The Week in Public Finance: Puerto Rico Drama and a Corn-y Kind of Tax Credit
A roundup of money (and other) news governments can use.
For previous editions of "The Week in Public Finance," click here.
Beyond the Numbers in Puerto Rico
The drama over whether Congress should allow financially strapped Puerto Rico to restructure its debts has kicked up a notch after the recent announcement that the territory’s main financier was putting a moratorium on paying its debt, among other things. This week, a group called Main Street Bondholders launched an ad campaign calling the proposed federal legislation a “bailout” that “removes any incentive for Puerto Rico to remain at the table with bondholders.” The group says it represents the interest of retiree investors.
In response, House Speaker Paul Ryan issued a lengthy statement charging that “big-money interest groups on Wall Street” were dumping “a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico.” That would put U.S. taxpayers on the hook for creditors’ “bad loans,” Ryan said, which is what Congress is trying to avoid.
Anytime someone mentions “big-money interest groups on Wall Street,” it can be tempting to assume they're referring to Republican mega-donors Charles and David Koch. In this case, that's correct: The Main Street Bondholders were formed by the 60 Plus Association, a conservative small-government group that spent millions in the 2012 and 2014 election cycles to help elect conservative or Tea Party candidates. Much of its funding came from conservative groups with ties to the Koch Brothers. The group has been quiet until recently and no information is readily available yet on its funding and expenses this election cycle.
Lost in Translation
Meanwhile, a new study shows that Puerto Rico’s financial problems have been a long time coming. Produced by the George Mason University’s Mercatus Center, the study highlights various parts of the territory’s history that have led to the massive $70 billion debt load Puerto Rico is suffering under today. Amazingly, a key part of the story is a translation error from English to Spanish, which is the island’s prime language.
It happened all the way back in 1952, during Puerto Rico’s constitutional convention. The balanced budget provision of the constitution’s English version said that “appropriations made for any fiscal year shall not exceed the total revenues, including available surplus…” But “total revenue,” was translated to “recursos totales” -- or "total resources," which has a much broader meaning. The provision effectively allowed Puerto Rico to spend more than it made. With no debt cap in place, the island freely took on debt – so much so, that even as early as 1982, an academic journal was warning of a future crisis.
The study, written by Marc Joffe (who is also a Governing contributor) and Jesse Martinez, points to other historical factors. A big one started when the IRS exempted income earned in Puerto Rico from taxation, which led to a lot of pharmaceutical companies parking their headquarters there. But Congress phased out that tax perk by 2006 -- which is precisely when Puerto Rico’s recession started because it lost a top industry. The study’s recommendations include: allowing the island to restructure its debt, installing a federal financial oversight board, and revising its constitution to make its spending and debt restrictions more like state provisions.
Upping the Ante on Corn
In Iowa, ethanol production alone accounts for $2.2 billion per year in state GDP and supports more than 8,600 jobs. Now the state is taking a big stand to try and grow its stake of the biochemical industry that one report says will expand to more than $250 billion per year and 50,000 new jobs across the country by 2020.
This month, Iowa enacted the first-ever tax credit for renewable chemical manufacturing and advanced bio-refining companies. For the next 10 years, the state will make up to $10 million a year available in credits for companies who work on extracting chemicals from biomass (like corn husks, which Iowa has a lot of) for use in consumer products. The idea is to attract more industries that transform organic by-products (plant materials) left over from producing ethanol, biodiesel and other biomass-based fuels, into higher-value chemicals. These chemicals would be used in other industries like pharmaceuticals, plastics, textiles and cosmetics.
Supporters of the credit point to a good history with the state’s ethanol production tax credit. The aforementioned study, produced by Iowa State University and funded by the biochemical industry, notes that Iowa produces 17 percent of the nation’s corn yet has nabbed one-quarter of the country’s ethanol production business.
Critics of the credit question whether it would actually create jobs. Like many tax credits that state legislatures across the country approve, the legislation lists requirements for companies to qualify for the credit but it doesn’t list any specific jobs requirements. Meanwhile, the state uses money from its High Quality Jobs program (which does have job creation requirements) to pay for the credit.