Puerto Rico Statehood Jude Wanniski March 5, 1998

\Memo To: House Speaker Newt Gingrich
From: Jude Wanniski
Re: Puerto Rico Vote

I see you voted with the one-vote majority Wednesday night in endorsing the process that could lead to statehood for Puerto Rico and am glad you did. I also see most Republicans voted against the measure, no doubt believing that with statehood there will be seven or eight new House members, and all will be Democrats. Over the years, you and I have discussed this several times, as I recall, and you know I've always believed when statehood arrives, as I think it will in the next decade, there will be at least as many Republicans in the delegation. You may remember I first met Carlos Romero Barcelo in early 1976, when he was mayor of San Juan. He was the first politician to run on the Laffer Curve, winning the governorship that November on a promise of a tax cut. I've talked to him several times since he became the island's non-voting representative in Congress. He knows my argument on why it isn't possible for PR to become a state until it has a tax reform, i.e., a low, flat tax that would enable it to merge its state tax with the federal tax. I've always hoped that Puerto Rico one day could become a state, because it now is neither fish nor fowl, dangling halfway between statehood and independence. The opponents of the measure before the Congress are quite correct that the people of Puerto Rico again and again have voted against statehood. But that is only because the island opponents have correctly pointed out that unless there is major tax reform in Puerto Rico, statehood would cause a depression in the island economy. With its 35% commonwealth income tax added to the federal 38.6% top marginal rate, all serious businesses and professionals would flee the island, and everyone would be unemployed and on food stamps. You could bet all members of the delegation would be Democrats.

I'd made this case in Puerto Rico dozens of times since 1976, arguing that statehood would come if they initiated a process by which they could bring their progressive tax down to a manageable level, somewhere around 6%. Polyconomics was actually engaged in a project financed by local industry and the government development bank to design the tax reform. Sadly, the current governor, as avid as he is in favor of statehood, killed the project in advance of the last plebiscite because he feared my arguments about depression would cause defeat of the plebiscite — which happened anyway. A correct supply-side merger would enable the PR electorate to overwhelmingly vote statehood ~ and their island economy would boom. The forces of inertia in the PR political establishment continue to block the kind of reforms I advocated and even Carlos pretends that statehood can be rammed through without this kind of work on the tax system. If I were you, I would urge Puerto Rico, through Carlos, to reform its tax code in a way that enables the island's electorate to take the attendant risks. To merely pass the statehood resolution without facing the barriers that worry the voters is a waste of time. Incidentally, I also made the argument that if worry the voters is a waste of time. Incidentally, I also made the argument that if something like Dick Armey's flat tax went into effect here, there is no doubt in my mind Puerto Rico would replicate the reform and statehood would produce an economy of entrepreneurs, voting Republican.

By the way, while it's good that you want to do something nice for Hispanics, it would have more immediate benefits if you opposed the $18 billion the IMF is trying to squeeze out of our taxpayers. You know as well as I that the IMF, the evil empire, is using its muscle all over Latin America to keep people poor. Kemp said he would not give another nickel to the IMF unless it changed its policies and personnel. As Speaker, you can make that happen by telling the administration the $18 billion will be approved if Michel Camdessus resigns and is replaced by Pedro Aspe, who Jack is pushing as his replacement.