Senate Committee on Energy and Natural Resources
Oversight Hearing on Fiscal and Economic Implications
of Puerto Rico Status
Washington, D.C.
May 19, 1998
(Transcript Copyright © 1998 by Puerto Rico Herald)

James R. White, Associate Director United States General Accounting Office Tax Policy and Administration Issues
Accompanied by: James A. Wozny, Assistant Director General Government Division United States General Accounting Office

Marcos Rodriguez-Ema, President Government Development Bank of Puerto Rico Accompanied by: Xenia Velez Silva, Secretary of Treasury

J. Tomas Hexner, President International Institute for Advanced Studies

Ivar Pietri, President, Peregrine Development Company

Fernando Martin-Garcia, V.P. Puerto Rico Independence Party Accompanied by: Erick Negron-Rivera, Tax and Commercial Law Attorney

Santos Negron Diaz, former Senior Vice-President Puerto Rico Development Bank Accompanied by: Senator Eduardo Bhatia


        MR. MURKOSWKI: (R-AK, Chairman) – for this committee on the issue of Puerto Rico self-determination. Previously, we had a mark-up where we heard from each of the spokespersons from the three interests. Namely, independence, status quo, commonwealth, and statehood. So, this does have significance as a formal hearing. As I indicated, it's been scheduled to consider the fiscal and economic implications of Puerto Rico self-determination status. First, let me thank the GAO, General Accounting Office, for their efforts to provide an overview for this committee and the other panelists for their willingness to participate. Now, I certainly understand the strong feelings that the people of Puerto Rico have with regard to the status of self-determination. But, I want to keep this hearing focused on specific facts and figures. And, I recognize there's a number of you in the audience that are enthusiastic about one point of view or the other. But, I would encourage you to reflect, as we must, on facts.
        Whatever the future political status of Puerto Rico may be, the economic and fiscal relationship with the federal government is going to change over time. And, this committee certainly has a responsibility to examine what the implications of what that change may be. While independence and statement present some fairly dramatic examples of change, the current political relationship is not set in stone by any means. Since Puerto Rico conducted its last referendum, Congress has acted to phase out the provisions of section 936 of the Internal Revenue Code, the possession corporate tax credit. Congress has also acted to reduce federal expenditures in many program areas and is likely to undertake some significant reforms in the entitlement area, as well. Some of these changes are going to have profound effects. I would hope that this hearing will provide us with a solid base of information on the current Puerto Rican economy and the fiscal relationships to the federal government. Comparisons with several states and with neighboring countries will provide some useful background. We also need to understand exactly what is constitutionally required if there is a change in status and what is the subject of federal discretion. For example, under independence, there are certain programs with vested individual rights, such as pensions, that would, of course, continue. Other programs may or may not be continued, depending on the nature of the relationship. The assumption underlining economic projections need to be carefully stated and understood if we're going to go back and rely on them.
        Now, in the same context, I think that all parties should remember what the finance committee, I happen to be a member of that committee, recommended in 1989 when it considered Puerto Rican status. Although this committee assumed that SSI, or social security, which does not currently apply to Puerto Rico, would simply be extended, why the finance committee disagreed. As constituted, social security would have provided payments in Puerto Rico that approached ninety percent of median income. The finance committee believed that that would be counterproductive and dangerous to both the local economy and the purposes of the social security program. Accordingly, finance recommended that payment levels not exceed fifty percent of the median income level in any state. CBO estimated the changes reduced the increase associated with extensions of social security from nine hundred million in FY-95, as this committee proposed, to four hundred million under the finance committee proposal. Unlike 1989, we are not considering self-executing legislation. In other words, we're not pressing to a specific route towards a determination. Now, the measures before the committee all call for a referendum leaving up to the Congress what type of transition to enact if a majority of Puerto Rico were to request changes.
        This oversight hearing should help to identify what areas would need to be addressed by Congress and what some of the options will be for future Congresses to consider. And, this is, of course, very important information. As I stated in my opening remarks, I hope that the witnesses can focus on the economic and fiscal issues associated with self-determination rather than political preferences that the witnesses may have individually. I appreciate how deeply those political preferences are felt, but the information needed by this committee, at least for today, requires that they be kept as related, but separate from the debate. My only caution to all the parties is that no one should assume that Congress will decline to make future changes, just as assumptions prior to the last referendum that section 936, and that was a corporate tax, would remain and definitely proved unfounded. I think that assumptions that Congress will provide large grants under independence or full extensions of all entitlement as those programs currently exist will also prove to be unfounded. Assumptions with respect to length and nature of any transition may also prove to be unfounded. So, these decisions, however, are going to be made by some future Congress. Today, we lay the groundwork. We've embarked on a process that will lead, I think, eventually to self-determination, and this is a very, very important and significant step. I want to thank all the participants and I welcome you to the committee. I call on brief statements from the members. Senator Landrieu.

        MS. LANDRIEU (D-LA): Thank you, Mr. Chairman. I've prepared an opening statement, but because our time is limited, I'd like just to submit it for the record. I'm anxious to hear the panelists and unfortunately have to step out in a few minutes for a meeting, but hope, Mr. Chairman, to step back in. I have stated before, for the record, I'm a very strong proponent of self-determination. I would hope that a bill could move through the Congress to give the people of Puerto Rico their choice into what direction they would like to take. And, I think this hearing will help not only those of us in the United States, but in Puerto Rico, to make up our minds about how to take this situation to the end result. So, let me submit this statement, Mr. Chairman, and I'm looking forward to hearing from the panelists this morning.

        MR. MURKOWSKI: No objection. Thank you, Senator Landrieu. Senator Craig. I might turn the red light off. That's okay. I will turn it on quick if you get too extended –

        MR. CRAIG (R-ID): Thank you, Senator. Mr. Chairman, let me thank for again holding another very important on the status of Puerto Rico. I look forward to hearing all of the testimony on the economic issues that face Puerto Rico, which I suspect will confirm that ad hoc policy making by Congress is not the best way to promote sound economic development in Puerto Rico. And, we really ought to get out of that business. Be honest with ourselves, as I think the legislation that I proposed does, allows the process of self-determination to move forward for Puerto Rico, and I would hope we could do that. Now that section 936 has been repealed and as tax credits are being phased out, we hear proposals for new ad hoc economic policy fixes for Puerto Rico. I'll listen with sincere interest to all proposals. But, we need to recognize that Congress may be as likely to make Puerto Rico a laboratory for new economic experiments, such as international tax bearing agreements for foreign businesses, as in the US jurisdiction. As it was to continue to section 936 in perpetuity. I have a longer statement, but I would ask unanimous consent it be a part of the record. I think it's important we get to our witnesses, and this is a very important building of record. So, I hope the Senate can review and recognize without prejudice the value of Senate bill 472. Thank you very much, Mr. Chairman.

        MR. MURKOWSKI: Thank you very much Senator Craig. Senator Campbell, good morning.

        MR. CAMPBELL (R-C0): Mr. Chairman I'd just ask unanimous consent to include my statement in the record and I look forward to hearing the witnesses.

        MR. MURKOWSKI: Without objection. Thank you, I appreciate the cooperation of the members in their opening statement. Senator Johnson.

        MR. JOHNSON (D-SD): Thank you, Mr. Chairman. I will submit a statement. I do want to express what, to me, is the underlying concern of this entire debate. And, that is, whether there is a sufficient consensus within Puerto Rico to justify statehood. It seems to me that, while in the past, the United States has taken new states within to the republic, it has always in the past been where there has been an overwhelming consensus of support for such a development. And, it seems to me that this is one of the most difficult and challenging underlying questions that this committee and this Congress will have to deal with as this debate goes forward.

        MR. MURKOWSKI: Thank you very much, Senator Johnson. Your entire statement will be entered into the record. Let me introduce our panelists this morning. We have Mr. James R. White, associate director, United States General Accounting Office, tax policy and administration issues. And, he's accompanied by Mr. James A. Wozny, assistant director, general government division, United States General Accounting Office. Our next witness will be Mr. Marcos Rodriguez-Ema, president of the Government Development Bank of Puerto Rico. And, he's accompanied by Xenia Valez Silva, secretary/treasurer. And, our last witness is Mr. Jay Thomas Hexner, president of the International Institute for Advanced Studies. And, after that, we will move into panel two. I would encourage those individuals on the panel making statements to try and limit their timeframe somewhere between seven and a half and ten minutes. We've been joined by a couple more senators. Senator Graham, we've had our opening statements, they've been very limited. Many were submitted for the record. But, I would certainly request you to go ahead and make any remarks you see fit.

        MR. GRAHAM (D-FL): Thank you, Mr. Chairman. I will submit my opening statement for the record. I wish to thank you for having this second, first workshop, now hearing, on the plebiscite, the issue for Puerto Rico. I believe the issues that we're going to discuss today are important, but in the context that the fundamental issue that we are discussing is not what the outcome will be of any plebiscite, but rather the fact that there shall be a plebiscite. That the people of Puerto Rico should have the right to express themselves as to their political future in a forum that will have significance to the people in Puerto Rico and to the people in the continental United States as well as Alaska and Hawaii. And, Mr. Chairman, I appreciate this step towards giving the people of Puerto Rico the opportunity to express their desires in terms of their political future.

        MR. MURKOWSKI: Thank you very much, Senator Graham. Senator Bumpers, ranking member.

        MR. BUMPERS(D-AR): Mr. Chairman, I don't have a formal written statement. I just am deeply interested in the issue and what to especially to welcome our panels this morning, many of who come from Puerto Rico. We appreciate it. I see my good friend, Louis Ferre in the audience. Louis and I were governors together. We used to get in trouble at all the governors' conferences together. Willie, welcome, it's good to see you again. And, we anxiously await hearing our witnesses. Thank you, Mr. Chairman.

        MR. MURKOWSKI: Thank you very much, Senator Bumpers. I will not forgo who got who in trouble in those earlier days. But, let us proceed on Mr. James White. I believe that you're up and ready.

        MR. WHITE: Yes. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, I'm very pleased. To be here to discuss the potential budget and economic impacts of changes in Puerto Rico's political status. You have a briefing document, which I'll be going through. I will try to skip some parts of it to hold my presentation to ten minutes. Our objectives are to present background information on Puerto Rico's economy and tax system, discuss the potential impacts of independence on the federal budget and on Puerto Rico's budget and economy, and discuss potential impacts of statehood on the federal budget and on Puerto Rico's budget and economy. The background information on Puerto Rico's economy and tax system is presented in a series of graphs and tables, which we will project. These graphs and tables are also in your briefing document starting on page three. And, turning to page three, the slide there shows GDP and GNP per capita in Puerto Rico for the years 1982 through 96 measured in current dollars. The millions there is a typo that I apologize for. In 1996, GDP per capita was about twelve thousand dollars in Puerto Rico. For comparison purposes, US GDP per capita was about twenty-nine thousand dollars. The important point in this graph is to notice that the trend lines show a rate of growth which is in the same ballpark as the growth rate in the US economy.
        The next slide, I'm on page four, shows public and private gross fixed investment in Puerto Rico. And, the growth in Puerto Rico is, in part, due to this increase in investment.
        Skipping along, the next slide shows how Puerto Rico compares with US and other Caribbean and Central American countries in terms of population, land area, and GDP. If Puerto Rico were a state, it would be the twenty-sixth largest in terms of population, forty-ninth in terms of land area, and thirty-seventh in terms of GDP.
        The slide on page six shows GDP per capita in neighboring nations. Puerto Rico ranks second in the region. Trinidad and Tobago is so high because of oil exports. Now, just note here that when we make these kinds of comparisons, we use the latest data available, but, often times, we can't get data for all of the entities that's as current as we like. So, some of this data is several years old.
        The next slide looks at unemployment in the neighboring nations. Puerto Rico's unemployment rate in 1996 was about fourteen percent. Moving along, the slide on page eight compares gross state product and personal income per capita to Puerto Rico's. In the US, the median or middle state had personal income per person of about twenty-three thousand dollars per year. The lowest state's income per person was around seventeen thousand dollars, and Puerto Rico's was around eight thousand dollars.

        MR. MURKOWSKI: What is our lowest state?

        MR. WHITE: The lowest state here –

        MR. : Mississippi.

        MR. MURKOWSKI: Mississippi?

        MR. : Yes.

        MS. : Louisiana's right above it.

        MR. WHITE: The next slide on page nine shows the unemployment and population below the poverty level compared to the US median, and Puerto Rico. The median or middle state had an unemployment rate of 5.1 percent, the highest state, these are 1996 numbers again, the latest available to be able to make this kind of comparison, the highest state had an unemployment rate of 8.1 percent and Puerto Rico's at that time was 13.8 percent. The poverty percentages are census bureau estimates.

        MR. MURKOWSKI: Mr. White, do you know that Puerto Rico is reflecting any rates current to the lower forty-eight or the fifty states current rate, in unemployment?

        MR. WHITE: I don't have –

        MR. MURKOWSKI: You don't have any of that.

        MR. WHITE: Do you have current employment numbers for Puerto Rico?

        MR. WOZNY: It's around 13.7, sir.

        MR. MURKOWSKI: Okay. Thank you.

        MR. WHITE: The slide on page ten shows GDP by major industrial sector in the US and Puerto Rico. And, Puerto Rico looks different than the United States because its manufacturing sector is so large when measured by the dollar value of the output that was produced. However, if you make the comparison on the next page on the basis of employment in the two sectors, there's a change in the picture. Puerto Rico's manufacturing sector is relatively large when measured by the dollar value of output. It's not as large when measured by the percent of the labor force that's employed in the manufacturing sector. And, this can be explained in part by the firms that use the possessions tax credit. The value of the output for those of firms is relatively high, but they don't use a lot of labor.
        I'll just, let's go on in the interest of time and skip to page thirteen. Uh, page thirteen, I switched to taxes. Here, we looked at individual income tax payments as a percentage of personal income. On average, residents in Puerto Rico pay almost no federal income tax. The state and local income taxes take about five percent of their income compared to about two percent of the US. The main point that I want to make here is made in the first bullet on page fourteen in your package, and that is that most residents in Puerto Rico do not pay federal individual income taxes. They are exempt from income earned in Puerto Rico. The other point to make here is that adding up federal, state, and local taxes shows the taxes as a percentage of income are higher in the US right now than in Puerto Rico. There are also other differences between federal taxes in Puerto Rico and the United States, profits earned by businesses incorporated in Puerto Rico are not subject to federal tax unless they are re-patrioted to the US. And, a large share of profits re-patriations that can use the possessions tax credit are effectively exempted from federal tax.
        Continuing with the differences between Puerto Rico and the states, most federal excise taxes did not apply to goods used in Puerto Rico. Most of the revenues from federal excise taxes on goods shipped from Puerto Rico to the US and most of the revenue from US customs duties collected in Puerto Rico is earmarked for Puerto Rico.
        I'm now up to page sixteen, where we switch from taxes to federal spending. The slide on page sixteen shows current eligibility differences for specific federal spending programs. These are programs with eligibility differences. For some large programs, such as social security, there are no differences.
        And, again, in the interest of time, I'm going to skip along here. There are also funding differences in additional to eligibility differences for specific federal programs and those are shown in the slide on page seventeen in your package.
        Now, I'm going to stop projecting this kind of background information on Puerto Rico. I want to switch gears and discuss the effects of changes in the political status of Puerto Rico on the federal budget and on Puerto Rico. I'm now on page eighteen. I'll begin with independence and then discuss statehood.
        Important factors that will influence the impact of independence on the federal budget include US citizenship and immigration rights of Puerto Ricans after independence, the extent to which these rights are exercised, and which federal programs immigrants will be eligible for in the future.
        On pages nineteen and twenty, we discuss the potential impact of independence on federal taxes, assuming Congress makes no changes to the tax code. First, US citizens residing in an independent Puerto Rico would be subject to federal income tax, but would be able to exclude seventy thousand dollars of their foreign earned income as of 1997. Citizenship matters here. US citizens living in Puerto Rico would be subject to the Internal Revenue code. Citizens of an independent Puerto Rico would not. Second, US citizens residing in Puerto Rico might not be subject to payroll taxes if they do not work for US corporations or the federal government. Third, customs duties would apply to goods shipped from Puerto Rico to the US unless a free trade agreement is adopted. Fourth, the low income housing tax credit would no longer apply. And, fifth, corporate income for businesses organized in Puerto Rico would be foreign source income eligible for the foreign tax credit.
        Turning to page twenty-one, the potential impact of independence on federal spending is less clear than the impact on taxes. It depends, among other things, on any transition that Congress might allow. For example, the Puerto Rico referendum bill reported by this committee in 1989 allowed for the continued payment of social security and federal pension program benefits, a long term transition grant for ten years to compensate for the loss of federal grants, programs, and services.
        So far, I discussed the impact of independence on federal spending. There would be a potential impact of independence on Puerto Rico's budget as shown on page twenty-two. And, these impacts reflect the changes on the federal budget, or many of them reflect the changes on the US federal budget, as well, so I will skip along to page twenty-three, the impact of independence on Puerto Rico's economy.
        Many factors relating to the effect of independence on Puerto Rico's economy are uncertain, including the fiscal monetary policy that the new country would run, investor perceptions, confidence of Puerto Ricans in the island's future, and the impact of that on immigration, and the signing of a free trade agreement. Other factors include reduction in shipping costs with removal of US regulations, likely reduction in net fiscal flows from the federal government, and possible impacts on interest rates associated with government borrowing.
        Now, I'd like to switch gears again and discuss the potential impact on federal taxes if Puerto Rico is treated like states. I'm on page twenty-five in the briefing package. Any new revenue from federal income tax and Puerto Rican individuals is likely to be small unless the earned income tax credit is limited. Any increase in corporate tax revenues is difficult to estimate, in part because the possessions tax credit will phase out and the expanded application of federal excise taxes in Puerto Rico could bring in about four hundred million dollars in additional revenue. And, federal excise and customs revenue would no longer be automatically transferred to Puerto Rico if Congress ends that special treatment.
        Page twenty-seven shows the potential impact on federal spending if Puerto Rico is treated like states. And, summarizing the point here, these three programs would all have increased costs if the rules that now apply to the states applied to Puerto Rico. Other programs, like social security, would not have changes under statehood. An important point, and I'm on page twenty-eight now, is the changes in existing federal taxes and programs could alter the impacts of statehood. For example, if federal tax and spending rules change, that would have an impact. Or, if Congress might purposely modify tax or spending rules to control the budget impact of Puerto Rican statehood.
        Page twenty-nine lists some general approaches that Congress might use to control budget impacts of statehood. By, for example, setting funding caps specifically for Puerto Rico. Setting special federal matching rates for Puerto Rico. Setting maximum benefits per recipient with respect to taxes. Examples of possible modification to standard federal tax treatment would include limiting the maximum earned income tax credit and treating Puerto Rico as an empowerment zone.
        On page thirty-one, we list some examples of possible specific modifications to federal spending programs. One such example is in nineteen ninety, the Senate finance committee proposed to limit SSI benefits, so no payee would receive more than half of a state's per capita income. Congress might similarly limit the maximum food stamp benefits. Congress might limit increased federal Medicaid costs by reducing the maximum matching rate. Congress might limit federal Medicare costs by reimbursing hospitals based on local costs rather than national average costs.
        Finally Puerto Rico's budget and economy would be affected by statehood. I'm on page thirty-three, which shows the composition of tax revenues for Puerto Rico compared to the fifty states, and the pie charts there show that Puerto Rico relies much more heavily on individual and corporate income taxes than do the states. Under statehood, Puerto Rico most likely would have to reduce its own income taxes. Otherwise, the combined federal, state, and local income tax rates could be higher in Puerto Rico than in the states. Puerto Rico would also have some new spending obligations with the full extension of federal programs. Increased federal funding would at least partly offset the costs of such new obligations. Also under statehood proponents argue that statehood will allow corporations to invest in Puerto Rico with more confidence. If Congress were to permit a sizeable net increase in federal transfers, that would obviously be a stimulative effect. If combined local and federal taxes on corporations were to increase, there could be a negative impact on investment and economic growth. And, finally changes in marginal tax rates and federal benefits could cause population shifts. Mr. Chairman, that ends my briefing. I'd be happy to answer any questions.

        MR. MURKOWSKI: Let me compliment you and your associate, Mr. Wozny, for a very comprehensive overview. There's a lot of material here and you've gone over it quickly. But, I think you've certainly highlighted on the points that are of interest to the committee. I'm going to go ahead with the balance of the panel before we enter into questions. So, our next witness is Mr. Rodriguez-Ema, president of the government development bank of Puerto Rico. Please proceed, sir.

        MR. RODRIGUEZ-EMA: Good morning Mr. Chairman. I will proceed to read the abridged version of the testimony which was submitted yesterday. Mr. Chairman and members of the committee, my name is Marcos Rodriguez-Ema. I'm the president of the government development bank for Puerto Rico, which serves as a fiscal agent and financial advisor to the government. I am joined this morning by the Honorable Xenia Valez, secretary of the treasury of Puerto Rico. We're delighted to be –

        MR. MURKOWSKI: If I may – as you describe the structure of your organization, this is fully independent of any policies of the US government.

        MR. RODRIGUEZ-EMA: It is fully independent from any policies of the US government.

        MR. MURKOWSKI: So, it's a sole creation of the commonwealth of Puerto Rico and is funded through sources that are non-associated with any federal government.

        MR. RODRIGUEZ-EMA: It is independent treasury, that's right.

        MR. MURKOWSKI: Thank you.

        MR. RODRIGUEZ-EMA: We're delighted to be here today to offer an overview of the economy of Puerto Rico as it exists today under our current territorial status, and as it might be affected by potential change in our political status. We're pleased that the committee's interest in Puerto Rico has allowed for this hearing to be held. Indeed, we are hopeful that this hearing will serve as a forum to dispel many of the misconceptions that are held about Puerto Rico's economy and about it's relationship to the nation's economy at large.
        Let me begin by stating that the economy of Puerto Rico is in ever sense an American economy, resembling in its basic structure the economies of the fifty states. This fact should really come as no surprise to the committee or to anyone or to anyone who is familiar with Puerto Rico and it's history and historic relationship with the United States. We have, after all, been a part of this nation for one hundred years, during which time we have achieved a high level of integration with the national economy.
        Today, for example, eighty-eight percent of Puerto Rico's exports are to the fifty states. While sixty-two percent of our imports come from the mainland. Puerto Rico is home to many of our nation's best known and largest manufacturing, retail, and service companies, all of which value our well trained and highly educate work force. Our managers and entrepreneurs, like those in the fifty states, are highly motivated professionals who interact every day with their counterparts with throughout the country.
        Indeed, it is because of this sophisticated class of professionals and entrepreneurs that the government of Puerto Rico, under the leadership of Governor or Pedro Rossello, has, in the past five years, achieved tremendous success in implementing economic reforms aimed at attaining self-sufficiency and economic empowerment of the people.
        In economic terms, the question before this committee and the Congress in general is whether Puerto Rican economy, despite clear similarities to the national economy and the achievements of the past five years, will ever reach its full growth potential until such time as our political status issue is resolved. It is our view that the uncertainty regarding our current status, which was designed in a very different economic and political climate than that which exists today, both in the nation and in Puerto Rico, has been and continues to be a serious impediment to Puerto Rico's ability to reach its full economic growth potential.
        In basic terms, Puerto Rico resembles Connecticut in size, and our population of 3.8 million is slightly higher than that of South Carolina, Oklahoma, Connecticut, and Oregon. Our 1997 real gross domestic product, 42.5 billion, is slightly ahead of that of New Mexico. In these and other fundamental respects, it is far more appropriate to compare Puerto Rico's economy to the fifty states than to the various major economies of Latin America. Our 1996 GDP per capita, for example, 12,212 dollars, was well head of the equivalent measure in Argentina, Chile, Mexico, and the rest of Latin America. By 1997, Puerto Rico's GDP per capita had increased to 12,761.
        Our integration in the national economy is further demonstrated by our economic performance over the past decade relative to the nation at large. Since 1986, Puerto Rico's real GDP growth rate has been slightly higher than the US average, and we are projected to stay within a close range in the immediate future. But, we need to grow at a much faster rate than the national average if we are to reduce the gap in per capita income between the mainland and Puerto Rico. It is important to note that the vast majority of personal income in Puerto Rico is the result of production. At the core of our economy, as is true of the national economy, we have a highly skilled, educated, and productive work force. Federal grants account for less than 5% of aggregate personal income in Puerto Rico. Again, dismissing the idea that Puerto Ricans rely heavily on federal welfare programs for their income.
        Having considered the economic aspects of that relationship, I believe it is important to turn the committee's attention to the economic reforms that have been implemented by Governor Rossello over the past five years. Puerto Rico has been moving in the direction of economic and social policies that reflect, and, in many ways, go beyond, the national trend to shrink the size, cost, and role of government in economic life, and to empower the private sector at an accelerated rate. Over the past five years, we have reduced income taxes across the board by over twenty percent and reduced the tax rate on investment income to seventeen percent on qualified interest from corporate debt and bank interest, and ten percent on qualified dividends. We've also slashed the capital gains rate from twenty percent to seven percent on qualified sales of stock in connection with an initial public offering. We've reduced our welfare roles by twenty percent while creating one hundred and fifty thousand new jobs, predominantly in the private sector, and we've frozen the size of our government. In the second phase of our tax reform, we're analyzing further cuts in individual tax rates as well as the capital gains rate.
        In economic terms as well as in social policy, we've asked the people of Puerto Rico to abandon the legacy of government dependence nurtured by our current status, and have entered the new century under polices that emphasize self-sufficiency and private sector growth.
        It is important to note within the last five years, Puerto Rico has been privatizing a variety of industries that previously were held by our government, with extraordinary results. During such period, we've divested our government of assets previously acquired in pursuit of a misguided policy of government intrusion, assets which rightfully belong in private hands. In the case of each privatization, we have proven so far that there is no substitute for the private sector. Government should be a facilitator of economic activity, not a direct participant.
        Although there has been a good deal of debate over the years regarding the potential economic cost of the change in Puerto Rico's political status, little effort has been devoted to quantifying the cost of the current status and its negative impact on the American tax payer and on the people of Puerto Rico. Quite frankly, Puerto Rico's economic development over the past fifty years has been made at a high cost to the federal treasury.
        In looking at a ten-year period from nineteen eighty-eight through nineteen eighty-seven, federal government expenditures, excluding earned benefits and revenues lost to the treasury under the Internal Revenue Code tax credits, amount to nearly thirty-four billion dollars. If we add to this amount revenues lost to the treasury under tax credits for US companies in Puerto Rico, the cost rises to approximately sixty-four billion in ten years. In historical terms, these expenditures have virtually doubled every decade.
        The only way to effectively reduce federal expenditures in Puerto Rico is to give our voters the opportunity to change our political status and, in so doing, give our economy the opportunity to grow at its full potential. As a territory, regardless of how dramatically we reform our economy, our local government, our tax system, we will always be in an uncertain dependent relationship with the rest of the nation.
        The Puerto Rican economy that is before this committee today is radically different from the economy that was before the Congress in the nineteen fifties when it last seriously considered the issue of Puerto Rico's political status. In effect, Congress in the 1950's saw it as a welfare state in need of a relationship that made us economically dependent on the federal government, but unable or unwilling to accept fully both the benefits and the obligations of a permanent political relationship with the rest of the nation.
        As this century comes to a close, we have changed, but the terms and conditions of our relationship to the nation have not. Nor have we been given the opportunity to change it. While we have made empowerment the basis of our own economic and social policies in Puerto Rico, we have yet to enjoy the ultimate empowerment of American democracy, the right to chose freely our political destiny.
        Much has been said about the potential cost of statehood, and some in Congress, as well as in the private sector, have voiced concern that a change in our status would literally "bust" the federal budget. Nothing could be further from the truth.
        It is indeed very difficult to speculate regarding the potential costs that might be incurred in ten years in extending federal programs, such as Medicaid, that do not now fully apply to Puerto Rico. In effect, those programs might change over time, as they have in recent years, and Congress could, in extending them, make modifications that wold reduce their cost. We fully believe that Congress and Puerto Rico have within their power the ability to greatly affect the ultimate cost of changing Puerto Rico's political status.
        Nevertheless, using the most conservative of estimates, we have concluded that were Puerto Rico to become a state today, there would be no downside risk to the US Treasury. In other words, a change in our status to statehood, measured on a static economic basis, which does not clearly reflect the realities of economic behavior, would be practically revenue neutral.
        I should add, however, that a number of economists whose work is known to this committee, measuring these affects on a dynamic basis, have concluded that a change in status would, over a short period of time, vastly increase incomes and the other key elements of economic development in Puerto Rico. After an appropriate transition period, it is our estimate that the Treasury would receive significant net inflows from Puerto Rico in the first year under statehood. And, we strongly believe, and studies have confirmed, that a statehood relationship would be beneficial to both parties. We can also affirm, without any doubt, that the cost of our current status to the US taxpayer will continue to rise as it has done in every year since nineteen fifty-two.
        In closing, Congress has nothing to fear from the change in Puerto Rico's status and potentially a great deal to gain from a national economic standpoint. We have worked hard and with great success to transform our own economy from the welfare state that evolved almost fifty years ago to the private sector empowerment model that we have today, but we cannot reach our full potential unless Congress gives us the opportunity to resolve the costly uncertainty that results from the lack of a resolution of our political status.
        Thirty-seven times since the founding of this great republic, territories have made the transition to statehood and the result in each case was a resounding economic success. After one hundred years as part of this country, Puerto Rico is as economically prepared as most of the thirty-seven, and more prepared than some to make that transition. We are asking that this Committee and this Congress give us the opportunity to make that choice.
        Thank you and I'm willing to accept and answer any questions you might have.

        MR. MURKOWSKI: Thank you very much. I appreciate that comprehensive statement, and obviously there's a good deal of research that's gone into it and we're most appreciative. Our next and last witness on this panel is Mr. Thomas Hexner, president of the International Institute for Advanced Studies. Good morning. Please proceed, and would you pull the microphone up close because that's what it's going to take.

        MR. HEXNER: Mr. Chairman, distinguished Senators, ladies and gentleman. My name is Tom Hexner. I was one of the first Harvard Business School graduates, as opposed to academic economists, to tangle with developing economies.

        MR. MURKOWSKI: And, there is a difference.

        MR. HEXNER: Yes, sir. I have met a payroll, and I have advised governments and international agencies. I first worked in Puerto Rico for a brief spell in 1959, and since 1959, my thrust has been that growth depends on the private sector and that investment should result from a trade of return and not from government planning or tax incentives. I've recently authored a report with Professor Glen Jenkins of the Harvard Law School that applies our market oriented approach to the Puerto Rican economy. Our four principle findings were, number one, commonwealth status stifles the economic potential of Puerto Rico and costs the US taxpayer billions of dollars. Commonwealth has relied mainly on tax gimmicks and government planning and its status has created a rigid dependence mentality. Number two, growth is driven by investment. Investment requires a predictable economic and political framework. That predictable framework can only be provided by statehood. Number three, under commonwealth, the Puerto Rican economy is falling further and further behind the rest of the US. And, number four, under statehood, Americans in Puerto Rico will pay federal income taxes just as the citizens of the other states.
        You know the numbers. You've heard them today. Federal transfers to Puerto Rico totaled about eleven billion dollars in 1997 without any offsetting income taxes. The question might be raised, why not impose federal income taxes on the commonwealth of Puerto Rico? Under the statehood option, the American taxpayer comes out ahead. If Puerto Rico had been a state in 1995, additional revenues would have acceded costs by over two billion dollars. Over the near term, it is our belief that the economy would grow faster, increase its tax base, boost revenues, and create jobs.
        Let's take a quick look at history. Prior to 1972, Puerto Rico's economy performed reasonably well, despite the umbrella of centralized control and government planning. Since 1972, Puerto Rico has essentially stagnated, while a state like Mississippi and a country like Singapore grew significantly. What happened to the Puerto Rican economy? The people of Puerto Rico continued to work just has hard as ever. Yet, in sharp contrast to the market oriented winners, Puerto Rico's commonwealth status fostered a dependence mentality and continued reliance on tax gimmicks and government manipulation.
        Do I need to say more than Puerto Rico's public sector grew more than triple the private sector from 1970 to 1990 and that it now employs almost a third of the island's work force. Double that of the US. Is Puerto Rico catching up? No. And, under commonwealth, it will continue to fall further and further behind. Puerto Rico's GNP per capita has been stuck at a third of the US since the early 1970's, and unemployment is consistently double or triple that of the US.
        Meanwhile, the incomes of the poorest states have converged with the richest states. For example, Mississippi has reduced it's income gap by fifty percent in the last fifty years. Fernando Lefort, a Chilean economist, an econometrician, estimated in his Harvard Ph.D. dissertation that commonwealth has cost the average Puerto Rican a hundred and ten thousand dollars since 1955. Had it been a state, Puerto Rico's annual per capita income would now be six thousand dollars higher.
        Lefort reviewed all the significant factors that drive growth. Political status is the only explanation he could find for Puerto Rico's lackluster performance. Only full political and economic integration, namely statehood, would allow Puerto Rico, to perform like Mississippi.
        What would be the cost and the benefits of independence? Starting a new country is an expensive process. Who would bear those costs? The people of Puerto Rico value their US citizenship highly. How many residents would move to the main land and what would be the impact of this potentially significant migration? Both our nation and Puerto Rico would profit from statehood. From an investors point of view, Puerto Rico would establish a permanent and predictable rules of the game. In making a choice, the investor would compare Puerto Rico with a state like Florida and not with a country like the Dominican Republic. Puerto Rico would be in the hands of corporate headquarters and not relegated to the international divisions.
        Growth in Puerto Rico ultimately depends on investment from the people of Puerto Rico. Puerto Rican capital is increasingly invested on the mainland. Only the permanence and discipline of statehood will provide the stimulus to alter this investment behavior so that the people of Puerto Rico will save and invest at home.
        You've probably all seen the Hertz rent a car ad on TV. In that Hertz ad, you either rent from Hertz or you rent from not exactly. Puerto Rico, to the investor, is not exactly. With a momentum of globalization in NAFTA and with the possible normalization of relations with Cuba, this not exactly status will increasingly hurt Puerto Rico.
        The bottom line is that commonwealth is the most expensive option. It has dearly cost the taxpayer and the people of Puerto Rico. The days of tax gimmicks are over. The nebulous "not exactly" status will not appeal to the investors of the twenty-first century. Independence might be an attractive option, but it would be a risky one and a costly one. Statehood presents the best opportunity to increase the wealth of the Puerto Rican people at the lowest cost to the US taxpayer. Thank you very much.

        MR. MURKOWSKI: Thank you, Mr. Hexner. I'm going to limit questions to five to seven minutes so that we can move. And, if there's need for a second round, we'll provide that opportunity, but I do want to get into the second panel as well. This is a general question that anybody may respond to, but it's relative to the familiarity with Moody's special comment of April on the credit implications of status. And, they noted an adverse effect on the economy from the phase out of section 936. That's the possession corporation tax credit dollar for dollar against US earnings that you're familiar with. But, that a change to statehood would provide, and I'm quoting, an offsetting influence of yet another uncertain segment, potentially could be an uncertain strength as well. So, there's two questions. First what exactly has been the effect of the change to section 936, possession corporate tax? And, what is likely to be the long-term effect, putting aside the status issue and, secondly, I'll throw these together, a phrase like as yet uncertain strength does not provide an answer of some lack of clarity and do you believe that the economics of the status, commonwealth or independence or statehood is simply a matter of good faith and confidence, something like the strength of investor confidence. Mr. White.

        MR. WHITE: With respect to the possessions tax credit phase out, I think it's important to understand that any impact that that phase out has is likely to be felt in the future. So, it's difficult right now, looking at current data, to tell whether there's any impact of the phase out or not. We looked at this issue about a year ago and that was the conclusion we reached then. It's going to affect investment and if it has an affect on investment, that affect on investment will affect output in the future and employment in the future. It may not have much of an impact on investment that's already been made in Puerto Rico. So, it's difficult to know what the impact of the phase out is.

        MR. MURKOWSKI: Do you agree with that?

        MR. RODRIGUEZ-EMA: Let me briefly explain a little about Moody's comment because I deal with them on a regular basis. As I said, we are the fiscal agents for the government and we have that relationship with them. I think it's very critical to understand where they're coming from. And, naturally, when we talk about a change in the structure of a section of the IRC, like 936, for them, they've been used to giving very solid credit ratings to Puerto Rico, and they still do, by the way. Because they have that legacy of 936 in the manufacturing sector, they are obviously a little bit apprehensive. And, we've discussed this at length with them. And, also, what is not mentioned in that particular study is the fact that, if you look at even the changes of 936, you will see that, at this point, we have record earnings for these companies in Puerto Rico, and we also have record exports from these companies in Puerto Rico. Because, at the bottom of all this, Mr. Chairman, why I think it's very critical is that these companies, even though tax is important and tax is always a very interesting notion that is discussed in the board rooms, it's not the ultimate and most important analysis. And, they really take into consideration things like investment climate, infrastructure, skilled labor, relationship with US regulatory and permitting agencies, stable political climate, all of those things add up to something more important than the tax issue. And, I think we've seen the numbers.

        MR. MURKOWSKI: Mr. Hexner, anything to add?

        MR. HEXNER: No, sir.

        MR. MURKOWSKI: Alright. My second question, and time's running, for FY-97, I'm told that there was apparently 1.8 billion of commonwealth source general fund revenues derived from personal income taxes, and 1.4 billion from corporate taxes. And, these represent thirty-three percent and twenty-six percent, respectively, of the commonwealth source revenues. How would those revenues be replaced, or what restructuring would have to occur if there were a status change?

        MR. WHITE: Mr. Chairman, as I said, Puerto Rico does rely on those taxes, the personal income tax and the corporate income tax, more heavily than do the states right now. If Puerto Rico is to become a state and federal income taxes were added on top of these state, Puerto Rican income taxes, you'd end up with a combined income tax that was out of like with the combined tax in the other states and therefore –

        MR. MURKOWSKI: You say out of line, how far out of line?

        MR. WHITE: Uh, it depends on exactly how Puerto Rico reacts. And, it depends also on your income in Puerto Rico. For example, if you're low income and eligible for the earned income tax credit, that would offset most of the income tax that you'd owe. If you're a higher income person and not eligible for the earned income tax credit, you could be paying a rate then that would be above.

        MR. MURKOWSKI: At what range would you project that rate?

        MR. WHITE: I don't have a precise projection.

        MR. MURKOWSKI: Have you got a general, what range might we be looking at? You're the best experts we have, and that's why we're anxious to – anybody want to give that a shot.

        MS. SILVA: Sir, if I may interject. At this point in time, we must remember that, if this Congress does the right thing and approves S.472 –

        MR. MURKOWSKI: Excuse me, we're not, we're not, you know, we're looking at self-determination so –

        MS. SILVA: I know, I know.

        MR. MURKOWSKI: I don't want to foreclose what's the right or wrong thing.

        MS. SILVA: Okay. If the plebiscite is held and should the statehood option be approved, then the people of Puerto Rico and the Congress would go into a negotiation of the terms of a possible statehood bill. During such time, the terms of such transition would be negotiated. Certainly, one of those, one of the issues to be addressed would be the orderly transition from an unincorporated territorial tax system to a state tax system. Certainly, the federal government will take a more active role, which will free up resources that are now having to be put up by the state government to return to the Puerto Rican taxpayer. As the president of the GDB mentioned before, we have taken steps to reduce the size of the Puerto Rico government because we think that's the right thing to do, and we will shrink it further. What we expect and our commitment is that once we have both systems in place, the federal tax system and the Puerto Rico tax system, we will do it in such a fashion so that the people of Puerto Rico do not have to bear a higher tax burden than what they would bear if they lived in any other state.

        MR. MURKOWSKI: Alright, well, that's what we're trying to generate some interest in the parameters. Mr. Hexner, do you have anything to add? Because, I'm out of time, and I just want to finish this question and –

        MR. HEXNER: Yes, Senator, I have a quick comment, which is –

        MR. MURKOWSKI: Alright, please proceed.

        MR. HEXNER: With all due deference to the people of the treasury of Puerto Rico, it is my understanding that compliance has gotten better and better over the last few years. But, there is still some scope for improvement. There's a bit of fact there that could increase revenues. Secondly, as you will know, revenues depend on the growth of the economy. And, it is my strong feeling, as I have stated with great respect for Senator Craig opening remark, that the predictability of the rules of the game would far outweigh the losses from the 936, and would engender investment that would increase the tax base.

        MR. MURKOWSKI: Okay, thank you. Finally, Mr. White, do you have anything that would give us an idea as to the range of revenues that would have to be replaced, recognizing that the, what, 1.4 billion from corporate taxes, which represent thirty-three to twenty-six percent of the commonwealth source of revenue. What range might we be looking at?

        MR. WHITE: In terms of replacement?

        MR. MURKOWSKI: Right. Revenues to be replaced from the change of status.

        MR. WHITE: If you change the status, the revenues that would need to be replaced are going to depend on factors such as what happens to economic growth.

        MR. MURKOWSKI: I understand that. Have you got a range for us to consider, because this is what this hearing's all about, the impact of any change of status.

        MR. WHITE: I do not have a precise range.

        MR. MURKOWSKI: Have you got a broad range? From one extreme to the other? You know, any other expert would say we've got five alternatives and leave up to the committee to see which one is preferred. Have you got any general range for us?

        MR. WHITE: It depends on what Congress does with things like the earned income credit, for example. If the earned income credit extends to Puerto Rico the way it does now to the fifty states, it would almost offset income tax collections there. So, the net gain there could be close to zero. If earned income tax credit is limited in some way, then it could be net gain there in terms of tax collections.

        MR. MURKOWSKI: Well, I'd like to keep this question pending. The record will remain open and we'd like to have you kind of dust this area off a little further and see if you could give us some qualifications, okay, qualified figures from a range of A to X. Okay?

        MR. WHITE: We will do that, Mr. Chairman.         MR. MURKOWSKI: Thank you. Because it's going to be significant in the ultimate debate as we proceed with this issue. Senator Bumpers.

        MR. BUMPERS: Mr. Chairman, I'm not going to pursue the line of questioning you're on, but I'm going to say that it's intriguing. It's a simple question. If Puerto Rico is that dependent on corporate and personal income taxes, obviously, when you pile the federal income tax on top of that, those taxes are going to have to be cut dramatically. Obviously, if Puerto Rico's a relatively poor state, they couldn't possible afford to pay that kind of a tax. As I understood Senator Murkowski's question is how much can they afford, and how much is it going to take to run the government after they start paying federal income tax?
        But, I want to shift gears to sort of a social issue, and that is, Mr. Rodriguez, I think maybe you're the most likely person to have the answer to this. Were you born and reared in Puerto Rico?

        MR. RODRIGUEZ-EMA: Yes, I was.

        MR. BUMPERS: Did you go to school there?

        MR. RODRIGUEZ-EMA: Yes, I did.

        MR. BUMPERS: Did you go to parochial school?

        MR. RODRIGUEZ-EMA: Yes, I did.

        MR. BUMPERS: What percentage of the students in Puerto Rico go to parochial school in the first grade?

        MR. RODRIGUEZ-EMA: I'm sorry. In the first grade?

        MR. BUMPERS: What percentage of the students who start in the first grade in Puerto Rico enter parochial schools?

        MR. RODRIGUEZ-EMA: I would suspect, sir, that it's a lower percentage. Most of the students in Puerto Rico go to the public school system.

        MR. BUMPERS: Does anybody have a figure on what the percentage would be? Do you know what percentage of the students in Puerto Rico graduate from high school?

        MR. RODRIGUEZ-EMA: The percentage of the students that graduate from high school has been increasing, and right now we have, if you look at the graphs that we have submitted to the committee, we have, on page –

        MS. SILVA: Thirty-first.

        MR. RODRIGUEZ-EMA: Thirty-one. As you can see, throughout the last twenty-five, thirty years, there has been a substantial increase in the number of students that have graduate from high school. And, right now, the percentage is well over forty percent, fifty percent.

        MR. BUMPERS: What percent go to college? Let's see, you've got that chart in front of you there. I can't extrapolate there – the percentage of your high school graduates that go on to college. In the United States, in all the United States, it's about forty-six percent. And, I was curious about what that figure would be in Puerto Rico.

        MR. RODRIGUEZ-EMA: In Puerto Rico, one year of college or more, it would be between the, thirty-five percent would be the graph that we're showing you sir. Closer to forty, maybe.

        MS. SILVA: It's closer to forty.

        MR. BUMPERS: Pardon.

        MS. SILVA: Closer to forty.

        MR. BUMPERS: You stated a moment ago that you have a period of reflection in your public schools in order to enhance family values. What is that?

        MR. RODRIGUEZ-EMA: That is precisely that, sir. It is instituted by the secretary of education, with the approval, obviously, of the governor of Puerto Rico.

        MR. BUMPERS: How long is the reflection period, do you know?

        MR. RODRIGUEZ-EMA: Five minutes, sir.

        MR. BUMPERS: Five minutes.

        MR. RODRIGUEZ-EMA: Yes.

        MR. BUMPERS: Is the teacher in the room during that period.

        MR. RODRIGUEZ-EMA: I believe she is or he is, yes sir.

        MR. BUMPERS: And, you mentioned school choice. What is school choice. What is school choice in Puerto Rico?

        MR. RODRIGUEZ-EMA: School choice is in, with regard to the voucher program, sir. There has been a voucher program instituted by the secretary of education in Puerto Rico. Approximately twenty-five thousand students right now are benefiting from that voucher program. There obviously is a critical funding issue, but in certain respects, it is very interesting because you have these students and their families choosing what sort of school they want to send their children to and what sort of public school have programs that would entice these particularly students to move from one school to another. So, we are giving the flexibility to the community school concept. We're giving the flexibility to the parents to decide whether the students should be opting to go to other schools.

        MR. BUMPERS: Mr. Hexner, in listening to your testimony and without fly specking it and getting into the very specific economic data that's been presented this morning, I got the impression from your testimony that Puerto is in high center, not likely to advance much, and have been falling, matter of fact, since 1972, have been falling further behind. On the other hand, I would have gleaned from Mr. Rodriguez's testimony that the opposite is true, that Puerto Rico's been doing very well. Did you get that same impression from Mr. Rodriguez's testimony?

        MR. HEXNER: Senator, I think, in essence, we may have been saying the same thing. He just is a better speaker. I believe my approach is that Puerto Rico has done quite respectably well. And, it has done well when compared to the nation's south of the Rio Grande. It has not done well when it is compared to the states north of the Rio Grande. And, since it's rather integrated into the US, but not quite, we should be comparing, in my opinion, Puerto Rico with South Carolina, with Arkansas, and with the other states. That's the first part. The second part is, I believe Mr. Rodriguez said that if we continue at this rate, we will never catch up. As you well know, typically, poorer countries and economies have to grow much faster to catch up. And, Puerto Rico is staying at relatively the same rate, so it's not catching up. That was the point I was trying to make, senator.

        MR. BUMPERS: Mr. Chairman, with your indulgence –

        MR. MURKOWSKI: Go ahead.

        MR. BUMPERS: This question that, I want to go back to where Senator Murkowski was earlier. Puerto Rico is heavily dependent on their corporate and personal income taxes, correct? To run the state government, to run the government of Puerto Rico.

        MR. : Yes.

        MR. BUMPERS: Now, obviously, when you pile corporate and personal taxes of federal level on them, under statehood, how in your opinion would they absorb that and, number two, obviously they couldn't absorb that on top of what they're paying, but I guess the question should be how much of that would have to be cut in order for this to be advantageous to the people who promote statehood, or, to Puerto Rico?

        MR. HEXNER: Are you addressing that to me, senator?

        MR. BUMPERS: Yes, yes.

        MR. HEXNER: I have a two-part answer, I believe. The first is that there are alternative methods of taxation that might indeed work better in Puerto Rico than the current heavy reliance on –

        MR. BUMPERS: Such as?

        MR. HEXNER: Perhaps a consumption tax. Perhaps even a flat tax. I have worked these out, but it is my feeling that exploration of these issues could bring you into a situation where, with a government that is now being frozen and with an economy that is growing, you could, over the transition period, not increase the taxes on the people of Puerto Rico.

        MR. BUMPERS: Thank you, Mr. Hexner. Mr. Chairman, thank you.

        MR. MURKOWSKI: Thank you very much, Senator Bumpers. Senator Craig.

        MR. CRAIG: Thank you very much, Mr. Chairman. Let me tackle the line of questioning that the chairman and Senator Bumpers were approaching a little bit differently. I understand that, in 1992, only two hundred people reported incomes above fifty thousand dollars in Puerto Rico.

        MS. SILVA: Well, I have the figures.

        MR. CRAIG: Is that reasonably accurate?

        MS. SILVA: It may have been a little bit higher, but certainly not much higher than that. Not significantly higher than that.

        MR. CRAIG: I also understand that the Mercedes Benz dealership sold more cars per capita in Puerto Rico than any other state in the nation.

        MS. SILVA: That is correct. Actually, they sent people there to find out how could it be possible for a jurisdiction with such a reduced per capita income could sell so many Mercedes Benz.

        MR. CRAIG: Alright, so what I'm nibbling on is something, Mr. Hexner quickly passed by a moment ago. Something called the underground economy of Puerto Rico. In relation to the current economic status and an underground economy that is driven by that. Which would then lead us to the question asked by Senator Bumpers, how would the citizens of Puerto Rico be capable of paying through a different tax structure to finance its government if it were to become a state? I would like that question discussed if we could. Is there any guesstimate, estimate, or otherwise value placed on a current underground economy in Puerto Rico and the inability of the government to tap that for record purposes and for taxation?

        MS. SILVA: Well, sir, the tax evasion in –

        MR. CRAIG: I didn't use that word, you did.

        MS. SILVA: Okay, well, it is an appropriate word. The level of tax evasion in Puerto Rico in 1992, as it relates to individual income taxes, was estimated at around twenty-six percent in 1992. The government of Puerto Rico has taken very aggressive steps to reduce the level of tax evasion. And, I am pleased to report that we have reduced the level, we estimate the level of evasion to have been reduced to twenty percent by 1995. The goal is to reduce it to not more than sixteen percent by the year two thousand. I am particularly proud of the fact that we have achieve this while maintaining a level of satisfaction from the taxpayers of an unprecedented ninety-four percent. I propose to you –

        MR. CRAIG: And, I congratulate you for that. Now, instead of comparing that with other countries, Mr. Hexner, could you compare that projected tax evasion with states. Is there any analysis there as to how it compares with the fifty states of the union?

        MS. SILVA: I understand that the federal average is about eleven percent.

        MR. CRAIG: I see, so it's nearly double.

        MS. SILVA: Yes.

        MR. CRAIG: Okay, so there is a potential there in revenue. Let me also ask the question of you, Mr. White, did you attempt, in your analysis – were those just cold facts based on current statuses and comparatives, not any growth factor determined by permanency of political status?

        MR. WHITE: That's correct.

        MR. CRAIG: Mr. Hexner, you've alluded to, with reason, changes in political status driving economies and investment, investor stability or security, sense of security. Do you have any comparatives of what happened in Hawaii following its statehood? Or, let me say, entities that have established political permanency, and what, and how that affected or impacted the investment and the economic growth of those entities once that political permanency was established.

        MR. HEXNER: I do, Senator. It's in my written testimony. If you will stick with me, I can give you the numbers –

        MR. CRAIG: Give us a couple of numbers for the record, if you would.

        MR. HEXNER: – but don't hold me to the exactness. The best illustration is Hawaii, which is an island economy. At the time that Hawaii became a state, it had the same percentage of state income, tourism did, as Puerto Rico has now. Pursuant to its becoming a state, Hawaii's tourism grew at the rate of fifteen percent a year for twenty years. So, that now it's about, I think thirty percent of the economy, but again, I say, let's look at the record to have it exactly right. And, there was an economic historian from Hawaii named Thomas Hitch. And, he said that Hawaii's becoming a state was worth more than several billion dollars of advertising. Does that –

        MR. CRAIG: Yeah, I think that that moves us in the direction that I think is important. Are there any studies that talk about percentages of growth or percentages of growth impact based on permanency, political permanency, not just in Hawaii, but in other entities? And, I use the word permanency because I think that's an important word. Statehood versus independence, while there may be some uncertainty in independence, permanency, I think, has real value. Versus the, you use the Hertz phrase of –

        MR. HEXNER: Hertz or not exactly.

        MR. CRAIG: Hertz or not exactly, right. Permanency versus not exactly.

        MR. HEXNER: There are senator. These data exist. And, Fernando Lefort, the economist to whom I referred, has that in his study and I would, with your permission, submit that to the record.

        MR. CRAIG: I'd like that very much. Thank you Mr. – without objection, if we could put that study in the record, Mr. Chairman, I think it would be valuable to us.

        MR. MURKOWSKI: Without objection. Senator Graham.

        MR. GRAHAM: Thank you, Mr. Chairman.

        MR. MURKOWSKI: Thank you, gentlemen, ladies. Please proceed.

        MR. GRAHAM: Thank you, Mr. Chairman. Before I ask questions, I might reflect on a little study of Florida's territorial period which lasted from 1821, when Florida was acquired from Spain, until 1845 when we became the 27th state. In the debate leading up to the decision by Congress to extend statehood to Florida, many of the same arguments were raised that we are discussing here today. Florida, in the 1830's and 1840's, was a very underpopulated state. Population of less than forty thousand people. Exclusively rural. Lacking in significant economic strength and without much prospects for the future. There was a great question as to whether statehood should be extended to a territory that had such little promise. I hope that now, a hundred and fifty years later, the Congress will feel that it made the proper decision, extending the opportunity to statehood to Florida, for which we are very appreciative and have benefited in the ways that Mr. Hexner projects will occur should a similar status be extended to Puerto Rico. Let me say that, in terms of the relevant economic questions, the issues that are essentially internal to Puerto Rico, such as how it would restructure its local tax system in the event of statehood or any other status, it would seem to me would be the essence of the debate that's going to take place in Puerto Rico if a plebiscite is provided. That it would be exactly those kind of questions that would be most relevant to the people of Puerto Rico as they assessed what their future. But, for the current fifty states, there are a different set of questions which relate to what the consequences would be to the residents of those current fifty states in the event that Puerto Rico were to elect to continue its commonwealth status, seek sovereign independence, or amalgamate with the United States through statehood. One of those questions would be what would be the cost to the US Treasury of each of those three options? Mr. White, have you attempted to assign some numbers to the various factors that would affect each of those three decisions and its impact on the US Treasury, and are you prepared to state what you think the cost or benefit to the US Treasury would be of the three options?

        MR. WHITE: Senator, I think the point I was trying to get across in the briefing was that the cost to the federal government of any of the options for Puerto Rico depends on actions that Congress takes. Congress can control the cost, to a very important extent, because you can control the programs and how they're extended to Puerto Rico.

        MR. GRAHAM: Do you believe that, for instance, with the earned income tax credit, which you said was key to the question of whether Puerto Rico would be a net payor into or recipient from the federal Treasury in terms of income tax. Are you suggesting that, if Puerto Rico were to elect to statehood and were to become the fifty-first state, that the Congress would be empowered to have a different standard of earned income tax credit for Puerto Rico than the other fifty states?

        MR. WHITE: I think that, again, there may be options there that you should consider. There are caps. For example, that –

        MR. GRAHAM: Could we have a cap today for Mississippi that would be structurally different than the way the other forty-nine states are treated?

        MR. WHITE: I think there are ways to do that. There are federal grant programs right now, for example, that treat states differently.

        MR. GRAHAM: So, your answer to the question is that it is a matter within our control as to what the effect of what the three options would be on the US Treasury.

        MR. WHITE: To a very important extent, yes.

        MR. GRAHAM: Mr. Rodriguez-Ema or Ms. Velez Silva or Hexner, do you have any comments on that question of the effect on the US Treasury?

        MR. RODRIGUEZ-EMA: Yes, we have a comment. And, if we may add, I mean, we mention in our presentation that, I think it's very relevant for this Congress to, when talking about numbers, sort of look back at what has happened in Puerto Rico in terms of what has been given to Puerto Rico with no tax receipts on the other side. We calculated in the last ten years that number to be sixty-four billion dollars. If we look at what has happened throughout the entire history of the commonwealth, that number, in ninety-seven dollars, could well be in excess of a hundred and fifty billion dollars for the life of a commonwealth, with no tax receipts to the US federal Treasury. The numbers that you have in your budget alone, estimate, and we're not including earned benefits. I want to make that very clear. We're not including social security that we pay and we receive or veterans benefits. We're not including any of that. In the next five years, in our own budget, you have approximately thirty billion dollars additionally going to commonwealth, with nothing coming back from Puerto Rico. I think that if we look at the numbers that we have today, on a static analysis, if we were to say, without any transition period, I mean, we're going to establish statehood today, you would be surprised as to the level of individual income tax, possessions, corporations tax, other corporate taxes, consumption taxes, and other increased receipts coming from Puerto Rico to the US Treasury, which might add up to close to six billion dollars. And, in turn, when you look at increased federal expenditure, that number, if you look at food stamps programs or SSI or earned income tax credits or Medicaid, it's pretty much 6.4. So, what we're talking about here is that we can't look at this on a static basis. I mean, we've got to be very honest. I mean, we have to sit down with Congress, if that were the choice, and we'd really have to work out a transition period. That is fundamental. But, the numbers, if we look at the economy today, are of such magnitude in terms of receipts to the US Treasury, that it's virtually revenue neutral, what we're talking about here.

        MS. SILVA: Mr. Graham, if I may add a little bit to the comment by Mr. White, an issue that probably Mr. Chairman is familiar with, the windfall profit tax applies differently to Alaska than to any other oil producing states. And, that is because Congress can make distinctions so long as they are non-discriminatory, and reflect the economic and geographic, in the case of the windfall profit tax, as the US Supreme Court said, of the state being affected. So, I just wanted to point that to the record. That, yes, Congress may, if economic and geographical situations so warrants, make distinctions amongst the states so long as they are non-discriminatory.

        MR. AKAKA (D-HI): – question, I have a statement, Mr. Chairman. I'd like to direct it to Mr. Rodriguez-Ema. I was interested in your viewpoints on the economic implications of Puerto Rico's current political status. Coming from the last state admitted into the Union, Hawaii, I can say that Hawaii has benefited tremendously from being a state. And, Mr. Hexner did mention Tom Hitch, who is a person, historically as well, who has put together many statistics about Hawaii as a territory and as a state. And, some of that may be of some help to you in comparisons. But, I want to say that Hawaii has benefited tremendously. And, also to tell you that I would look forward to working with you and others to ensure that the people of Puerto Rico are given the same opportunities. I've seen you folks before. We've talked and discussed this, and I look forward to working with you. I hope that this committee can, Mr. Chairman, move legislation as soon as possible so that the full Senate can act before the end of the 105th Congress. Thank you very much, Mr. Chairman.

        MR. MURKOWSKI: Thank you Senator Akaka. I'm going to excuse the panel with the observation that I think we'd agree that the economic studies, the projections, that we have heard are premised on the one hand, the federal government extending all entitlement programs as presently structured, as well as the federal internal revenue laws suggesting no change. I guess it would be a fair conclusion that are so many variables that it's pretty difficult to make any firm economic or fiscal projections on any particular status alternative. And, in your responses, Mr. White, I came to the conclusion that it's very much dependent, obviously, on just how Congress would structure these significant details, but it could be a broad range relative to the responsibility of either the structured status of Puerto Rico to meet a significant obligation or a moderate or limited, depending on the structure of the Congressional authorization that set those boundaries, which is about what I expected. But, suggest that, as we progress and proceed with debate, there's going to be wide range of views relative to the cost to Puerto Rico as well as the potential cost to the federal government. Nevertheless, we will keep the record open for ten days. We would appreciate again, Mr. Wozny and Mr. White, the submission of some broad parameters because, again, we need to be able to depend on the best research that we can come up with and your submission has been very helpful. I want to thank you Mr. Ema, Ms. Silva, and Mr. Hexner. I wish you a good day and would excuse this panel.

        Our next panel, as we clear, Mr. Ivar A. Pietri President of Peregrine Development Company. And, Mr. Fernando Martin-Garcia, vice president of the Puerto Rican Independence Party, Mr. Santos Negron Diaz, former senior vice president, Puerto Rican Development Bank. I believe that constitutes the panel. I see we have Mr. Garcia there. I would encourage the participants to proceed because we're going to have a vote around here pretty soon and I want to make sure that we have an opportunity to hear this panel. If we could cease conversation and please, uh, I'm sure some of the folks haven't seen each other in a while and it's kind of a greeting opportunity, but I'd appreciate it if you'd save that for the end of the discussion.
        I'm going to call on Mr. Garcia. Fernando Martin-Garcia, first, since he sat down first. Is that fair enough? Very well.

        MR. MARTIN-GARCIA: Good morning – that is, after all, the nature of dependency. In the past, when pro-independence sentiment was pervasive in Puerto Rico as it was between the mid-1930's and the 40's, the United States put forward a punitive, isolationist view of independence from Puerto Rico that was designed together with complimentary policies of persecution and discrimination to substantially reduce popular support for independence. It was from these anti-independence policies that the present status of colonial self-government emerged fifty years ago. Puerto Ricans were terrorized away from the natural solution of independence and bullied into the course of colonial reform. But, those were other times. Now, the Cold War is finally over, and Puerto Rico's strategic role is much diminished. Its addiction to the federal budget has become not only increasingly costly to the US Treasury, but also debilitating to our own economy. And, free trade is becoming the hallmark of the globalized world economy.
        In Puerto Rico, the increased dependency on federal transfers, as well as the slowdown in our rate of growth and the growing moral bankruptcy of colonialism have been translated politically into an ever larger, though artificial, statehood movement, which now threatens the Congress with the ultimate contradiction in terms. A petition for statehood from a different nation.
        After the second world war, and during the 50's and 60's, free access to the US market, together with abundant surplus capital in the United States, coupled with low wages in Puerto Rico, fueled a period rapid and sustained economic growth on the island. Mass migration to the United States and post-war destruction and disruption in our potential competitors in Europe and Asia rounded out the conditions which made this growth possible. These conditions, however, also served to obscure and downplay the importance of the economic tools that political sovereignty can make available to an independent Puerto Rico. Thus, colonialism, and later the apparently never ending bonanza of federal transfers came to be perceived perversely as the indispensable tools for economic development. Yet as federal tax policy towards Puerto Rico and federal trade policy towards the rest of the world have shifted dramatically through the last decade, witness the demise of section 936 and the creation of NAFTA, a new set of conditions begin to emerge. It is becoming increasingly obvious not only that the tools of political sovereignty are a vital necessity for promoting economic development, but that continued free access to the US market need not be paid for at the unconscionable price of colonial subordination.
        If Puerto Rico's economy is to obtain the much higher growth rates that it needs to fully emerge from social injustice and underdevelopment, as well as from the relative economic stagnation which afflicts it, a fundamental political transformation is needed. Puerto Rico must be able to gain access to cheaper imports and to expand its markets outside the US, both for exports and for investment capital. It needs to shift from the actual unilateral customs union with the United States, to a free trade relationship without common external tariffs. It also needs to be free from the regulatory straight jacket imposed by the uniformity required by the American political and constitutional structure.
        Puerto Rico is in an excellent position to reap great benefits from the complete array of monetary, fiscal and administrative tools that only independence can provide. I have no doubt that once the people of Puerto Rico are appraised of a good faith and just offer of independence on terms designed to provide stability and continuity leading to greater growth and self-sufficiency, that they will re-embrace the natural course towards independence. Only in this way will the crutch of dependency ever be finally discarded, both for you benefit and for ours.
        This re-uniting of the Puerto Ricans with the historically inevitable outcome of independence will take place that much faster if they are equally appraised of the political and moral impossibility of continued colonialism and of the truth regarding the conditions, if any, under which statehood would ever be truly available.
        Finally, I need not remind you, that as important as economic considerations are for the United States in the debate on Puerto Rico's status, they are today as they have always been, subordinated to larger political considerations. If there is sufficient political will and wisdom, the economic policies will fit and promote your higher political and national purposes. Traditionally, these were always viewed as adverse to the cause of independence. Today, that is no longer the case. Herein lies the true challenge facing this Congress. The moment presents a unique opportunity for you to act in pursuance not only of the national interest of the United States in these new times, but also in a manner consistent with justice and with the too-long neglected national interests of Puerto Rico. Thank you very much, Mr. Chairman.

        MR. MURKOWSKI: Thank you very much, Fernando Martin-Garcia. Our next witness will be Mr. Ivan Pietri, President Peregrine Development Corporation. Please proceed.

        MR. PIETRI: Good morning. Chairman Murkowski, members of the Committee, ladies and gentleman. My name is Ivar Pietri. I have submitted for the record a more detailed statement.

        MR. MURKOWSKI: Without objection, it will be entered in the record as read.

        MR. PIETRI: I am a private business man appearing before you as someone who has, for twenty-five years been a close analyst of the economy of Puerto Rico. For the record, I am a member of the New Progressive Party of Puerto Rico, and I serve as the treasurer of the Republican Party of Puerto Rico. I am proud to be a US citizen and I believe that the United States of America, our country, is the greatest in the history of mankind.
        As you have already heard this morning, Puerto Rico is not a depressed Third World economy. Far from it. However, neither is Puerto Rico the economic wonder claimed by the advocates of commonwealth status. Puerto Rico is not and has ever been an economic miracle. During the five decades of political domination by commonwealth advocates, big government and high tax policies were pursued that chained the local entrepreneur. At the same time, the local businessmen were restrained by the heavy load of taxes as high as eighty-seven percent. And, this was as recently as the first term of former Governor Raphael Hernandez Colon in the seventies. The so-called miracle of Operation Bootstrap was promoting a privileged industrial sector, totally exempt from local taxes subsidized to the tune of close to four billion dollars annually by the US taxpayers through section 936. These policies did not even create net gains in jobs in the industrial sector in the last thirty years. They also produced a huge underground economy and ever-growing dependency on federal funds for some sectors of our populations. For those five decades, the local administration lead by commonwealth advocates purposely and irresponsibly pursued a one dimensional development strategy, neglecting other initiatives in order to foster dependency on section 936 to sustain their political goals. The net cost of commonwealth to the US taxpayer approximates seven billion each year with no end in sight. Gentlemen, there is no escaping the fact that commonwealth is an economic sink hole. In contrast, statehood has a very proven track record.
        As we know, there are conflicting view about the economic impact of statehood for Puerto Rico. 936 and US taxes have been the center of the economic arguments against statehood. There have been several studies that supposedly analyze the economic viability of statehood for Puerto Rico. However, they all share the same critical flaw. They are static analyses that superimpose the US tax system on our economy and remove section 936 and then they assume that nothing else changes. Well, that is not statehood. That is commonwealth with US taxes and without 936. And, obviously, that would be negative. However, these studies complete ignore the most important benefits of statehood: full integration into the US economy, stability, credibility, permanence, political power, dignity and the broad comprehension around the world of what it is to be a state.
        The benefits of statehood are definitely tangible and they are concrete. And, they will have an extremely positive economic impact. Historically, territories have had a lower level of economic development than the states. Upon admission into the union and full integration into the US economy, they experienced accelerated growth that allowed them to converge with the national economy. Members of the committee, statehood is a pre-condition to Puerto Rico's economic growth, not vice versa. The opponents of statehood have used the notion that pre-development must come before Puerto Rico is ready for statehood to distort the historical fact that statehood leads to dramatic growth. And, we have thirty-seven examples of that. I ask each of the members of this committee that represents one of those thirty-seven former territories, where would your state be today, economically and socially, if it was still a territory? To begin with, it would not the benefit of your hard work on its behalf here in the Senate.
        It is easy to use faulty analysis to pretend that you can prove that statehood would ruin our economy and would be more costly to the US than the other two options. To believe such flawed analysis defies logic and turns a blind eye to certain key facts. Not only have the other fifty states been very successfully economically, but the thirty-seen territories which became states caught up with the national economy at a fast pace. Especially Alaska and Hawaii, the most recent states. So, why can't Puerto also enjoy the same success as part of the greatest and most prosperous nation on earth? After all, let us not forget that, at the turn of the century, the US had five great offshore territories. Alaska and Hawaii became states and they have prospered. Cuba and the Philippines chose independence. And, we all know how much they have prospered. Puerto Rico is still a territory and has muddled through this entire century showing potential that will never be fulfilled until we become a state. To believe that we cannot achieve more progress as a full partner in the nation is to have a very cynical view of what it means to be a part of this great nation. And, it also takes a dim view of our capabilities as Puerto Ricans to compete in the global economy and to contribute to our nation. The enemies of statehood put our own people down to confuse the Congress and the nation about the potential of Puerto Rico as a state. And, I will say unequivocally to this committee, if the people of Puerto Rico were welfare junkies, we would have moved to the mainland a long time ago. Almost four million of us live in Puerto Rico and we are very proud of it, and we are determined to make the best of our future. Those of us that moved in the past did so in search of opportunity, not welfare. Mr. Chairman, the people of Puerto Rico are industrialists. They are hard working and they are devoted to family. Those that rely on welfare do so only because the present political status has not provided them the opportunities they aspire to.
        Puerto Rico has many competitive advantages. A strategic geographic location, a democratic tradition, the US flag, a dollar based economy, the best infrastructure south of the Rio Grande, world class communication and transportation, a bilingual and bicultural business environment and, most important of all, a large, loyal well educated trainable and highly productive American labor force. But, only as a state can the potential of these advantages be maximized for both Puerto Rico and the nation. As a territory, Puerto Rico cannot realize its full economic potential. We simply do not have all the tools needed. As a state, we can truly become the economic crossroads of the Americas, the nation's bridge to improving its relations and its trade with the booming markets of Latin America. Puerto Rico is a totally unexploited resource in this regard and this has tremendous potential for both Puerto Rico and the nation.
        In closing, we ask the Congress to give us the opportunity to settle the status issue once and for all. We want the chance to end over five hundred years of colonial status. The American citizens living in Puerto Rico ask Congress to let us vote for real choices, present it to the people in a truthful and fair plebiscite. We urge the Senate to approve S.472. Thank you very much.

        MR. MURKOWSKI: Mr. Bhatia.

        MR. BHATIA: Bhatia.

        MR. MURKOWSKI: Bhatia?

        MR. BHATIA: Yes, sir.

        MR. MURKOWSKI: Please proceed.

        MR. BHATIA: Thank you sir. Buenos dias Mr. Chairman and members of the committee. I have submitted for the record a full text of my testimony and I request that it be admitted. Sitting next to me, Mr. Chairman, is Mr. Santos Negron, a distinguished Puerto Rican economist who served as vice president and chief economist of the Government Development Bank for Puerto Rico from 1989 to 1995, including three years under the presidency of Mr. Rodriguez-Ema. It is an honor to appear before this committee to discuss the economic impact of changes in the political status of Puerto Rico. Mr. Chairman, I would like this morning to make three basic points. First, commonwealth has enabled Puerto Rico to prosper within a fruitful association with the United States. Second, statehood would have disastrous consequences for the people of Puerto Rico and the US Treasury. And, third, commonwealth has the right combination of flexibility and integration with the United States to enable Puerto Rico to continue to grow and thrive into the twenty-first century.
        Through an ingenious combination of investment incentives and free trade, Puerto Rico has developed a thriving manufacturing sector that has fueled economic growth. Once considered a stricken land, the poorest of the poor countries in the hemisphere, Puerto Rico today enjoys one of the highest standards of living in Latin America and the Caribbean. Even though Puerto Rico's per capita income of eight thousand, five hundred and nine dollars is less than one third of the US average, and about one half that of Mississippi, the poorest state, it is nonetheless twenty-five times greater than in 1950, when it was only three hundred and forty-two dollars. Our exports have boomed from two hundred and thirty-five million in 1950 to 23.9 billion in 1997. Puerto Rico imports over thirteen billion dollars annually from the United States, ranking among the top ten purchasers of US products and, as a trade partner, ahead of France, Italy, Hong Kong, Brazil, and Thailand.
        Despite this progress, Mr. Chairman, Puerto Rico is still a developing economy quite different from the United States. As the GAO has pointed out this morning, Puerto Rico, I'm sorry, manufacturing is the engine of Puerto Rico's economy, accounting for forty-two percent of GDP. In contrast, manufacturing represents only eighteen percent of GDP in the United States. That is because Puerto Rico's manufacturing sector is tied to the fiscal autonomy possible only under commonwealth status. The distribution of income in Puerto Rico is also vastly different than in the United States. In Puerto Rico, fifty percent of families have incomes of less than ten thousand dollars. In the United States, sixty-seven percent of families have incomes of twenty-five thousand and over. These basic economic differences make statehood inappropriate to the realities and developmental needs of Puerto Rico's economy.
        Statehood requires the imposition of federal income taxes on top of Puerto Rico's taxes. No serious economist has ever recommended increasing taxes to stimulate economic development. Yet, under statehood, Puerto Rico would have to pay federal income tax at a minimum rate of thirty-nine percent plus local income tax, which currently stands at thirty-three percent, for a combined maximum tax rate of approximately sixty percent, which is the figure that Senator Murkowski was looking for this morning. Such a tax burden would be impossible to sustain. Local income taxes would have to be reduced significantly, leading to either a reduction in government expenditures or increasing other taxes, mainly sales and property taxes. Both alternatives would hurt Puerto Rico's economy.
        A reduction in government expenditures would lead to higher unemployment. Currently, the government sector in Puerto Rico generates approximately three hundred and eight thousand jobs, or thirty-three percent of total employment. Income taxes currently contribute sixty-four percent of commonwealth net recurrent revenues. The elimination of income taxes, without any compensating increases in other taxes, would lead to a reduction in government employment that will lead to higher unemployment.
        The elimination of Puerto Rico's fiscal autonomy and the imposition of federal taxation will lead to massive relocation of manufacturing operations to other areas, with dramatic negative effects on both wages and employment in Puerto Rico. A nineteen-ninety Congressional Budget Office study concluded that, under statehood, Puerto Rico would suffer a permanent decrease in GNP of ten to fifteen percent by the year 2000 accompanied by a direct loss of between fifty thousand and one hundred thousand private jobs. A 1989 study, conducted by Peat Marwick Policy Economics Group, on the direct and indirect effects of statehood concluded that statehood would cost a loss of between eighty thousand one hundred and forty-five thousand jobs and between 1.4 and 2.6 billion dollars in wages.
        Such increases in unemployment would generate massive dislocations in the Puerto Rican economy, leading to increased migration from Puerto Rico to the US mainland and enormous increases in welfare rolls. The 1990 CBO study estimated that statehood would cost the US government over nine billion in additional federal spending during the first four years of statehood. Much of it to compensate for the loss of jobs in the private sector.         Mr. Chairman, statehood would also constrain the ability of Puerto Rico to borrow and to service the twenty billion dollars worth of Puerto Rican bonds and notes currently outstanding. In March of this year, Moody's financial analysts expressed their concern regarding this matter. Under statehood, holders of Puerto Rican debt obligations would lose their current exemption from federal, state, and local taxes. Losing this exemption would imply a higher cost of borrowing for agencies and municipalities in Puerto Rico as investors would have to be compensated for a partial loss of these exemptions.
        The situation would present a stark policy dilemma. Puerto Rico could find itself in the awkward position of either having, a) to default on its obligations, or b) bailed out by the federal government, just like a couple of years ago, Congress had to bail out bondholders in the aftermath of the Mexican peso crisis. Either way, public investment would be curtailed, further reducing growth prospects for the island.
        Mr. Chairman, every serious study, since 1990, on the economic and fiscal effects of statehood has confirmed that it would have disastrous effects on both the Puerto Rican economy and the US Treasury. And, we just saw, in the previous panel, statehood proponents do not have the answers of how Puerto Rico's economy would work under statehood. That is the burden they have, and they have not met it today.
        The uniformity mandated by the US Constitution under statehood would be incompatible with incentives necessary to make Puerto Rico competitive internationally. There is no sense in precipitating this economic catastrophe with an ill-conceived and mis-informed process. It behooves this distinguished committee to perform the necessary studies, including an update of the 1990 CBO report on the economic impact of a change in Puerto Rico's status before enacting legislation.
        Finally, Mr. Chairman, as we approach the new millennium, it is not necessary, nor required, for a nation to become politically integrated with another in order to converge with a common market. As people come together to trade more freely, they also want to preserve their political identity. In the three plebiscites held since 1950, the people of Puerto Rico have expressed their desire to retain commonwealth status and benefit from their association with the United States, while returning their jobs, their productivity, their culture, their language, and their very way of being. This is the dignified alternative. For us policymakers, there is more dignity in creating a job than in having to resort to welfare. And, that is a crucial economic trade-off that statehood entails. Thank you, Mr. Chairman, for this opportunity, and I'm looking forward to answering your questions.

        MR. MURKOWSKI: Thank you very much, Senator. I think what we have heard is evidence that whatever you genuinely believe in, you can make an economic scenario favorable your point of view. But, I do want to compliment all three of you for the positions and the justifications and the rationale behind your particular points of view relative to status quo statehood and, of course, independence. We had our previous workshop addressing the presentations suggested with the benefits of each of those three. We've heard from the previous panel, relative to the GAO, and your own evaluation from your government development bank and your institute for advanced studies relative to the financial implications. And we have, I think, reached the consensus that a good deal of it is based on what kind of ultimate legislation and what preference is made by the people of Puerto Rico, all of which take us down a little different rabbit trail.
        The sobering reality that if we combine your existing state tax with the maximum federal income tax, you're looking at about seventy-two percent. But, that's an unrealistic comparison because you clearly wouldn't have both. You would have something in between and then another determining factor is the phase in time. How long would it take under one proposal or another. A couple of quick questions and I'm going to turn the balance of the hearing over to the ranking member. I've got some people outside. But, in discussing the independent option, independence option, what would the opening of Cuba do to projections for the economic future of Puerto Rico? Is there a decided opportunity there or is there just a kind of a push?

        MR. : Well, I think, Mr. Chairman, that inasmuch as Cuba re-integrates itself into the regional and –

        MR. MURKOWSKI: Which is a little slow in coming.

        MR. : – continental economy, yes. But, there are ways to push it ahead. It's more in your hands than in mine. If that does happen, I think that will be definitely a positive element for the region as a whole. It will increase economic activity. It will increase economic interchange. Puerto Rico's advantages in terms of infrastructure and development and technology, I think, Puerto Rico would be excellently placed to take advantage of an opening of the Cuban situation.

        MR. MURKOWSKI: We were kind of leaving it up to the Pope and then there was a distraction on that particular effort so I –

        MR. : Well, let's say he did his part.

        MR. MURKOWSKI: Okay. Assuming either statehood or independence were the preferred status option, what length of transition do you see is needed and what might be entitled. That's a pretty broad question, but what are you looking at timewise. And, let's take statehood first. Mr. Pietri.

        MR. PIETRI: Senator, I believe that the impact of the change in status to statehood will be so dramatic that we really won't need that long a transition. I think five years should be more than enough. I think just as you have seen that the federal government has been able to balance the budget four years ahead of schedule as a result of the economic boom that resulted from the mere announcing the plan to balance the federal budget. Who had forecasted that it could be done in two years? Everybody had their concerns about six years. Well, just the same way I think we're going to have such a strong boom in Puerto Rico, such great interest and investment in Puerto Rico and dramatic impact, that I think we won't need a long transition period. On the long end, I've heard comments that people would like to see a ten-year transition. I think that's on the long end. I think that five years should be more than enough in my own personal opinion.

        MR. MURKOWSKI: You know, what we haven't heard from is potential investors that might look at one scenario or another – statehood, independence, or status quo. Recognizing the phase out of the current incentive to get a determination of just what we might expect recognizing that there's an opportunity for a large labor pool availability in Puerto Rico and whether or not the projections that you set forth as pro-statehood would be realized relative to, you know, all of the factors being equal. Is there a necessity for some type of tax credit to attract new investors or might there be a fear of significant tax burdens that would be difficult to determine until we had some time frame under which to determine whether the economic vitality of whatever is the result of self-determination if sufficient to generate the type of activity that you folks have suggested in your own individual interpretations. That's what makes this process a little foggy for the Congress because, under the House bill, there's a procedure set that it doesn't necessarily represent the attitude prevailing of the people of Puerto Rico with regard to what their preference is. And, that's why, as we look at our next step in this process, we are a little less than, I think, of a mindset as to what the popular belief in Puerto Rico is for a determination that would ultimately lead to Congressional action on self-determination. I see some people nodding their head this way and some nodding their head that way, so we had that going on. Anybody want to comment on that before I give up the podium?

        MR. : Well, if I may, Mr. Chairman, there are two points which I think you made in the statement in the question just now. And, I'd like to address both of them. First, in terms of the transition period, I think whatever transition period is advised for statehood, it must recognize something that this morning's panels did not recognize. And, that is you cannot have a one state having some conditions and some other states having some other conditions. I mean, there's one concept, and I think the people of Puerto Rico should be told very clearly what statehood is all about. We're not talking about getting some earned income tax credits in Mississippi or Louisiana and not getting them in Puerto Rico. I mean, that is not statehood and it's not possible under the US Constitution to treat some states one way and treat some other states another way even when there is, indeed, a transition period. Second, you mentioned something which is very important to Puerto Rico right now, and that is manufacturing. Jobs, investors. Right now, we're depending, forty-two percent of our GDP depends on manufacturing. Manufacturing is very important –

        MR. : What percentage?

        MR. : Forty-two percent. In the US, it's about eighteen percent. Manufacturing is very important to generate good quality jobs in the private sector in Puerto Rico. And, since the tax credit was eliminated, we have seen right now, we have some sketchy information, and we have seen some of the plants leaving Puerto Rico, there's a ten year phase out period, but there is no real new investment and extensions of new plants coming in to Puerto Rico, some local plants have expanded, but no new plants are coming into Puerto Rico. And, the people of Puerto Rico are very worried. We're not generating any new jobs in terms of the –

        MR. MURKOWSKI: You attribute that to lack of incentive?

        MR. : I would say I attribute that to Puerto Rico's lack of competitiveness, if you combine the concept that the world is opening up. The US is investing now and people in the US are investing in places like Vietnam and China, and Puerto Rico needs every single tool it can use in order to generate those jobs. My point is the closer Puerto Rico would get to even becoming a state, the less competitive it would be for external investment into Puerto Rico and the creation of jobs. We could end up being and generating more welfare in Puerto Rico as a result of statehood, given the fact that Puerto Rico, only about six to seven years ago, was considered a number one place in the world to invest because of its political climate, because of its tax incentives, because a number of factors, our labor force, and today, the very same group that ranked Puerto Rico number one, which is a New York based group, ranked Puerto Rico number twenty-two. We have fallen into the twenty-second position because of this whole discussion about statehood. Statehood and the idea of statehood is making the Puerto Rican economy and the Puerto Rican private sector economy very, very unstable. And, very, very, it's losing the attractiveness and its competitiveness right now.

        MR. : Mr. Chairman, if I could add a quick comment on your question on the transition period concerning independence. It is our judgment that a ten year transition period for a phase out of federal programs would be enough time for Puerto Rico to be able to make up in balance of payment savings through the new instruments at its disposal. But, ten years would be a reasonable amount of time and, after that, it would be the final handshake.

        MR. : Senator, regarding your comment on tax credits, I would say that I won't believe they will be necessary under the state of Puerto Rico or that they should be considered.

        MR. MURKOWSKI: Can you explain why there are not new investments coming into Puerto Rico now?

        MR. : Now? Well, what Senator Bhatia just said, he's just repeated the conventional wisdom that the future is manufacturing. Well, the future is not manufacturing. As we have seen, here nationally, the employment growth in manufacturing has not been there. We have had output growth because of the productivity increases. The future is not necessarily manufacturing. Quite opposite. We've seen the development of the national economy and the global economy that actually the future is more service, entertainment, and trade. And, that's the future of Puerto Rico, as well. Most definitely. The plants that are leaving now that he is alluding to are not leaving because the Congress changed section 936. They're leaving because they're losing their competitive edge and competitive problems. We saw IBM have problems years ago. We saw Digital Equipment years ago. Why did they have problems? Competitive situations in the market. That's what causes some of these plant closings. The future is not manufacturing, most definitely. And, as a state, Puerto Rico will have more tools and better tools to take advantage of its strategic geographic location and to capitalize on the growth and services, entertainment, tourism, trade between the Americas.

        MR. MURKOWSKI: On the other hand, you know, you have a relatively large population, you have a relatively high unemployment level, which suggests that you have to initiate attractions to employ those people so that they can have dollars to spend on recreation and entertainment and other social values that are very important. But, if you don't have some functional direction towards the utilization of that labor force, and that's what concerns me a little bit. And, you know, if indeed factories that did come in are not competitive, why aren't those that see Puerto Rico as a substantial pool and are competitive come in and fill that void, because that is key to the future, regardless of what self-determination is. The ability to have that labor force productive.

        MR. : Well, sir, right now, Puerto Rico, to a lot of investors, they don't even know whether we're in the Atlantic or Pacific and, worse, they don't even care. Being a state all of a sudden puts you on the map. Everybody in the world knows what being a state of this great nation is try. Now, try to explain a commonwealth to them. Particularly foreign investors. I mean, they just don't understand it. Most people confuse it with the British concept of commonwealth. So, people don't really fully understand Puerto Rico, and they don't really feel that it's a great place to invest because there's no certainty. Once you become a state, all of a sudden, everybody understands what it is be a state, and not only that, but it's certain, and you can count on something, and you know that it's a full and integral part of the US, permanently. That accounts for one of the most important considerations of any investment. All of sudden, they understand where Puerto Rico is. They might want to invest. They'll be attracted. They'll look at the location. They'll see that we have a great labor force, and they'll combine all of our advantages, competitive advantages, and then we'll be in a position to have investors take advantage of them. Right now, they don't know about us, it's hard to explain it, they don't care.

        MR. MURKOWSKI: Well, I'd appreciate it – we're going to leave the hearing open and I've gone on long enough, but I want to assure you that statehood does not necessarily automatically imply a high degree of economic progress or prosperity. You know, we've seen historically in this country the depression. We've seen the dust bowl, we've seen the rust belt, we've seen the movement around as we restructure moving from resource development oriented society to higher tech and so forth. So, you know, I'm more interested in identifying why investment will come to Puerto Rico under your particular suggestions and why they're not coming now. To a degree, it may be that the uncertainty of knowing what is going to be the ultimate self-determination could very well be a significant factor. But, I'm very concerned about the utilization of that labor force that you have, some of which are trained, some of which are untrained, and how you put them together. Because, when we get further along in this process, that's going to be an area where an awful lot of debate and opinions are going to be generated, how that labor pool is going to be utilized, whether they are going to have to depend on a significant federal support program of some kind, or whether there's reason to believe that that labor force will be utilized in a productive manner. In conclusion, before I turn it over to Senator Bumpers, let me thank Fernando Martin-Garcia. Our historian has indicated that ten years ago, today, or thereabouts, you were going to testify but you were the proud father of a daughter ten years ago. Well, the economist, Mr. Erick Negron, who was going to testify, gave birth to son today and that's why he's not here. And, all is doing well.

        MR. : As you know, independence has always been associated with growth.

        MR. : Mr. Chairman, for the last issue, which was mentioned by you, I request permission to submit more information.

        MR. MURKOWSKI: You bet, we'll be happy to have it.

        MR. MARTIN-GARCIA: Fortune 500 companies that have invested in Puerto Rico and they have found that Puerto Rico is in the Caribbean, not in the Pacific or anywhere else. I think there is ample evidence of companies that do know where Puerto Rico is and have invested in Puerto Rico over the last twenty years.

        MR. MURKOWSKI: Okay, Senator Bumpers, thank you. Please proceed and would you conclude the hearing for me?

        MR. BUMPERS: I'll be happy to, Mr. Chairman.

        MR. MURKOWSKI: I thank you gentlemen, I thank our witnesses and our participants.

        MR. BUMPERS: Let me just say that, gentlemen, you and the first panel were all as well prepared for this hearing as any witnesses I've ever heard appear before this committee. You all spoke eloquently and very effectively and persuasively for your respected positions. It is the job of this committee to evaluate all of that and determine not just – hopefully not so parochial that we're only interested in what's best for the rest of the United States, but what's best for Puerto Rico. And, with that, Senator Bhatia, is the emphasis right, Bhatia?

        MR. BHATIA: It's only the first syllable.

        MR. BUMPERS: Senator Bhatia, you mentioned a moment ago, that when you pile federal income tax under statehood on top of the state's income and corporate taxes, that it would present a totally unaccepted version. And, I agree with that, for the most part, but you also went ahead and said that the, you used, in reaching your conclusion, that the federal income tax should be thirty-nine percent. It's true that senators hit the thirty-nine percent category, but only 2.9 hundredths of one percent of the people of Puerto Rico pay tax on seventy-five thousand dollars or more. You must reach that level or something a little higher than that, but before you get into the thirty-nine percent category. So, it's not really draconian. I must say, what we're talking about here is very relevant to how well the state of Puerto Rico would fare and how it would survive if you had to cut the present corporate and personal income taxes in Puerto Rico in order to accommodate federal personal income and corporate income tax.

        MR. BHATIA: Well, my, I mean, I think it all depends on what you call draconian. I mean, thirty-nine percent is pretty draconian, but –

        MR. BUMPERS: It is, but very few people in Puerto Rico would fall in that category.

        MR. BHATIA: But, how far down do we have to go to stop calling it draconian? I mean, that's my point. My point is, yes, we need to get more information. We need to get more statistical analysis from people like the CBO, who should be presenting this committee before any decision is made, with an update of the 1990 study which looked into this issue. But, the point I'm trying to make here is that there will be reduction, a massive reduction, in the funds generated locally by the state government. And, if you reduce the amounts that the state government have right now, the state government collects right now, you will have to be faced with a very serious debate. That is, you have three h hundred and eight thousand public employees. Who's going to pay you the payroll.

        MR. BUMPERS: How many?

        MR. BHATIA: Three hundred and eight thousand, thirty percent of Puerto Rico's employees are public employees, work for the government. And, the question is, who's going to pay –

        MR. BUMPERS: That includes the school system?

        MR. BHATIA: That includes the school system. Who's going to pay the payroll of the teachers? Are we going to fire half of the –

        MR. BUMPERS: What is the present budget of Puerto Rico?

        MR. BHATIA: It's about six – the operating budget is about six billion dollars. The secretary of treasury's right here. She might help me. If I run into one or two million dollars up or down. But, it's about six billion dollars operating budget. And, Senator, if I may, it also has a lot to do with paying the obligations that Puerto Rico has. Right now, through our fiscal autonomy –

        MR. BUMPERS: You're talking about that forty-billion dollar bonded indebtedness?

        MR. BHATIA: Twenty billion dollar.         MR. BUMPERS: What is it, twenty billion?

        MR. BHATIA: Twenty billion dollar indebtedness. And, the question is, I mean, do we have the ability and the capacity to pay for those loans if Puerto Rico's income is reduced dramatically as a result of phasing in the federal taxation system? And, that's a question that should be addressed. Perhaps I will not have the same figures that someone else in the panel will have. I suggest, and I recommend to the committee, that a more thorough study be conducted on this issue.

        MR. BUMPERS: Mr. Pietri, forty-two percent of the economy of Puerto Rico is from manufacturing. Is that correct?

        MR. PIETRI: Yes sir.

        MR. BUMPERS: And, eleven percent of the total employment in Puerto Rico is provided by 936 corporations?

        MR. PIETRI: More or less, sir.

        MR. BUMPERS: And –

        MR. PIETRI: The manufacturing sector in whole might be slightly larger, more like fifteen percent –

        MR. BUMPERS: And, I'm not sure what the, what the corresponding GNP for the state of Puerto Rico would be compared to the way we combine GNP in this country. But, my question is this, the 936 corporations pay, if they are eleven percent of the employment and they pay 2.4 billion dollars in payroll, if there was any significant drop in that as a result of losing that tax benefit, that would have to be devastating to the state of Puerto Rico, would it not?

        MR. PIETRI: Well, not necessarily sir. First of all, it's a far cry, it's stretching a bit to say that they're all going to leave immediately.

        MR. BUMPERS: I'm not suggesting that.

        MR. PIETRI: Yes, but a lot of these companies have their best plants in the world in Puerto Rico because of the high productivity and trainability, loyalty of our labor force. They have hundreds of millions of dollars invested there. And, these are plants that they first analyzed – for them, when a manufacturing company makes an analysis as to where to locate, it has to be a good decision, not based on taxes, but based on the cold hard numbers of it. And, then the tax benefits are an added benefit to them. So, these are high productive plants with huge investments there. They're not necessarily just going to leave. But, forty-one percent of that GDP in Puerto Rico, and, by the way, it's measured the same way as you do measure it here nationally. But, it's huge, and this is the result, our GNP slightly lower than GDP, and that's an anomaly. The reason for that is because of the huge investment by external investors that create this huge trade back to the mainland because they import the raw material, they process it, and they export right back to the mainland. What remains on the island, yes, it's the payrolls, yes, it's some indirect employment and other services that they need to provide for their own plants, but it really isn't wealth that is created in our own economy happens to be located there and it does not contribute to the economy in the same way of wealth created by a local entrepreneur whose capital is invested in his business there. He provides a service or sells a product, and then that wealth is his and remains and reinvested in the local economy. It's very different. The profits that are generated by 936 companies are not reinvested in the local economy. They are brought back to the parents. So, even if there was to be a reduction, it wouldn't be as devastating as the numbers might lead you to believe.

        MR. BUMPERS: Well, let me ask you this, of the forty-two percent of the economy – or, incidentally, what is the gross economy in Puerto Rico?

        MR. PIETRI: The total GNP is about thirty-two billion dollars.

        MR. BUMPERS: Thirty-two?

        MR. PIETRI: Yes, sir.

        MR. BUMPERS: And, what percentage is provided by the 936 corporations?

        MR. PIETRI: Well, it's normally a measure based on the gross domestic product. It's about forty-two percent for the manufacturing sector. Most of which is 936, because they are the largest companies with the largest sales.

        MR. BUMPERS: How many – of the forty-two percent of your economy provided by the manufacturing, how much of that is by manufacturing from other than American companies?

        MR. PIETRI: A very small portion. I don't have the exact figure here, but it would be a small – of the production, yes. Of the employment, it's about four percent.

        MR. BUMPERS: So, it's fair to say, is it not, that, if the vast majority of the economy of Puerto Rico is provide with the 936 corporations, and there's very little manufacturing there from other countries, I don't see how we can escape the conclusion that the loss of the 936 status is going to be devastating for Puerto Rico.

        MR. PIETRI: Well, the loss of the 936 status –

        MR. BUMPERS: Let me make one other observation. The 936 corporations receive a benefit of roughly twenty-four thousand dollars a year per employee. That's more than the payroll. Twenty-two thousand – the average employee in a 936 corporation makes twenty-two thousand, and the tax benefit to them is twenty-four thousand dollars per employee. It seems to me that, if you lost that, I can't imagine, frankly, a corporation staying unless there was just some really overwhelming reason to stay if they lost that. That's a tremendous benefit to a corporation.

        MR. PIETRI: Of course it's a tremendous benefit, and it came at an extremely high cost to the federal government, and that's why –

        MR. BUMPERS: It does, it costs us about two and a half billion dollars a year in federal income tax.

        MR. PIETRI: – and at very little job creation. So, that's why the Congress saw it as unsustainable. And, that's why the Congress already took action to end the program. I mean, this is already a fact, sir. It's not like it's going to come. It is here. It is being phased out. The companies are not leaving in a massive way. One closing here and there is not a massive exodus. One closing here and there in response to competitive pressures on that company is not a massive exodus. We're not seeing the massive exodus. They're there. They have hugely productive plants. They're going to stay because they do well there. Because it's good to do business in Puerto Rico. They're going to stay.

        MR. : Mr. Chairman.

        MR. BUMPERS: What percentage of the – just a moment, senator. What percentage of the economy of Puerto Rico is tourism? Do you know the answer to that?

        MR. PIETRI: Yes, sir. It's about six percent. And, has not significantly grown in a long time.

        MR. BUMPERS: It's been fairly static?

        MR. PIETRI: Yes, sir.

        MR. BUMPERS: Do you have a reason, do you have a personal belief as to why that's true?

        MR. PIETRI: Yes, I do.

        MR. BUMPERS: What is it?

        MR. PIETRI: It was basically a totally – Puerto Rico's unnatural for tourism. And, it was a totally neglected sector until Governor Rossello came into office in 1993 and he's trying to promote it significantly. The basic reason is because the commonwealth advocates wanted to foster dependency on section 936 and neglected every other sector, including the local commerce and trade. I mean, they had punitive taxes on the local businessman in order to provide tax exemptions to the outside investor.

        MR. BUMPERS: Senator, I want you to comment on that in just a moment. But, before you do, I want to ask Mr. Pietri one additional question. And, that is, do you think Puerto Rico should gain statehood if the vote is fifty-one percent for?

        MR. PIETRI: Absolutely yes. I mean, this is a democracy –

        MR. BUMPERS: Anything above a majority ought to – do you agree with that, Mr. Bhatia, Senator Bhatia?

        MR. BHATIA: Mr. Chairman, I think it's a question not only of Puerto Rico's democracy, but it is also a question of the United States willingness to accept a state, which is a very different state, it's a Spanish speaking state, it's a culturally different state. And, it's a question of whether you want, as a state, a group of people that can turn out, because of its nationalistic feelings, turn out en masse, two years later saying perhaps we made the wrong decision. I think there is a very valid concern, which I don't think it's a question of Puerto Rico. It's a question that you should have in terms of, you know, what exactly are your standards in terms of Puerto Rico as a state. I think you should recognize that, unlike any other of the fifty states, Puerto Rico, we're talking about a group of people which considers itself a nation. Not only considers itself a nation, but it has all the characteristics and aspects to support the claim that Puerto Rico is indeed a nation. So, the question is, how many votes do you need to make a nation, another part of a nation? Do you need fifty-one percent or do you need ninety-nine percent? Do you need eighty percent? I mean, what is exactly is the figure. It's something that I think ought to be discussed by this committee and by the Congress as a whole.

        MR. BUMPERS: We deal here all the time, not necessarily, we don't, in the Senate, there are any number of issues which require a sixty percent vote. Some people would find that offensive as being anti-democratic. For example, our constitution requires a sixty-seven percent vote to override a presidential veto. It requires a sixty-seven percent vote to amend the Constitution. Those things were put in by what I consider the most brilliant men ever assembled under one roof, over two hundred years ago. And, while that doesn't sound very democratic, it has served this nation very well. Because, when you're dealing with matters of social and economic and political changes of the magnitude you deal with when you tickle with the Constitution, it seems to me like sixty-seven percent is not an undue burden. And, so, I have difficulty, I have difficulty accepting the proposition that Puerto Rico should be made a state with 50.1 percent of the vote.

        MR. MARTIN-GARCIA: Senator Bumpers.

        MR. BUMPERS: Yes.

        MR. MARTIN-GARCIA: This is a case where you're seeking our advice, obviously.

        MR. BUMPERS: Yes, I am.

        MR. MARTIN-GARCIA: Let me answer this way. This will be, of course, a matter that will be an important one for the Senate to take up at the appropriate moment, but the most I can tell you is the following. If I were asked what I would require from another nation that wanted to fuse with Puerto Rico, what would I require as an expression on the part of another nation that wanted to join Puerto Rico? I would require not only a mathematical requirement, I would want to make sure that these people want, in fact, want to become Puerto Ricans. That they want to join the mainstream of Puerto Rican life, that their primary loyalty is to Puerto Rico, that they are in it for the duration, that they are not going to have the feeling that they abdicate a historical or inalienable right. I want to make sure that it's compatible with my interest for the future. I do not see, quite frankly, Puerto Rico as a nation as being a donor compatible with the body politic of American federalism. That is my personal observation. And, I, as one Puerto Rican, if Puerto Rico ever were to become a state, would never cease in my struggle to gain independence for Puerto Rico from the United States. And, I would view that as a strictly transitory proposition and I'm sure that future generations would see it that way also.

        MR. PIETRI: Senator, I'd like to add, regarding that, because my answer was very brief. I mean, I'm a businessman and not a politician. But, I'd like to say that the thousands of Puerto Ricans who served in the wars on behalf of this country very much did so with did so with as much patriotism as anyone else's. And, I'd also like to add, if you look at the history of territories becoming states, there was many instances where you had very small majorities, and there were some where you didn't have majorities in the first vote. But, thereafter, after the decision has been made, the situation changed dramatically. And, when the enabling act went back, there was a huge vote in favor of statehood. And, I venture to say, that's exactly what's going to happen in Puerto Rico. Right now, we have three alternatives. Many people are confused by the more than fifty years of a hoax trying to tell them that commonwealth is actually a status when it's no more than a territory. And, some people actually believe that. So, all this confusion and the three alternatives and that dilutes that. Once the decision is made and the enabling act is brought back, I will forecast it will have a very large majority, just as it happened in Alaska and has happened in many other territories that became states. So, I wanted to add that, as a businessman because I'm not a politician.

        MR. BUMPERS: Puerto Rico deserves tremendous credit for its patriotism. I don't know, I really have not immersed myself in this issue since we took it up before. As I recall then, I think Puerto Rico lost more men in the Vietnam War on a per capita basis than any state in the nation. And, I don't want anybody to think that the rest of the country is not most grateful for that. We are and we take that – that is a factor to be considered in making a decision on this. But, back to you, Senator Bhatia, I have a poll here and I might ask all of you to comment on this, I have a poll here that came off the Internet that was take between May 1 and May 4th of a thousand and eight people, that shows forty-two percent of the people favor statehood, forty-five favor commonwealth, and five percent favor independence. Now, this is not exactly – I mean, I don't see how you can take a poll on this without concluding that it was a fairly sophisticated electorate. The people of Puerto Rico have been bombarded with this issue for, as we lawyers say, since the memory of man runneth not. So, it's not a cold turkey thing whether they're making an impulsive decision on it. And, my guess would be that if you were having the election today, that's probably close to what the outcome would be, and Mr. Pietri, that's the reason I asked you about the 50.1 percent majority. I think if you were to have an election there today or anytime in the foreseeable future, it's going to be a very, very close vote. And, that troubles me, do you want to comment on that, Mr. Bhatia?

        MR. BHATIA: Well, I'd like to say two things, Mr. Chairman. One is that the people in Puerto Rico are not ambivalent about the status issue. I mean, they feel very strongly and very – I mean, it's something that we, we talk in our homes after dinner, before breakfast, after breakfast, before lunch, after lunch. It's something that is discussed every day, day in and day out in Puerto Rico. And, people feel very strongly. So, you not only have perhaps if you have those numbers fifty-two percent of the people of the people against statehood. But, you have fifty-two percent of the people who feel very strongly against statehood. And, that makes a very big difference. So, in terms of getting an x-ray of the Puerto Rican electorate, I think we ought to realize that, as long as this Senate, and as long as the United States Congress, give the people of Puerto Rico a fair chance with all the definitions and all the rights to participate in a fair process, that the results will be those. We have had plebiscites in and plebiscites out. Since 1952, we've had three plebiscites. And, those three plebiscites, the most recent one in 1993 against anyone's suspicion, commonwealth won because the people of Puerto Rico, even when they have fought in those wars and they have, and we're very proud of those men, but they want to remain as a commonwealth and under a commonwealth relationship with the United States. And I think that, Mr. Chairman, is democracy. Listening to the people and real self-determination is nothing but listening to what the people of Puerto Rico want and they want to remain as a commonwealth of the United States.

        MR. BUMPERS: Well, of course, they're going to have that opportunity if we pass this bill.

        MR. BHATIA: Yes, yes.

        MR. MARTIN-GARCIA: Senator. First of all, I think those numbers could very well change in the future. Historically, in Puerto Rico, if one takes the longer view, there have been, in Puerto Rico during the past sixty or seventy years, at different times majorities for statehood, there have been majorities for independence, there have been majorities for different transformations of current commonwealth status. And, those numbers that you read from that all sort of sound like a picture of what our prevailing attitudes at this moment, but those attitudes are all conditioned on the perception that people have of the implications of statehood versus continued commonwealth or versus independence. For example, the growth of pro-statehood sentiment in Puerto Rico in the last twenty years has very much to do, I think, among other things, with the very successful propaganda on the part of pro-statehood sympathizers in Puerto Rico who put forward statehood as something not only not equivalent to cultural and linguistic assimilation, but statehood as something that basically meant you get more money, you get two senators, you get seven representatives, but everything continues the same. Well, that made sort of statehood attractive for people who were dissatisfied with commonwealth and who were under the pressure of dependence. Commonwealth, for a long time, was viewed as the favorite option on the part of the US. It had favorable tax policies and it was viewed as a kind of preferred sweetheart solution with the US. And, of course, independence was always viewed as jumping off the eighth floor without a parachute as a solution that was viewed as punitive as isolationist. And, those numbers today reflect those perceptions. In as much as this congressional process and subsequent ones change those perceptions by redefining what statehood would really entail and what are the real options for self-government other than colonialism, and what would be a true good faith offer of independence, I see no reason why one shouldn't believe that those numbers could substantially change in the future.

        MR. BUMPERS: When Governor _____ hosted the National Governors' Conference in Puerto Rico in 1973, was it Louis? I got the impression during that period of time because the independence movement was, I felt, was fairly strong at that time, and it seems to me, and I invite you to comment on this, it seems to me that the independence movement has lost ground ever since then. Is that –

        MR. BHATIA: Well, first of all, I think that it was noisier than it is now.

        MR. BUMPERS: It was very noisy, I can vouch for that.

        MR. BHATIA: But, I think that, in the case of the independence movement, when one realizes that federal transfers to individuals in Puerto Rico in 1972 amounted to seven million dollars, and that in 1996, they amounted to 1.7 billion dollars, the amazing thing is that there is any independence movement left in Puerto Rico at all. After what we have been through. The Puerto Rican independence movement should have disappeared from the face of Puerto Rico a long time ago. On the contrary, it is very strong. I think it is growing, but not only growing. I think that the terms of the way politics is discussed in Puerto Rico are ever more discussed in the vocabulary of the independence movement. When I hear in this process that took place in the House in the preceding months and the one that will take place here in the Senate in the coming months, if it does happen, you will note if you are observant, and I know you are, that the language that the statehood movement uses to attack commonwealth is ever more the language of the independence movement. Commonwealth as colonialism. And, when you hear the commonwealth movement attacking statehood, they ever more use the language of the independence movement, that is, denouncing that statehood would, in a way, be contrary to the interest of Puerto Rico as a nation, up-playing the whole cultural and linguistic elements. So, in that sense, the language and the ideology of independence, the recognition that Puerto Rico is a nation and has a right to govern itself, which it should not abdicate, I think, is very more present in the language of politics in Puerto Rico.

        MR. BUMPERS: There's been a – I have not heard this from any of my Republican brethren, but I have read extensively about how a number of things could happen. Number one, that the Republicans could ingratiate themselves with the Hispanics in general and the Puerto Ricans specifically in this country by embracing this bill. And, on the other hand, I've heard that the Republicans are very apprehensive about statehood, which would probably add six Democratic members to the Congress. Now, again, mentioning the poll, which I found just to be interesting – politicians are hung up on polls and I find them as interesting as everybody else does – and this same poll that was taken May 1 through May 4th, the figures on that were, just in the presidential election, if the presidential election were held today without naming a candidate, twenty-seven percent of the people in Puerto Rico said they'd vote Republican. Fifty-seven percent said they would vote Democratic. But, you go a little further and you find that seventy-seven percent of the people of Puerto Rico say they are pro-life. And, if you ask would you vote for a Democrat who is pro-choice or a Republican who is pro-life, the numbers are rather staggering in favor of pro-life, which makes this an extremely important issue in Puerto Rico and my question, senator, is there anybody in the Senate that's pro-life? I mean, pro-choice? In Puerto Rico?

        MR. BHATIA: It's an issue that has not been addressed by the legislature in this term, which is the only term where I've been in the legislature, but it's certainly an issue which is very close to people's hearts. And, Puerto Rico being a Christian community and where so many different values are being weighed every day. So, it's not an issue that has been addressed by the legislature in this term, yet. I mean, there are a few bills running around and it's something that may come up soon. So, I cannot tell you, I cannot give you a tally of who's going to vote which way.

        MR. BUMPERS: Do you know of anybody in the Senate who is an avowed pro-choice person?

        MR. BHATIA: Yes, I may have to answer that question as yes. I'm going to get the press to come and follow me and say who is that person later, but –

        MR. BUMPERS: Well, I'll let you whisper it to me, and I promise I won't tell a soul. You know, what –

        MR. BHATIA: There are twenty-eight members of the Senate of Puerto Rico and, yes, some have expressed to me the fact that they are very much pro-choice and some have expressed to me that they are very much so-called pro-life. And, I think Puerto Rico's –

        MR. BUMPERS: Seventy-seven, twenty-one is what this poll shows.

        MR. BHATIA: But, in a way, Puerto Rico's legislature is no different than legislatures anywhere in the world in terms of having people with diverse –

        MR. BUMPERS: Well, that's roughly twice the pro-life vote in polls in the United States. I'm just curious about this. We're winding this thing down and I thought this would be something interesting. Mr. Pietri, do you have anything do say on that?

        MR. PIETRI: Yes, yes, I would. As a member of the Republican party of Puerto Rico, I'd like to say that it is my firm belief that the Republican party in Puerto Rico will definitely be very competitive. And, that the conventional wisdom that because of the demographics and the per capita incomes, it's a natural constituency for Democrats is not necessarily correct. I'd also like to say regarding the poll that you mentioned earlier, you know, well over ninety percent of the people of Puerto Rico value their US citizenship very, very strongly. It is one of the most essential factors in decision making in Puerto Rico and the permanence of that US citizenship is very important to them, to well over ninety percent. So, I believe that, once they understand that the only way to, first of all enjoy all of the rights of that citizenship and, second of all, to assure themselves of the permanence of that citizenship for their future offspring is statehood, I believe that the numbers in favor of statehood will be very strong and it will do quite well in this plebiscite. I'd also like to say, regarding a comment that Mr. Martin said, there is and remains a movement in Texas that advocates independence, as there is in Hawaii and there is in Alaska. I mean, there are independence ideologues in many, many states and we know that there are many disgruntled in many other states as well that are against the US government. So that the fact that we might have a small percentage of our population to continue to advocate independence indefinitely after we become a state is not unusual.

         MR. BUMPERS: Well, gentlemen, I thoroughly enjoyed this. Let me reiterate, it's been extremely informative for me because you have all been so well prepared and you speak eloquently and, as I say, persuasively for your respected positions. And, we are most grateful to you for coming up to be with us and, with that, we'll stand adjourned.

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