfully invite the\nPresident's attention to sections 6 and 11. The Advisory\nCommittee explains section 6 as founded on a belief,\n\"that United States citizens, notwithstanding their place\nof residence within the jurisdiction of the Federal\nGovernment, should participate equally in the benefits\nprovided by laws of the United States relating to social\nand economic aid, such as loans and other assistance for\nthe benefit of health, education, housing, opportunities\nfor employment and social welfare.\" A number of the\nDepartment's major programs, such as welfare assistance\nto the adult categories under the Social Security Act,\nsupport programs in Puerto Rico on terms quite different\nfrom those that apply within the fifty States and the\nDistrict of Columbia.\nTHE HONORABLE JAMES E. CONNOR\n2\nSection 12 of the Compact, on the applicability of Federal\nlaws, would provide a procedure under which Puerto Rico\ncould delay the application to it of regulations implementing\nany statute and ultimately obtain judicial review on the\nquestion of whether the regulation was \"essential to the\ninterests of the United States\".\nThe implications of these provisions, as well as others\nthat would bear on the programmatic concerns of other\nagencies of the Executive Branch (such as the provision\nallowing Puerto Rico to impose external tariffs different\nfrom those imposed on goods entering other portions of\nthe United States), require intensive evaluation.\nAccordingly, I would recommend that you forward the report\nof the Ad Hoc Advisory Group to the President with the\nrecommendation that he designate a suitable group, perhaps\na task force of the Domestic Council, to study the report\nin consultation with affected departments and agencies of\nthe Executive Branch, and to advise him whether to accept\nthe recommendation of the Advisory Group \"that the Compact\nbe referred to both Houses by the President of the United\nStates with his endorsement, for Congressional action.\"\nDarict Walle\nTHE SECRETARY OF HEALTH, EDUCATION, AND WELFARE\nWASHINGTON, D.C. 20201\nNOV 4 1975\nMEMORANDUM FOR THE HONORABLE JAMES E. CONNOR\nSUBJECT: Report of the Ad Hoc Advisory Group on\nPuerto Rico: Response to your memorandum\nof October 23\nThe Ad Hoc Advisory Group on Puerto Rico has proposed\nfor consideration of the President of the United States\nand the Governor of Puerto Rico a Compact of Permanent\nUnion Between Puerto Rico and the United States that,\nif adopted, would substantially alter the relationship\nbetween the two governments. Several provisions of the\nCompact may be expected to bear directly on the manner\nin which Puerto Rico participates in programs that our\nDepartment administers.\nFor present purposes, we would respectfully invite the\nPresident's attention to sections 6 and 11. The Advisory\nCommittee explains section 6 as founded on a belief,\n\"that United States citizens, notwithstanding their place\nof residence within the jurisdiction of the Federal\nGovernment, should participate equally in the benefits\nprovided by laws of the United States relating to social\nand economic aid, such as loans and other assistance for\nthe benefit of health, education, housing, opportunities\nfor employment and social welfare.\" A number of the\nDepartment's major programs, such as welfare assistance\nto the adult categories under the Social Security Act,\nsupport programs in Puerto Rico on terms quite different\nfrom those that apply within the fifty States and the\nDistrict of Columbia.\nTHE HONORABLE JAMES E. CONNOR\n2\nSection 12 of the Compact, on the applicability of Federal\nlaws, would provide a procedure under which Puerto Rico\ncould delay the application to it of regulations implementing\nany statute and ultimately obtain judicial review on the\nquestion of whether the regulation was \"essential to the\ninterests of the United States\".\nThe implications of these provisions, as well as others\nthat would bear on the programmatic concerns of other\nagencies of the Executive Branch (such as the provision\nallowing Puerto Rico to impose external tariffs different\nfrom those imposed on goods entering other portions of\nthe United States), require intensive evaluation.\nAccordingly, I would recommend that you forward the report\nof the Ad Hoc Advisory Group to the President with the\nrecommendation that he designate a suitable group, perhaps\na task force of the Domestic Council, to study the report\nin consultation with affected departments and agencies of\nthe Executive Branch, and to advise him whether to accept\nthe recommendation of the Advisory Group \"that the Compact\nbe referred to both Houses by the President of the United\nStates with his endorsement, for Congressional action.'\n/s/David Mathews\nSecretary\nTHE WHITE HOUSE\nWASHINGTON\nDecember 1, 1975\nJim Falk -\nAttached are the atiditional\ncomments submitted by Department\nof Commerce on the Puerto Rico\nReport.\nTrudy Fry\ncc: Steve Low\nDEPARTMENT OF COMMERCE\nU.S. DEPARTMENT OF COMMERCE\nOffice of the Secretary\nUNITED STATES OF AMERICA\nWashington, D.C. 20230\nNovember 28, 1975\nHonorable James E. Connor\nSecretary to the Cabinet\nThe White House\nWashington, D. C. 20005\nDear Mr. Connor:\nThis is in further response to your request of October 23 for\nthe views of this Department on the proposed \"Compact of\nPermanent Union Between Puerto Rico and the United States\"\ndrafted by the Ad Hoc Advisory Group on Puerto Rico.\nIn view of the time constraints in which we have had to\nconsider the proposed Compact, this response will focus on\nthose areas which fall within the particular interest of\nthis Department, i.e., questions of trade and tariff\npolicies and the concept of a common market as described\nin Section 9 of the proposed Compact. We defer comment on\nthose provisions of the proposal which fall within the\nprimary interest of other Federal agencies.\nSeveral of the provisions in Section 9 represent little or\nno change from existing law. For example, General Headnote 2\nto the Tariff Schedules of the United States (TSUS) (19 U.S.C.\nS 1202) already provides that Puerto Rico will be considered\npart of the Customs Territory of the United States. With\nthe exception of coffee, articles imported into Puerto Rico\nfrom foreign countries incur the same rate of duty as they\nwould were they imported directly into the United States\n(48 U.S.C. 739) U.S. imports from Puerto Rico and Puerto\nRican imports from the United States enter duty-free (48 U.S.C.\n$738). Duties and taxes collected in Puerto Rico (less the\ncost of collection), and the gross amount of all collections of\nduties and taxes in the United States upon articles of merchan-\ndise coming from Puerto Rico, are paid into the Treasury of\nPuerto Rico (48 U.S.C. 8740). Further, all taxes collected\nunder the internal revenue laws of the United States on\narticles produced in Puerto Rico and transported to the\nUnited States or consumed in Puerto Rico are paid into the\nTreasury of Puerto Rico. (48 U.S.C. §734)\n- 2 -\nThis Department, however, does have serious reservations\nwith respect to other provisions of Section 9. First, there\nappears to be an inconsistency between the provisions of\nsubsections 9 (a) and (c). Subsection 9 (c) provides, inter\nalia, that the \"income from Internal Revenue taxes which\nmay be collected on articles transported from Puerto Rico\nto the United States shall be paid into the Treasury of\nPuerto Rico.\" However, subsection 9 (a) seems to negate\nthis provision by providing that the United States shall\nnot \"impose restrictions, tariffs or taxes of any kind\" on\nU.S. imports from Puerto Rico. An explanation appears in\norder to clarify this apparent inconsistency. Furthermore,\nthe provisions of subsection 9 (a) would appear to prohibit\nthe imposition of excise taxes by either the United States\nor Puerto Rico with respect to each other's exports. Since\nthe revenue generated by such excise taxes is now paid to\nPuerto Rico, we question whether such a result was intended\nby the drafters of the proposed Compact. To overcome this\napparently unintended result, we suggest that the second\nparagraph of subsection 9 (a) be revised to prohibit \"restrictions,\ntariffs, or other charges of any kind imposed on or in\nconnection with the importation of articles\" imported from\neach other. In addition, the specific exemption for coffee,\nprovided for in subsection 9(d), should be reflected in\nsubsection 9 (a).\nSecond, subsection 9 (d) provides that Puerto Rico may \"levy,\nincrease, reduce or eliminate tariffs and quotas on articles\nimported from foreign countries or transshipped through the\nUnited States.\" The only restrictions placed on such authority\nare that the actions conform to the international obligations\nof the United States, that articles containing foreign com-\nponents shipped or transshipped from Puerto Rico to the rest\nof the U.S. Customs Territory or from there to Puerto Rico\nconform respectively to the laws, and that changes in the\nduty rates be accompanied by consultation and coordination\nof trade policy with the Federal authorities concerned.\nConformity with international obligations would constitute\na limitation on the use of quotas, and on the upward movement\nof tariffs by Puerto Rico because of the upper limit bindings\non duty rates resulting from the trade agreements which the\n-3-\nUnited States has entered into pursuant to the General\nAgreement on Tariffs and Trade (GATT). Article XXIV of\nthe GATT states, in pertinent part, that its provisions\n\"shall apply to the metropolitan customs area of the\ncontracting parties\n....\nEach such customs territory\nshall, exclusively for the purposes of the territorial\napplication of this Agreement, be treated as though it\nwere a contracting party.\" As noted above, General Head-\nnote 2 to the TSUS provides that Puerto Rico is included\nin the Customs Territory of the United States. However,\nsubsection 9 (d) would leave open the possibility of se-\nlective reduction or elimination of duties by Puerto Rico\nsubject only to prior consultation and coordination with\nthe United States. We believe that this constitutes much\ntoo loose an arrangement and lacks sufficiently appropriate\nsafeguards against possible adverse effects on U.S. industry.\nMoreover, not even the U.S. Government can arbitrarily raise\nor lower a duty or quota on goods entering the U.S. without\nconforming to the requirements of relevant tariff and trade\nlegislation which provide various safeguards as conditions\nto reducing or eliminating tariffs. In this connection, we\nalso note that the second restriction in subsection 9 (d) is\nunclear as to its application. For example, is it to be\nread in conjunction with subsection 9 (e) or does it relate\nonly to those cases where Puerto Rico reduces but does not\neliminate a tariff?\nAccordingly, we suggest that subsection 9 (d) be deleted.\nAt a minimum it should be revised to require U.S. con-\ncurrence with respect to any change in tariffs or quotas.\nMany of the problems stated as applying to subsection 9 (d)\napply equally to subsection 9 (e). While this Department\nrealizes the need to further develop the economy of\nPuerto Rico by providing industry with incentives to\nestablish operations there, we feel that the provisions\nof this subsection may have serious adverse effects on\nmainland U.S. industry and employment. With the incentive\nof duty-free treatment for the importation of goods to which\n35% value is added in Puerto Rico before shipment to the\nUnited States, many U.S. firms may be encouraged to leave the\nSERALD\n-4-\nmainland and establish operations in Puerto Rico. This\ncould well result in a worsening of the critical un-\nemployment situation which already exists in the fifty\nstates. Moreover, not only would jobs on the mainland\nbe lost, but those companies in the same industry that\nremained on the mainland would be put to a competitive\ndisadvantage vis-a-vis those companies which had relocated\nin Puerto Rico. An example is provided in the separate\nremarks of Representative Don H. Clausen. He notes (p. 62\nof the Report of the Ad Hoc Advisory Group on Puerto Rico)\nthat \"an entrepreneur could set up a textile processing\nplant in Puerto Rico, which the Puerto Rican Government\nwould encourage in order to improve the island's economy.\nSubsequently, raw, unfinished textiles from abroad could\nbe imported duty-free. Next, the merchandise would be\nprocessed, adding at least 35% value to the finished pro-\nduct. As a consequence, clothing could be shipped to the\nUnited States, again duty-free, permitting sale of the\nfinished product in the fifty states at a much cheaper\nrate than that produced on the mainland.\"\nSubsection 9 (e) could also adversely affect the U.S.\neconomy in yet another way. Under its provisions,\nforeign firms would be encouraged to move their final\noperation unit to Puerto Rico where they could import,\nduty-free, low-cost foreign-made semi manufactures, to\nwhich 35% value would be added in Puerto Rico. The\nfinal product could then be shipped duty-free to the U.S.\nmainland. U.S. jobs at all levels of the manufacturing\nprocess for that product would then be taken away, while\nthe benefit to Puerto Rican employment would occur only\nin connection with the final operation necessary to add\n35% local content to the final article coming to the U.S.\nmainland from Puerto Rico.\nWhile we would prefer that subsection 9(e) be deleted,\nalternatively we would suggest that it be amended, adding\nthe requirement of U.S. approval with respect to each\narticle that may receive duty-free treatment under sub-\nsection 9 (e). In addition, the commentary for Section 9\n-5-\nshould indicate that the regulations implementing that\nSection should include the value-added criteria set\nforth in Title V of the Trade Act of 1974 concerning the\nrequirements for the U.S. Generalized System of Preferences,\nfor the purpose of determining whether the 35% valued-added\nrequirement has been met.\nSuch application of the Title V value-added criteria would\neliminate the problems encountered with \"front operations\"\nunder the special duty arrangement for insular possessions,\nsuch as the Virgin Islands. That arrangement works as\nfollows. Under General Headnote 3 (a) (i) to the TSUS, pro-\nducts of insular possessions are generally subject to\ncolumn 1 rates of duty when imported into U.S. Customs\nTerritory, except that General Headnote 3 (a) (i) also pro-\nvides that articles from insular possessions may be imported\ninto the U.S. Customs Territory duty-free when they have\nhad at least 50% value added in such insular possession.\nHowever, because the meaning of \"value-added\" in General\nHeadnote 3 (a) (i) is not limited to direct costs of processing,\ngoods are exported from various developed nations to the\nVirgin Islands in nearly finished form, have small direct\namounts of value added there, but for purposes of duty-free\nexportation to the United States, have indirect costs of\nmanufacture and/or processing and a profit markup included\nin order to meet the 50% value added requirement. Thus,\nmany products of developed countries which should be subject\nto a duty, enter the U.S. Customs Territory without incurring\nany duty. Moreover, this arrangement has had a negligible\neffect on economic development in the Virgin Islands because\nit has resulted in mere assembly plants, instead of complete\nmanufacturing operations, being established on the Islands.\nWe would not want economic development in Puerto Rico to be\nsimilarly frustrated.\nSubsection 9 (f) poses two issues. The first involves ex-\ntending to Puerto Rico observer status within the U.S.\nnegotiating delegations to international trade negotiations.\nAlthough this Department has no objection to the establishment\nof such observer status for Puerto Rico, we would defer to\nthe views of the President's Special Representative for Trade\nNegotiations on this matter.\n-6-\nThe second issue concerns the proposal that the U.S. seek\nto have Puerto Rico accepted by other developed countries\nas an \"associated developing state\" for purposes of inclusion\nin all benefits from any regional or worldwide system of\npreferences for developing countries. While we have no pro-\nblem with the concept of other developed countries according\n\"developing country status\" to Puerto Rico and extending it\npreference benefits, we believe that the United States is\nnot in a position to seek such status and benefits for\nPuerto Rico because the United States is not prepared to\nextend reciprocal \"beneficiary developing country\" status\nto other areas, such as the French West Indies, which are\nwithin the customs territory of a developed country. Moreover,\nthe opportunity for channeling developed country products\nthrough such receiving areas within a customs territory are\nso great and the problems of policing such an arrangement are\nso formidable as to render such arrangement unacceptable in\nmost instances.\nRelative to the subject matter of Section 9 is subsection\n2(d) which provides that the United States shall be re-\nsponsible for the international relations and defense of\nPuerto Rico, but that Puerto Rico may participate in in-\nternational organizations and may enter into educational,\ncultural, health, sporting, professional, industrial,\nagricultural, financial, commercial, scientific, or\ntechnical agreements with other countries consistent\nwith the functions of the United States as determined by the\nPresident of the United States and the Governor of Puerto Rico.\nThe implementation of agreements with foreign countries in\nmost of these areas would, no doubt, require the cooperation\nand agreement of the United States. In particular, almost\nany industrial, agricultural, or commercial agreement of\nany substance would require close consultation because of\nthe possible effects on the United States in view of the\ncommon market and dual citizenship aspects of the U.S.-\nPuerto Rican relationship. Financial arrangements would\nhave to be agreed to by the U.S. Treasury so long as the\ndollar is maintained as a common currency. Consideration\nwould also have to be given to requirements of the U.S.\nregulatory agencies, including such agencies as the U.S.\nPatent Office (which it is assumed will continue to protect\nand service the patents of Puerto Ricans). In short, to\n-7-\nmerely state that the U.S. will be responsible for foreign\nrelations and defense matters and Puerto Rico will have\nrelative freedom of action in other areas would seem to be\nunrealistic where almost any agreement could have significant\npolitical, economic, or social implications for the United States\nand would require intimate coordination with U.S. authorities.\nIt seems to us that merely to note that the agreements entered\ninto are to be \"consistent with. the functions of the United\nStates, as determined by the President of the United States\nand the Governor of the Free Associated State on a case-by-\ncase basis\" does not sufficiently take into acount the\nconsiderable substantive and procedural problems that may\nflow from the provisions of subsection 2(d). At a minimum,\nit is suggested that the commentary on subsection 2 (d) be\nrevised to elaborate on these problems of implementation.\nAlthough we have limited our comments to those sections of\nthe proposed Compact which fall within the particular\ninterest of this Department, we nevertheless feel it necessary\nalso to express our reservations on certain aspects of\nSection 12 of the proposal. Subsection 12 (d) allows\nPuerto Rico to be exempted from the coverage of certain enacted\nlegislation if the appropriate committee or committees of\nCongress by vote express agreement with the objections thereto\nof the Governor or Resident Commissioner of Puerto Rico.\nWhile we do not object to a legislative mechanism whereby\nobjections of Puerto Rico to proposed legislation that would\napply thereto can be expressed prior to enactment, we feel\nthat the arrangement proposed here may, in effect, allow a\ncommittee of the Congress to overrule and thereby frustrate\nthe intent of Congress and the President. Aside from policy\nobjections, it would appear that such a procedure raises\nissues of Constitutional dimension.\nIn addition, we question the procedural aspects of sub-\nsection 12(d). For example, what would be the result if\nthe appropriate committee of one House of Congress agreed\nwith the objections interposed and the appropriate committee\nof the other House reached the opposite conclusion? Would\nthe legislation enacted by the whole Congress and approved\nby the President then apply to Puerto Rico?\n-8-\nSubsection 12(e) is also of questionable merit. That\nsubsection provides that if Puerto Rico should object to\nthe application to it of any rule, regulation, or order of\na department or agency of the United States, such rule,\nregulation, or order would be inapplicable to Puerto Rico\nunless and until the department or agency finds and declares\nthat the application is essential to the interests of the\nUnited States and is compatible with the Compact. Such a\nprovision seems to us to be much too broad and burdening.\nAt the very least such a provision should not apply to\nrules, regulations, or orders which directly affect the\nrights and duties of citizens, common market, security\nand common defense, foreign affairs, and currency. Moreover,\nwe fail to see why present administrative procedure under\nthe Administrative Procedure Act which provides for the\nopportunity to comment on proposed administrative regulations\nand judicial review thereof is inadequate for the inter-\nposition and consideration of objections to proposed rules\nand regulations. Requiring a separate determination for\nPuerto Rico with an \"essential to the interests of the\nUnited States\" standard seems to us to be too severe and\nunwarranted.\nNotwithstanding this Department's expressed reservations\nto certain provisions of the proposed Compact, we welcome\nthis opportunity to reexamine the legal relationship\nbetween Puerto Rico and the United States, especially in\nthe area of trade and tariff policies. While in some\ncases our reservations are substantial, we feel that the\nproblems posed are not insurmountable. Indeed, we view\nthe proposed Compact as an important step in improving the\nrelationship between Puerto Rico and the United States.\nDirector, Robert Office Sincerely, RobitS of S. Milligan Policy Development\nOF\nDIPARTMENT\nCOMMERCE\nUNITED STATES DEPARTMENT OF COMMERCE\nOffice of the Secretary\nUNITED STATES OF AMERICA\nWashington, D.C. 20230\nNOV 4 1975\nMEMORANDUM FOR JAMES E. CONNOR\nSECRETARY OF THE CABINET\nTHE WHITE HOUSE\nFROM\n:\nRobert S. Milligan\nRSm\nDirector\nOffice of Policy Development\nSUBJECT: Department of Commerce Status Report on Evaluation\nof Proposed \"Compact of Permanent Union between\nPuerto Rico and the United States\"\nIn response to your request of October 23rd for comment on\nthe above subject, specialists are undertaking a detailed\nevaluation of the Compact's provisions which fall within the\nDepartment's expertise. In particular, we refer to SECTION 9\nor \"Common Market\" aspects of this proposed Compact.\nSECTION 9 is of crucial significance not only for the future\ndevelopment and well-being of the Puerto Rican economy, but is\nalso of great practical importance to the U.S. mainland business\ncommunity. For example, Puerto Rico is currently the world's\nlargest per capita purchaser of mainland United States goods.\nIn terms of volume, Puerto Rico with $2.9 billion of mainland\nU.S. exports in 1974, ranked an impressive eighth place vis-a-\nvis our other trading partners being surpassed only by Canada,\nJapan, West Germany, Mexico, United Kingdom, Netherlands and\nBrazil.\nFurthermore, we note that SECTION 9 has been in part revised\nfrom the April 12, 1975 version of the proposed Compact on which\nthis Department already commented informally by letter of June\n3, 1975 to Marlow W. Cook, Co-Chairman of the Ad Hoc Advisory\nGroup on Puerto Rico. As a result of these revisions, it now\nrequires further study and review.\nAs soon as an expeditious review is completed we will transmit\nour comments to you.\nREVOLUTION\nAMERICAN\nBICENTENNIAL\n1776-1976\nmemcrandum\nOF CALL\nTO:\nYOU WERE CALLED BY-\nYOU WERE VISITED BY-\nOF (Organization)\nMr. Radspielu\nX X 189-2058 189- 2058\nPHONE NO.\nPLEASE CALL\nCODE/EXT.\nWILL CALL AGAIN\nIS WAITING TO SEE YOU\nRETURNED YOUR CALL\nWISHES AN APPOINTMENT\nMESSAGE\nPolicy Development\naffice- Commerce Dept of\nPurto Rico compacts\nRECEIVED BY\nDATE\nSTANDARD FORM 63\nGETALO $ALD 332-389 FORD BRANT TIME\nGPO :1969-048-16--80 : 60841\n3-108\nREVISED AUGUST 1967\nGSA FPMR (41 CFR) 101-11.6\nOF\nTHE TREASURY THE DEPARTMENT\nTHE GENERAL COUNSEL OF THE TREASURY\nWASHINGTON, D.C. 20220\n1789\nNOV 5 1975\nMEMORANDUM FOR:\nThe Honorable\nJames E. Connor\nSecretary to the Cabinet\nFrom:\nRichard R. Albrecht.RA\nSubject:\nReport of the Ad Hoc Advisory Group\non Puerto Rico\nOn behalf of Secretary Simon, I am responding to\nyour request for the views of the Treasury Department on\nthe Report of the Ad Hoc Advisory Group on Puerto Rico\non the proposed Compact of Permanent Union Between Puerto\nRico and the United States.\nThe attached Treasury Memorandum discusses issues\nraised by the proposed Compact which are of interest to this\nDepartment.\nAttachment\nTREASURY MEMORANDUM\nThe following sections of the Report of the Ad Hoc Advisory\nGroup on Puerto Rico on the proposed Compact of Permanent Union\nBetween Puerto Rico and the United States are of interest to this\nDepartment:\nSection 2\nThis section outlines the proposed jurisdiction and authority\nof the Free Associated State of Puerto Rico. Puerto Rico would\ndelegate certain powers enumerated within this Compact to the\nUnited States. Powers not SO delegated would be reserved to Puerto\nRico. The enumerated powers delegated to the United States in the\nfield of taxation are ambiguous. This ambiguity could create many\nadministrative and substantive tax problems which would have to be\nresolved prior to enactment of the Compact. Also, the Compact\nshould delegate to the United States the specific power to assess,\ncollect and enforce the taxes imposed by the Internal Revenue Code\nof 1954 (hereinafter cited as \"Code\") with respect to all persons\nsubject to taxation under the Code.\nThe proposed Compact would grant the United States responsibility\nfor the foreign policy of Puerto Rico, while providing Puerto Rico\nwith jurisdiction over matters of a domestic nature. Presumably,\nthe United States power to determine Puerto Rico's foreign policy\nwould include the power to determine its oceans policy. Section 2(a)\nof the draft bill would grant Puerto Rico jurisdiction over its seas\nand seas adjacent to Puerto Rico. This language could be construed\nto authorize Puerto Rico, in the exercise of its sovereignty over\nits seas, to extend unilaterally its jurisdiction over oceans adjacent\nto its territory or territorial sea in conflict with United States\npolicy in the ongoing law of the sea negotiations. Accordingly, we\nrecommend that a sentence be added to section 2(a) to read: \"The\nFree Associated State of Puerto Rico shall exercise its national\nsovereignty over its seas in a manner consistent with the foreign\npolicy of the United States.\"\nIt is not clear from the wording. of this section whether the\ncoastwise laws of the United States, which cover the transportation\nof passengers and merchandise on water between points embraced by\nthe coastwise laws and towing and dredging operations in United States\nwaters (see 46 U.S.C. 289, 292, 315, and 883), would continue to be\napplicable to Puerto Rico itself, or only to water transportation\n- 2 -\nbetween Puerto Rico and the United States. The Department believes\nthe language in this section should be more specific in this regard.\nWe assume that such coastwise laws may continue to apply to Puerto\nRican waters provided that the conditions specified under the\nprovisions of section 3(b), are complied with, although this is far\nfrom clear. There is also some question of the applicability of other\nnavigation laws such as those relating to entry and clearance of\nvessels (see 19 U.S.C. 1434 and 1435 and 46 U.S.C. 91) and to the\nfisheries (46 U.S.C. 251 and 16 U.S.C. 1081-1094). Another question\nrelates to the applicability of laws relating to aircraft, such as the\nreport of arrival requirement, air cabotage prohibitions, etc.\nThe above-stated questions are raised in spite of and particularly\nin light of section 12(a), which states that \"The laws of the United\nStates applicable to the Free Associated State on the date of approval\nof this Compact shall continue in effect except to the extent repealed\nor modified by this Compact or incompatible with it, and except as\nhereafter modified, suspended or repealed in accordance with law.\"\nIt appears that section 2(a), is, in fact, incompatible with said section\n12(a), and that clarification is especially warranted in view thereof.\nExamples of how the draft bill might be revised to specify applicable\nstatutes are 19 U.S.C. 81e and 43 U.S.C. 1333(c) to (g).\nSection 2(d) would authorize Puerto Rico to participate in inter-\nnational organizations and to enter into international agreements with\nother countries with respect to, inter alia, financial and commercial\nrelations consistent with the functions of the United States, as\ndetermined by the President of the United States and the Governor of\nPuerto Rico on a case by case basis. This provision would authorize\nPuerto Rico to join organizations, such as the GATT, the IMF, and the\nIBRD and to enter into financial and commercial agreements with other\ncountries. Puerto Rico's exercise of this authority could conflict\nwith United States international economic and foreign policy. The draft\nCompact of Free Association which the United States has negotiated with\nthe Trust Territory of the Pacific Islands (Micronesia) provides for\nthe United States to have full responsibility for and authority over\nthe foreign affairs of Micronesia while enabling Micronesia to become\na member of certain international organizations of which the U.S. is\na member, to enter into agreements with certain international organiza-\ntions of which the U.S. is a member, and to request the U.S. to negotiate\ncertain types of bilateral agreements which would apply to Micronesia.\nThe preferable, most consistent course of action may be to make section\n2(d) less broad by revising it along the lines of similar provisions in\nthe draft Micronesian Compact.\nSection 2(d) should also be modified to provide specifically that\nPuerto Rico may not enter into income tax agreements with other countries\ncovering matters generally handled by conventions for the avoidance of\ndouble taxation.\n- 3 -\nSection 4\nThis section should be carefully restudied and redrafted.\nThe thrust of the provision is unclear in the light of present\nincome tax provisions of the Code. We would recommend that this\nsection be drafted to provide that the income tax laws presently\nin effect will remain in force except as may specifically be\nprovided to the contrary. Exceptions should then be carefully\nand specifically stated. Our specific objections to this section\nare summarized below.\n1. It is unclear whether Puerto Rico would continue to be a\npossession for purposes of the Code. Section 7701(c) of the Code\npresently provides as follows:\nSec. 7701. Definitions.\n\"(c) Commonwealth of Puerto Rico. Where\nnot otherwise distinctly expressed or manifestly\nincompatible with the intent thereof, references\nin this title to possessions of the United States\nshall be treated as also referring to the\nCommonwealth of Puerto Rico.\"\nEven in the event Puerto Rico is to continue as a possession, this\nparagraph (c) must be modified to refer to Puerto Rico as the Free\nAssociated State of Puerto Rico. A number of other income tax\nprovisions of the Code would also have to be amended to change\nformal references to Puerto Rico or reconsidered in view of the\nproposed compact.\n2. Section 931 of the Code provides an exclusion from gross\nincome for United States corporations carrying on a trade or\nbusiness in Puerto Rico but only if certain conditions are satisfied.\nSuch corporations may often be treated as resident in Puerto Rico\nby virtue of having engaged in business in Puerto Rico and, as such,\nwould be exempt from United States taxation of income from sources\nwithin Puerto Rico under section 4(b) without satisfying the\nconditions of section 931.\n3. Section 4(b) would provide that the Federal income tax may\nbe imposed only on the U.S. source and the foreign-source income\nof Puerto Rican residents, and that in computing the Federal income\n- 4 -\ntax on such amounts a credit would have to be allowed by the United\nStates for the Puerto Rican tax imposed on the same income.\nUnder present law, Federal income tax is imposed on the U.S.-\nand foreign-source income of Puerto Rican residents, but Puerto Rican-\nsource income is excluded from gross income under section 933 of the\nCode where the taxpayer is a \"bona fide resident\" of Puerto Rico.\nThe U.S. - and foreign-source income of Puerto Rican residents is\nalso subject to Puerto Rican income tax, but Puerto Rico allows a\nforeign tax credit for the U.S. tax imposed on such income. 26 P.R.L.A.\n§ 3131(b)(2). The proposed Compact would thus retain the first rule\nbut change the foreign tax credit rules.\nThe Department would have no objection to a rule which required\nthe United States to grant a foreign tax credit for the Puerto Rican\nincome tax imposed on foreign-source income, because that is the\nrule which would be in effect under Federal law if Puerto Rico did not\nallow a tax credit, for Puerto Rican purposes, for the U.S. tax\nimposed on such income. The Department would object, however, if the\nUnited States were to be required to give a foreign tax credit for\nthe Puerto Rican tax imposed on U.S. -source income. At the present\ntime, most U.S. -source income received by Puerto Rican residents\nescapes U.S. tax anyway, because Puerto Rican residents are entitled\nto claim the standard deduction, personal exemptions for all\ndependents, and if married to file a joint return with respect to\nU.S. - and foreign-source income subject to U.S. tax. The amount of\nadditional tax that Puerto Rico would collect if such a change were\ninstituted, moreover, would be only about $7 million annually. If\nthe United States were to agree to such a rule, however, there might\nbe pressure to grant similar rights to foreign countries in our\nincome tax treaties.\n4. Section 933 of the Code exempts from taxation income derived\nfrom Puerto Rican sources by an individual resident there only if he\nwas a Puerto Rican resident for his entire taxable year (or if he\nhad been such a resident for the 2 years preceding his change of\nresidence from Puerto Rico). Section 4(b) has no similar requirement\nof residence for the entire year.\n- 5 -\n5. Section 4 seems patently inconsistent with paragraphs 1\nthrough 3 of section 7651 of the Code which provide for administration\nand collection of taxes in possessions. Is it the intention of\nsection 4 to repeal these provisions as they apply to Puerto Rico?\n6. There are a number of other provisions of the Code not\npertaining to the income tax which have special application to\nPuerto Rico. See, for example, section 5001(a)(10), relating to\ndistilled spirits; section 5314, relating to applicability of certain\nlaws to Puerto Rico; section 7652, relating to shipments from Puerto\nRico to the United States; and section 7653, relating to shipments\nfrom the United States to Puerto Rico. The Department is uncertain\nof the impact of section 4(a) upon such sections. This should be\nclarified.\nSection 5\nSection 5( (3) apparently would require the United States to\nexempt from Federal taxes the interest earned on Puerto Rican govern-\nment bonds, and Puerto Rico to exempt from Puerto Rican taxes the\ninterest earned on bonds issued by the United States and by the States\nand political subdivisions thereof. This would confirm present law,\nsection 103(a)(1) of the Code, and 26 P.R.L.A. § 3022(b)(4)(A).\nSection 5(b) would direct officials of the United States and\nPuerto Rico to assist each other in the execution of their respective\nfunctions when compatible with their legal responsibilities and\nauthority. The Department would be opposed to officials of the\nInternal Revenue Service or Customs Service collecting taxes of the\nFree Associated State.\n- 6 -\nSection 8\nThe Department recommends that section 8 of the proposed com-\npact be amended to insert \"and Coinage\" in the heading and to read\nas follows:\n\"The currency and coinage of the United\nStates shall be the exclusive currency and\ncoinage of Puerto Rico. The laws of the\nUnited States relative to currency, coinage,\ngold and silver shall apply to Puerto Rico.\nSection 9\nSection 9(a) would prohibit the United States from imposing\nexcise taxes on articles imported into the United States from Puerto\nRico, and would prohibit Puerto Rico from imposing excise taxes on\narticles imported into Puerto Rico from the United States. We\nquestion whether the ramifications of such a proposal are fully\nunderstood. The effect of the proposal would be to repeal the\nFederal excise taxes on Puerto Rican rum, tobacco products, and\nrefined gasoline that are imported into the United States, and\nwhich account for about $100 million in Federal tax collections\neach year. Of this amount, about $60 million (attributable to\nalcohol and tobacco tax collections) is rebated by the U. S.\nTreasury to the Puerto Rican government. If the proposal were\nadopted, therefore, Puerto Rico would lose the $60 million which\nit now receives in rebates from alcohol and tobacco collections,\nand the United States would lose the remaining $40 million in\nrevenue attributable to gasoline tax collections.\nThe effect of the second half of this proposal -- which would\nprohibit Puerto Rico from imposing excise taxes on articles im-\nported into Puerto Rico from the United States -- would probably\nhave a much more severe impact on Puerto Rico than the first. The\nPuerto Rican Treasury is heavily dependent on excise taxes on\nimported goods, much more so than is the U. S. Treasury, and we\nunderstand that an emergency 5 percent excise tax on all imported\ngoods was recently imposed in order to help balance the Puerto\nRican budget. All Puerto Rican excise taxes are applied equally\nwhether the goods are imported from foreign countries, or from\nthe United States.\n- 7 -\nSection 9(b) purports to limit generally the applicability\nof section 739, title 48, United States Code, which states that\n\"The same tariffs, customs, and duties shall be levied, collected\nand paid upon all articles imported into Puerto Rico from ports\nother than those of the United States which are required by law\nto be collected upon articles imported into the United States from\nforeign countries. All books and pamphlets printed in the English\nlanguage shall be admitted into Puerto Rico free of duty when im-\nported from the United States.\"\nSection 9(c) would require that the income from customs duties,\nlicenses for imports, tariffs and taxes collected in Puerto Rico\nbe paid into the Treasury of Puerto Rico. Current law requires only\nthat income from duties and taxes collected in Puerto Rico shall be\npaid into the Puerto Rican Treasury. 48 U.S.C. 740. The intent of\nthe proposed section 9(c) obviously is to require that the import\nlicense fees on petroleum collected in Puerto Rico also be paid\ninto the Puerto Rican Treasury.\nThe Administration has agreed, however, that only that portion\nof the oil import license fees collected in Puerto Rico attributable\nto imported oil consumed in Puerto Rico should be covered over to\nthe Puerto Rican Treasury. If the full amount of the fees were paid\nover, Puerto Rico would receive a windfall to the extent that the\nfees were not borne by Puerto Rican consumers. Accordingly, the\nlanguage \"licenses for imports\" should be deleted from section 9(c).\nIt is unclear whether section 9(c) applies to income taxes.\nIf so, it would be inconsistent with section 7651 (2) (A) of the\nCode, which provides that all taxes collected by the Secretary in\nPuerto Rico must be paid into the Treasury of the United States.\nOn this point, section 7809 of the Code is very relevant, since\nit provides that collections under the internal revenue laws must\nbe paid into the United States Treasury unless otherwise provided.\nOne of the exceptions is under section 7652(a) (3), which provides\nthat certain collections of internal revenue taxes in Puerto Rico\nare to be covered into the Treasury of Puerto Rico, after deduc-\ntion of expenses under section 5314(a) (4).\n- 8 -\nSection 9(d) would authorize Puerto Rico to levy, increase,\nreduce or eliminate tariffs on goods imported into Puerto Rico\nfrom foreign countries or transshipped through the United States,\nprovided that it exercises this authority \"in a manner consistent\nwith the international obligations of the United States and after\nprior consultation and coordination with the Federal authorities\nconcerned.\" In addition, exercise of this authority would be\nconditioned upon the establishment of procedures mutually agreed\nupon by the United States and Puerto Rico to (1) assure con-\nformity with international obligations; (2) assure that articles\ncontaining components shipped or transshipped from Puerto Rico\nto the rest of the United States customs territory or from there\nto Puerto Rico conform respectively to the laws; and (3) assure\ncontinuous communication and coordination between the United\nStates Executive Branch and Puerto Rico on economic and trade\npolicy and implementation.\nSection 9(e) would prohibit any article imported into Puerto\nRico at a tariff rate lower than the applicable U. S. tariff rate\nfrom being shipped to any other point in the United States customs\nterritory unless the appraised value on shipment contains at least\n35 percent in value added in Puerto Rico.\nSection 9(d) would grant Puerto Rico wide latitude to estab-\nlish separate tariffs. In view of the fact that most U. S. tariff\nrates are bound under the GATT, its authority to increase tariff\nlevels above the U. S. rates would be limited by the requirement\nthat such increases be consistent with United States international\nobligations. Puerto Rico would have, however, virtually unlimited\ndiscretion to reduce or eliminate tariffs.\nThe economic relationship between the United States and Puerto\nRico presently represents a true common market possessing unrestricted\ntrade between the two areas, a common currency, common economic\npolicies, and a common external tariff. The proposed compact would\ntake a step backward from a common market and economic union.\nThe proposed compact would create a free trade area with dif-\nferent external tariffs. The United States has discouraged free\ntrade agreements for sound commercial policy reasons. Free trade\nagreements lead to trade distortions because trade can respond to\ndifferences in tariffs between the two areas rather than dif-\nferences in relative efficiencies.\n- 9 -\nThere are practical problems in maintaining free trade between\ntwo areas with different external tariffs. A major difficulty lies\nin preventing goods from being imported into the area with the lower\ntariff for re-exportation to the high tariff area, thereby avoiding\nthe latter's higher tariffs. To some degree this problem is miti-\ngated by rules of origin and other regulations, but loopholes\nalways remain.\nSection 9(e) of the proposed compact would attempt to deal\nwith this problem by requiring that 35 percent of value of an\nimported product be added in Puerto Rico before it can be shipped\nto the United States. This is similar to the rule of origin appli-\ncable to our Generalized System of Preferences (GSP), which was\nauthorized by the Trade Act of 1974. However, the GSP provisions\ncontain built-in safeguards, e.g., the tariff preferences are\napplicable only to nonsensitive products, and are subject to a\n$25 million limit. Escape clause relief is available if such\nimports cause or threaten injury. None of these safeguards would\napply to Puerto Rico under the compact. Thus, goods could be\nimported into Puerto Rico, processed sufficiently to meet the\n35 percent rule, and then exported to the United States duty free\nwithout limitation. The absence of safeguards, or of any other\nmeasures to prevent injury to U. S. producers, makes the proposal\nunacceptable on practical as well as policy grounds.\nSubsection (d) would also provide that \"Puerto Rico shall\ncontinue to enjoy the right to levy tariffs upon or otherwise to\nrestrict the import of coffee from foreign countries or the United\nStates.\" However, under current law, Puerto Rico has authority\nonly to impose duties on imports of coffee from foreign countries\nor from the United States if the coffee is grown in a foreign coun-\ntry. 19 U.S.C. 1319. The Department is opposed to this provision\nto the extent that it would modify existing law.\nFinally, with regard to customs procedures, the Department is\nuncertain of the overall applicability of section 2(b) and section\n3(b) to duty on vessel repairs (19 U.S.C. 1466) and tonnage tax\n(46 U.S.C. 121 and 128), and of the applicability of the Outer\nContinental Shelf Lands Act and the Deepwater Ports Act of 1974.\nSection 12\nSection 12 (a) would provide that the laws of the United\nStates applicable to the Free Associated State shall continue in\neffect except to the extent repealed or modified by the compact,\nor incompatible with it.\n- 10 -\nThere should be specific listing of the proposal's effect\non relevant laws rather than reliance on the general statement\nin section 12(a).\nSection 12(b) would provide that no new Congressional enact-\nments would be applicable to Puerto Rico except as provided in\nsubsections (c) and (d). Subsection (d) would provide that laws\nwhich directly affect the rights and duties of citizens and the\nsecurity and common defense, and laws which relate to foreign\naffairs and currency would apply. It is unclear whether it is\nintended that future Federal tax legislation affect Puerto Rican\ncitizens. It is uncertain if payment of taxes would be considered\na duty for purposes of the Compact and whether application of\nFederal tax legislation to Puerto Rico would be essential to\nUnited States interests and would be compatible with the Compact.\nSection 12(e) would provide that new Federal rules, regula-\ntions, and orders will be applicable to Puerto Rico over its\nobjection if the promulgating authority makes a finding and\ndeclaration that application to Puerto Rico is essential to the\ninterests of the United States and compatible with the Compact.\nSubjection of such declarations to judicial review will add to\nthe uncertainty of whether specific Federal tax rules, regula-\ntions, and orders may affect Puerto Rican citizens.\nTo summarize, it is not clear from the proposed compact\nwhat legal status is intended for the Commonwealth of Puerto\nRico. If it is intended that Puerto Rico be treated as a foreign\ncountry for purposes of the Internal Revenue Code of 1954, this\nshould be expressed. In the alternative, if Puerto Rico is to\nbe considered a possession, this should be stated. The proposed\ncompact may represent an attempt to assign to Puerto Rico a legal\nstatus heretofore unknown and unrecognized or contemplated by the\nCode. If this be the case and this compact were adopted, many\nprovisions of the Code would have to be amended to clarify their\napplication to Puerto Rico. Further, new provisions may have to\nbe added to the Code to deal exclusively with matters of income\ntaxation involving both the United States and Puerto Rico.\nIf one of the objectives of the proposal is to foster the\ndevelopment of Puerto Rico as a tax haven in order to boost its\neconomy, consideration should be given to whether subpart F\n(secs. 951 and following) of the Code is incompatible with such\nan objective.\n- 11 -\nSection 16\nSection 16 (d) would require that the U. S. District Court not\nintervene to prevent the collection of any tax imposed under Puerto\nRican law. It appears to us that such a rule might be unconstitu-\ntional under article III, § 2 of the United States Constitution\nwhere the tax in question violated the Compact between the United\nStates and Puerto Rico. This is because the Compact would be\npassed in the form of an Act of Congress, and any violation by\nthe Puerto Rican government of the Compact would probably consti-\ntute a Federal question. The Department of Justice should consider\nthis issue.\nTREASURY MEMORANDUM\nThe following sections of the Report of the Ad Hoc Advisory\nGroup on Puerto Rico on the proposed Compact of Permanent Union\nBetween Puerto Rico and the United States are of interest to this\nDepartment:\nSection 2\nThis section outlines the proposed jurisdiction and authority\nof the Free Associated State of Puerto Rico. Puerto Rico would\ndelegate certain powers enumerated within this Compact to the\nUnited States. Powers not SO delegated would be reserved to Puerto\nRico. The enumerated powers delegated to the United States in the\nfield of taxation are ambiguous. This ambiguity could create many\nadministrative and substantive tax problems which would have to be\nresolved prior to enactment of the Compact. Also, the Compact\nshould delegate to the United States the specific power to assess,\ncollect and enforce the taxes imposed by the Internal Revenue Code\nof 1954 (hereinafter cited as \"Code\") with respect to all persons\nsubject to taxation under the Code.\nThe proposed Compact would grant the United States responsibility\nfor the foreign policy of Puerto Rico, while providing Puerto Rico\nwith jurisdiction over matters of a domestic nature. Presumably,\nthe United States power to determine Puerto Rico's foreign policy\nwould include the power to determine its oceans policy. Section 2(a)\nof the draft bill would grant Puerto Rico jurisdiction over its seas\nand seas adjacent to Puerto Rico. This language could be construed\nto authorize Puerto Rico, in the exercise of its sovereignty over\nits seas, to extend unilaterally its jurisdiction over oceans adjacent\nto its territory or territorial sea in conflict with United States\npolicy in the ongoing law of the sea negotiations. Accordingly, we\nrecommend that a sentence be added to section 2(a) to read: \"The\nFree Associated State of Puerto Rico shall exercise its national\nsovereignty over its seas in a manner consistent with the foreign\npolicy of the United States.\"\nIt is not clear from the wording of this section whether the\ncoastwise laws of the United States, which cover the transportation\nof passengers and merchandise on water between points embraced by\nthe coastwise laws and towing and dredging operations in United States\nwaters (see 46 U.S.C. 289, 292, 315, and 883), would continue to be\napplicable to Puerto Rico itself, or only to water transportation\n- 2 -\nbetween Puerto Rico and the United States. The Department believes\nthe language in this section should be more specific in this regard.\nWe assume that such coastwise laws may continue to apply to Puerto\nRican waters provided that the conditions specified under the\nprovisions of section 3(b), are complied with, although this is far\nfrom clear. There is also some question of the applicability of other\nnavigation laws such as those relating to entry and clearance of\nvessels (see 19 U.S.C. 1434 and 1435 and 46 U.S.C. 91) and to the\nfisheries (46 U.S.C. 251 and 16 U.S.C. 1081-1094). Another question\nrelates to the applicability of laws relating to aircraft, such as the\nreport of arrival requirement, air cabotage prohibitions, etc.\nThe above-stated questions are raised in spite of and particularly\nin light of section 12(a), which states that \"The laws of the United\nStates applicable to the Free Associated State on the date of approval\nof this Compact shall continue in effect except to the extent repealed\nor modified by this Compact or incompatible with it, and except as\nhereafter modified, suspended or repealed in accordance with law. \"\nIt appears that section 2(a), is, in fact, incompatible with said section\n12(a), and that clarification is especially warranted in view thereof.\nExamples of how the draft bill might be revised to specify applicable\nstatutes are 19 U.S.C. 81e and 43 U.S.C. 1333(c) to (g).\nSection 2(d) would authorize Puerto Rico to participate in inter-\nnational organizations and to enter into international agreements with\nother countries with respect to, inter alia, financial and commercial\nrelations consistent with the functions of the United States, as\ndetermined by the President of the United States and the Governor of\nPuerto Rico on a case by case basis. This provision would authorize\nPuerto Rico to join organizations, such as the GATT, the IMF, and the\nIBRD and to enter into financial and commercial agreements with other\ncountries. Puerto Rico's exercise of this authority could conflict\nwith United States international economic and foreign policy. The draft\nCompact of Free Association which the United States has negotiated with\nthe Trust Territory of the Pacific Islands (Micronesia) provides for\nthe United States to have full responsibility for and authority over\nthe foreign affairs of Micronesia while enabling Micronesia to become\na member of certain international organizations of which the U.S. is\na member, to enter into agreements with certain international organiza-\ntions of which the U.S. is a member, and to request the U.S. to negotiate\ncertain types of bilateral agreements which would apply to Micronesia.\nThe preferable, most consistent course of action may be to make section\n2(d) less broad by revising it along the lines of similar provisions in\nthe draft Micronesian Compact.\nSection 2(d) should also be modified to provide specifically that\nPuerto Rico may not enter into income tax agreements with other countries\ncovering matters generally handled by conventions for the avoidance of\ndouble taxation.\n- 3 --\nSection 4\nThis section should be carefully restudied and redrafted.\nThe thrust of the provision is unclear in the light of present\nincome tax provisions of the Code. We would recommend that this\nsection be drafted to provide that the income tax laws presently\nin effect will remain in force except as may specifically be\nprovided to the contrary. Exceptions should then be carefully\nand specifically stated. Our specific objections to this section\nare summarized below.\n1. It is unclear whether Puerto Rico would continue to be a\npossession for purposes of the Code. Section 7701(c) of the Code\npresently provides as follows:\nSec. 7701. Definitions.\n\"(c) Commonwealth of Puerto Rico. Where\nnot otherwise distinctly expressed or manifestly\nincompatible with the intent thereof, references\nin this title to possessions of the United States\nshall be treated as also referring to the\nCommonwealth of Puerto Rico.\"\nEven in the event Puerto Rico is to continue as a possession, this\nparagraph (c) must be modified to refer to Puerto Rico as the Free\nAssociated State of Puerto Rico. A number of other income tax\nprovisions of the Code would also have to be amended to change\nformal references to Puerto Rico or reconsidered in view of the\nproposed compact.\n2. Section 931 of the Code provides an exclusion from gross\nincome for United States corporations carrying on a trade or\nbusiness in Puerto Rico but only if certain conditions are satisfied.\nSuch corporations may often be treated as resident in Puerto Rico\nby virtue of having engaged in business in Puerto Rico and, as such,\nwould be exempt from United States taxation of income from sources\nwithin Puerto Rico under section 4(b) without satisfying the\nconditions of section 931.\n3. Section 4(b) would provide that the Federal income tax may\nbe imposed only on the U.S. source and the foreign-source income\nof Puerto Rican residents, and that in computing the Federal income\n- 4 -\ntax on such amounts a credit would have to be allowed by the United\nStates for the Puerto Rican tax imposed on the same income.\nUnder present law, Federal income tax is imposed on the U.S.-\nand foreign-source income of Puerto Rican residents, but Puerto Rican-\nsource income is excluded from gross income under section 933 of the\nCode where the taxpayer is a \"bona fide resident\" of Puerto Rico.\nThe U.S. - and foreign-source income of Puerto Rican residents is\nalso subject to Puerto Rican income tax, but Puerto Rico allows a\nforeign tax credit for the U.S. tax imposed on such income. 26 P.R.L.A.\n§ 3131(b)(2). The proposed Compact would thus retain the first rule\nbut change the foreign tax credit rules.\nThe Department would have no objection to a rule which required\nthe United States to grant a foreign tax credit for the Puerto Rican\nincome tax imposed on foreign-source income, because that is the\nrule which would be in effect under Federal law if Puerto Rico did not\nallow a tax credit, for Puerto Rican purposes, for the U.S. tax\nimposed on such income. The Department would object, however, if the\nUnited States were to be required to give a foreign tax credit for\nthe Puerto Rican tax imposed on U.S.-source income. At the present\ntime, most U.S. -source income received by Puerto Rican residents\nescapes: U.S. tax anyway, because Puerto Rican residents are entitled\nto claim the standard deduction, personal exemptions for all\ndependents, and if married to file a joint return with respect to\nU.S. - and foreign-source income subject to U.S. tax. The amount of\nadditional tax that Puerto Rico would collect if such a change were\ninstituted, moreover, would be only about $7 million annually. If\nthe United States were to agree to such a rule, however, there might\nbe pressure to grant similar rights to foreign countries in our\nincome tax treaties.\n4. Section 933 of the Code exempts from taxation income derived\nfrom Puerto Rican sources by an individual resident there only if he\nwas a Puerto Rican resident for his entire taxable year (or if he\nhad been such a resident for the 2 years preceding his change of\nresidence from Puerto Rico). Section 4(b) has no similar requirement\nof residence for the entire year.\n- 5 -\n5. Section 4 seems patently inconsistent with paragraphs 1\nthrough 3 of section 7651 of the Code which provide for administration\nand collection of taxes in possessions. Is it the intention of\nsection 4 to repeal these provisions as they apply to Puerto Rico?\n6. There are a number of other provisions of the Code not\npertaining to the income tax which have special application to\nPuerto Rico. See, for example, section 5001(a)(10), relating to\ndistilled spirits; section 5314, relating to applicability of certain\nlaws to Puerto Rico; section 7652, relating to shipments from Puerto\nRico to the United States; and section 7653, relating to shipments\nfrom the United States to Puerto Rico. The Department is uncertain\nof the impact of section 4(a) upon such sections. This should be\nclarified.\nSection 5\nSection 5(a)(3) apparently would require the United States to\nexempt from Federal taxes the interest earned on Puerto Rican govern-\nment bonds, and Puerto Rico to exempt from Puerto Rican taxes the\ninterest earned on bonds issued by the United States and by the States\nand political subdivisions thereof. This would confirm present law,\nsection 103(a)(1) of the Code, and 26 P.R.L.A. § 3022(b)(4)(A).\nSection 5(b) would direct officials of the United States and\nPuerto Rico to assist each other in the execution of their respective\nfunctions when compatible with their legal responsibilities and\nauthority. The Department would be opposed to officials of the\nInternal Revenue Service or Customs Service collecting taxes of the\nFree Associated State.\n- 6 -\nSection 8\nThe Department recommends that section 8 of the proposed com-\npact be amended to insert \"and Coinage\" in the heading and to read\nas follows:\n\"The currency and coinage of the United\nStates shall be the exclusive currency and\ncoinage of Puerto Rico. The laws of the\nUnited States relative to currency, coinage,\ngold and silver shall apply to Puerto Rico.\nSection 9\nSection 9(a) would prohibit the United States from imposing\nexcise taxes on articles imported into the United States from Puerto\nRico, and would prohibit Puerto Rico from imposing excise taxes on\narticles imported into Puerto Rico from the United States. We\nquestion whether the ramifications of such a proposal are fully\nunderstood. The effect of the proposal would be to repeal the\nFederal excise taxes on Puerto Rican rum, tobacco products, and\nrefined gasoline that are imported into the United States, and\nwhich account for about $100 million in Federal tax collections\neach year. Of this amount, about $60 million (attributable to\nalcohol and tobacco tax collections) is rebated by the U. S.\nTreasury to the Puerto Rican government. If the proposal were\nadopted, therefore, Puerto Rico would lose the $60 million which\nit now receives in rebates from alcohol and tobacco collections,\nand the United States would lose the remaining $40 million in\nrevenue attributable to gasoline tax collections.\nThe effect of the second half of this proposal -- which would\nprohibit Puerto Rico from imposing excise taxes on articles im-\nported into Puerto Rico from the United States -- would probably\nhave a much more severe impact on Puerto Rico than the first. The\nPuerto Rican Treasury is heavily dependent on excise taxes on\nimported goods, much more so than is the U. S. Treasury, and we\nunderstand that an emergency 5 percent excise tax on all imported\ngoods was recently imposed in order to help balance the Puerto\nRican budget. All Puerto Rican excise taxes are applied equally\nwhether the goods are imported from foreign countries, or from\nthe United States.\n- 7 -\nSection 9(b) purports to limit generally the applicability\nof section 739, title 48, United States Code, which states that\n\"The same tariffs, customs, and duties shall be levied, collected\nand paid upon all articles imported into Puerto Rico from ports\nother than those of the United States which are required by law\nto be collected upon articles imported into the United States from\nforeign countries. All books and pamphlets printed in the English\nlanguage shall be admitted into Puerto Rico free of duty when im-\nported from the United States.\"\nSection 9(c) would require that the income from customs duties,\nlicenses for imports, tariffs and taxes collected in Puerto Rico\nbe paid into the Treasury of Puerto Rico. Current law requires only\nthat income from duties and taxes collected in Puerto Rico shall be\npaid into the Puerto Rican Treasury. 48 U.S.C. 740. The intent of\nthe proposed section 9(c) obviously is to require that the import\nlicense fees on petroleum collected in Puerto Rico also be paid\ninto the Puerto Rican Treasury.\nThe Administration has agreed, however, that only that portion\nof the oil import license fees collected in Puerto Rico attributable\nto imported oil consumed in Puerto Rico should be covered over to\nthe Puerto Rican Treasury. If the full amount of the fees were paid\nover, Puerto Rico would receive a windfall to the extent that the\nfees were not borne by Puerto Rican consumers. Accordingly, the\nlanguage \"licenses for imports\" should be deleted from section (c).\nIt is unclear whether section 9(c) applies to income taxes.\nIf so, it would be inconsistent with section 7651 (2) (A) of the\nCode, which provides that all taxes collected by the Secretary in\nPuerto Rico must be paid into the Treasury of the United States.\nOn this point, section 7809 of the Code is very relevant, since\nit provides that collections under the internal revenue laws must\nbe paid into the United States Treasury unless otherwise provided.\nOne of the exceptions is under section 7652 (a) (3), which provides\nthat certain collections of internal revenue taxes in Puerto Rico\nare to be covered into the Treasury of Puerto Rico, after deduc-\ntion of expenses under section 5314(a)(4).\n- 8\nSection 9(d) would authorize Puerto Rico to levy, increase,\nreduce or eliminate tariffs on goods imported into Puerto Rico\nfrom foreign countries or transshipped through the United States,\nprovided that it exercises this authority \"in a manner consistent\nwith the international obligations of the United States and after\nprior consultation and coordination with the Federal authorities\nconcerned.\" In addition, exercise of this authority would be\nconditioned upon the establishment of procedures mutually agreed\nupon by the United States and Puerto Rico to (1) assure con-\nformity with international obligations; (2) assure that articles\ncontaining components shipped or transshipped from Puerto Rico\nto the rest of the United States customs territory or from there\nto Puerto Rico conform respectively to the laws; and (3) assure\ncontinuous communication and coordination between the United\nStates Executive Branch and Puerto Rico on economic and trade\npolicy and implementation.\nSection 9(e) would prohibit any article imported into Puerto\nRico at a tariff rate lower than the applicable U. S. tariff rate\nfrom being shipped to any other point in the United States customs\nterritory unless the appraised value on shipment contains at least\n35 percent in value added in Puerto Rico.\nSection 9(d) would grant Puerto Rico wide latitude to estab-\nlish separate tariffs. In view of the fact that most U. S. tariff\nrates are bound under the GATT, its authority to increase tariff\nlevels above the U. S. rates would be limited by the requirement\nthat such increases be consistent with United States international\nobligations. Puerto Rico would have, however, virtually unlimited\ndiscretion to reduce or eliminate tariffs.\nThe economic relationship between the United States and Puerto\nRico presently represents a true common market possessing unrestricted\ntrade between the two areas, a common currency, common economic\npolicies, and a common external tariff. The proposed compact would\ntake a step backward from a common market and economic union.\nThe proposed compact would create a free trade area with dif-\nferent external tariffs. The United States has discouraged free\ntrade agreements for sound commercial policy reasons. Free trade\nagreements lead to trade distortions because trade can respond to\ndifferences in tariffs between the two areas rather than dif-\nferences in relative efficiencies.\n- 9 -\nThere are practical problems in maintaining free trade between\ntwo areas with different external tariffs. A major difficulty lies\nin preventing goods from being imported into the area with the lower\ntariff for re-exportation to the high tariff area, thereby avoiding\nthe latter's higher tariffs. To some degree this problem is miti-\ngated by rules of origin and other regulations, but loopholes\nalways remain.\nSection 9(e) of the proposed compact would attempt to deal\nwith this problem by requiring that 35 percent of value of an\nimported product be added in Puerto Rico before it can be shipped\nto the United States. This is similar to the rule of origin appli-\ncable to our Generalized System of Preferences (GSP), which was\nauthorized by the Trade Act of 1974. However, the GSP provisions\ncontain built-in safeguards, e.g., the tariff preferences are\napplicable only to nonsensitive products, and are subject to a\n$25 million limit. Escape clause relief is available if such\nimports cause or threaten injury. None of these safeguards would\napply to Puerto Rico under the compact. Thus, goods could be\nimported into Puerto Rico, processed sufficiently to meet the\n35 percent rule, and then exported to the United States duty free\nwithout limitation. The absence of safeguards, or of any other\nmeasures to prevent injury to U. S. producers, makes the proposal\nunacceptable on practical as well as policy grounds.\nSubsection (d) would also provide that \"Puerto Rico shall\ncontinue to enjoy the right to levy tariffs upon or otherwise to\nrestrict the import of coffee from foreign countries or the United\nStates.' However, under current law, Puerto Rico has authority\nonly to impose duties on imports of coffee from foreign countries\nor from the United States if the coffee is grown in a foreign coun-\ntry. 19 U.S.C. 1319. The Department is opposed to this provision\nto the extent that it would modify existing law.\nFinally, with regard to customs procedures, the Department is\nuncertain of the overall applicability of section 2(b) and section\n3(b) to duty on vessel repairs (19 U.S.C. 1466) and tonnage tax\n(46 U.S.C. 121 and 128), and of the applicability of the Outer\nContinental Shelf Lands Act and the Deepwater Ports Act of 1974.\nSection 12\nSection 12 (a) would provide that the laws of the United\nStates applicable to the Free Associated State shall continue in\neffect except to the extent repealed or modified by the compact,\nor incompatible with it.\n- 10 -\nThere should be specific listing of the proposal's effect\non relevant laws rather than reliance on the general statement\nin section 12(a).\nSection 12(b) would provide that no new Congressional enact-\nments would be applicable to Puerto Rico except as provided in\nsubsections (c) and (d). Subsection (d) would provide that laws\nwhich directly affect the rights and duties of citizens and the\nsecurity and common defense, and laws which relate to foreign\naffairs and currency would apply. It is unclear whether it is\nintended that future Federal tax legislation affect Puerto Rican\ncitizens. It is uncertain if payment of taxes would be considered\na duty for purposes of the Compact and whether application of\nFederal tax legislation to Puerto Rico would be essential to\nUnited States interests and would be compatible with the Compact.\nSection 12(e) would provide that new Federal rules, regula-\ntions, and orders will be applicable to Puerto Rico over its\nobjection if the promulgating authority makes a finding and\ndeclaration that application to Puerto Rico is essential to the\ninterests of the United States and compatible with the Compact.\nSubjection of such declarations to judicial review will add to\nthe uncertainty of whether specific Federal tax rules, regula-\ntions, and orders may affect Puerto Rican citizens.\nTo summarize, it is not clear from the proposed compact\nwhat legal status is intended for the Commonwealth of Puerto\nRico. If it is intended that Puerto Rico be treated as a foreign\ncountry for purposes of the Internal Revenue Code of 1954, this\nshould be expressed. In the alternative, if Puerto Rico is to\nbe considered a possession, this should be stated. The proposed\ncompact may represent an attempt to assign to Puerto Rico a legal\nstatus heretofore unknown and unrecognized or contemplated by the\nCode. If this be the case and this compact were adopted, many\nprovisions of the Code would have to be amended to clarify their\napplication to Puerto Rico. Further, new provisions may have to\nbe added to the Code to deal exclusively with matters of income\ntaxation involving both the United States and Puerto Rico.\nIf one of the objectives of the proposal is to foster the\ndevelopment of Puerto Rico as a tax haven in order to boost its\neconomy, consideration should be given .to whether subpart F\n(secs. 951 and following) of the Code is incompatible with such\nan objective.\n- 11 -\nSection 16\nSection 16 (d) would require that the U. S. District Court not\nintervene to prevent the collection of any tax imposed under Puerto\nRican law. It appears to us that such a rule might be unconstitu-\ntional under article III, § 2 of the United States Constitution\nwhere the tax in question violated the Compact between the United\nStates and Puerto Rico. This is because the Compact would be\npassed in the form of an Act of Congress, and any violation by\nthe Puerto Rican government of the Compact would probably consti-\ntute a Federal question. The Department of Justice should consider\nthis issue.\nDEPARTMENT OF AGRICULTURE\nAGRICULTURE\nOFFICE OF THE SECRETARY\nWASHINGTON, D. C. 20250\nNovember 5, 1975\nSUBJECT: dvisory Group on Puerto Rico\nFROM:\nJ. Phil Campbell, Acting Secretary\nTO: Connor, Secretary to the Cabinet\nThe White House\nWe have reviewed the Report of the Ad Hoc Advisory Group on Puerto\nRico entitled \"Compact of Permanent Union Between Puerto Rico and\nthe United States\". In particular, we are concerned with the\nimplementation of such provisions as those contained in Article 3,\nLegal Title to Crown Lands and Navigable Waters; Article 12,\nApplicability of Federal Laws; Article 13, Assignment of Federal\nFunctions to the Free Associated State; Article 15, Judicial Review;\nand Article 18, Ecology.\nIt is not possible to determine from either the proposed compact\nor the commentary contained in the report, the manner in which the\nprovisions of the Compact would in fact be administered by the Free\nAssociated State. We do not, therefore, know precisely the degree\nto which programs of the Department of Agriculture would be affected\nin the event of ratification of the Compact. However, we have noted\nbelow some of the problems which might arise for the Department and\nPuerto Rico if the Compact is adopted:\n1. Article 3. Legal Title to Crown Lands and\nNavigable Waters.\nSubsection a. of this Article transfers title to all land and other\nproperty of the United States in Puerto Rico acquired by cession\nunder the treaty of peace with Spain to the government of the Free\nAssociated State. USDA administers such Federal lands in Puerto\nRico as those within the jurisdiction of the Forest Service and the\nAgricultural Research Service. To the degree that title to these\nlands was acquired by the United States under the treaty of peace\nwith Spain, they would be transferred to the Free Associated State.\nAlthough the United States could continue to hold to and use such\nproperty for public purposes, disputes as to the exercise of rights\nby the United States in lands, the timber thereon, any any other\npropriety interests it may have therein might arise between the\nDepartment of Agriculture and the Free Associated State.\n2\n2. Article 12. Applicability of Federal Laws.\nIn general this Article provides the laws of the United States\napplicable to Puerto Rico on the date of approval of the Compact\nwill continue in effect unless they are repealed or are \"modified\nby this Compact or incompatible with it.\" In addition, laws\nenacted by Congress in the future would not be applicable to the\nFree Associated State unless such laws explicitly referred to the\nFree Associated State and were incompatible with the Compact.\nFurther, the Free Associated State would have the right to object\nto the applicability of future laws prior to their passage and if\nthe committee of Congress concerned expressed agreement with such\nobjections the Free Associated State would be exempt from such laws.\nRules, regulations and orders issued by USDA and other agencies of\nthe United States would apply unless they are incompatible with the\nCompact. While the agency involved would have the right to decide\nwhether a rule, regulation, or order applied to the Free Associated\nState, that determination would be subject to judicial review.\nThese provisions of the Compact would significantly change the\nrelationship which now exists between the United States and Puerto\nRico with respect to the effectiveness of Federal laws and regula-\ntions in Puerto Rico. In the case of USDA such a change might\nimpair the ability of the Department to carry out programs of the\nForest Service, Farmers Home Administration, and the Food and Nutri-\ntion Service. The latter two programs involve the expenditure of\nlarge amounts of money in Puerto Rico and operations under these\nprograms might require substantial change if the Compact were rati-\nfied and the Free Associated State exercised its rights under this\nArticle to challenge the applicability of future legislation and\nregulations.\n3. Article 13. Assignment of Federal Functions to\nthe Free Associated State.\nThis Article contemplates that the United States would, from time\nto time, transfer certain of its functions to the Free Associated\nState if that State agreed to perform them. Provision is also made\nfor maximum flexibility in the use of funds appropriated by Congress\nfor the Free Associated State consonant with the purposes and\nobjectives of the appropriations so that the use of the funds may be\nadapted to circumstances considered relevant by the State to the\nadministration of whatever program might be involved. Under this\nArticle it appears that agencies of the Federal Government, such as\nUSDA, could transfer operations such as those involved in the food\nstamp program or the programs of the Farmers Home Administration to\n3\nthe government of the Free Associated State for administrationin\nthat jurisdiction. The Article, under certain circumstances,\nwould permit utilization of funds appropriated by Congress for such\nprograms in the Free Associated State in a manner different from\nthat applied in the United States, if that state concluded that\nbecause of different economic, social and administrative conditions\nmodifications in the program were appropriate.\n4. Article 15. Judicial Review.\nProvision is made in this Article for concurrent jurisdiction for\nthe courtsof the United States and of the Free Associated State\nwith respect to justiciable questions arising under the Compact.\nActions involving such questions brought in the courts of the Free\nAssociated State may not be removed to the Federal District Courts.\nWhile in the final analysis review might be had by the Supreme\nCourt of the United States from decisions on such questions, it\nwould be possible for disputed issues involving the applicability\nand construction of the terms of the Compact to USDA programs to be\nheard by the courts of the Free Associated State, even though\nsubstantial Federal questions might be involved.\n5. Article 18. Ecology.\nThis Article would vest the primary authority to regulate the\necology and environmental quality in Puerto Rico in the Free\nAssociated State. It is possible, therefore, that the government\nof that State might change or modify existing principles of law\nrelating to the protection of the environment. Such changes would\nimpinge upon programs of the USDA in Puerto Rico. In particular,\nit would seem likely that operations of the Forest Service in its\nmanagement of Federal lands in the State would be most immediately\naffected.\nIt is possible that further analysis of the Compact would develop\nmore fully these and other concerns with respect to areas of\nDepartmental administrative responsibility. The proposed Compact\nis, of course, drafted in broad terms and much of the practical\nimpact which could occur if the Compact were adopted cannot be\ndetermined without operating experience. Accordingly, the comments\nabove should be considered as merely suggestive of areas for\nconsideration, discussion and analysis.\nCOMPACT OF PERMANENT UNION BETWEEN\nPUERTO RICO AND THE UNITED STATES\nTHE WHITE HOUSE\nWASHINGTON\nJim -\nJim Falk gave these reports to\nDave Hoopes with the request that\nwe staff them to Domestic Council\nand NSC to prepare recommendations\nand response.\nHe said Cannon has acknowledged\n(I am checking this out with Cannon's\noffice -- we should have a copy of\nmemo) acknowledgment)\nAlso Jim Falk suggests that it\nbe staffed to all Cabinet Members.\nI have given it to Bob Linder to\nrecord.\nTrudy\nAD HOC ADVISORY GROUP\nON PUERTO RICO\n1016 16th Street, NW.\nWashington, DC 20036\nOctober 9, 1975\nThe President\nThe White House\nWashington, D. C. 20500\nDear Mr. President:\nYou will find transmitted herewith eight copies of\nthe \"Compact of Permanent Union Between Puerto Rico and the\nUnited States\". This proposal is submitted pursuant to the appoint-\nment of a Joint Commission by the President of the United States\nand the Governor of the Commonwealth of Puerto Rico, which\nCommission went into operation in September of 1973.\nIt has been my honor, pursuant to the President's\nrequest that I serve as Co-Chairman, a duty which I gladly assumed,\nand as you are well aware, since January of 1974 has been my con-\ntribution of pro bono work to the White House.\nMr. President, there will not be a Department in\nGovernment that will not find fault with this Compact, for it\npossesses the ability of the United States to move into a new form of\nfederalism with those peoples outside of the 50 States who wish to be\nbound constitutionally to the United States and yet not being a State\nfunctioning within a term which this Compact appropriately designates\nas a \"free associated state\". The myriad of bureaucratic agencies.\ntreat Puerto Rico as a State and administrate to Puerto Rico as a\nState, but all Puerto Ricans know they are not a State and their pros-\npects of being one are remote. In that light, we propose for your\nconsideration and the consideration of Congress a new form of\nfederalism.\nThere has been much discussion as to why we did\nnot consider alternative proposals such as statehood, but for those\nwho would request the desecration of this proposal because of that\nomission, I am reminded of our Presidential admonition in 1967,\nand I quote:\n\"In order to implement the express desires of\nthe people of Puerto Rico freely made in the plebiscite\nof 1967, this Ad Hoc Advisory Group will be charged\nfurther to develop the maximum of self-government and\nself-determination within the framework of Common-\nwealth, etc.\nIt is with that admonition in mind that I submit here-\nwith our final work constituting scores of meetings and hundreds of\nhours of debate and ask with its receipt that I be relieved of the\nCommission received in September of 1973.\nRespectfully yours,\nMarlow W. Cook"
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