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V.I. Advised to Stand Up for Itself on EDC Issues

May 4, 2005 – Passions ran high for awhile Wednesday in a hastily called meeting to address problems brought upon the territory's EDC program by recent changes in federal tax law.
"We are not second class citizens and this message needs to resound from every corner of Washington, D.C., " Senate President Lorraine L. Berry said in opening the Committee of the Whole hearing. "We are being significantly impacted by these behind-closed-doors activities," Berry said, referring to drastic changes made to the internal revenue code last fall that severely impacted one particular class of business in the territory's Economic Development Commission tax benefit program. The changes were all made during a Congressional committee meeting during a single October weekend.
Berry introduced for discussion only a bill that would amend the current EDC law, in the hope of impressing upon federal lawmakers that the V.I. is serious about making adjustments to the program.
But David Nissman, former U.S. attorney currently serving as chief executive officer of Bridge Capital, an EDC beneficiary, had another approach. "It's time to stand up and fight," he said. "If you don't get up on your hind legs and fight, that town [Washington] will eat you up."
In a power point presentation, Nissman, who had been asked by Berry to give testimony, drew a history of the nature of the V.I.'s relationship with Washington, going back to 1900. What to do with the various acquisitions the U.S. had made around the world was the biggest issue in the elections that year, he said.
Though the V.I. had not yet been purchased from Denmark at the time – that didn't happen until 1917 – the policies back then set the stage for the relationship to come, Nissman said. The idea was that the U.S. didn't want to annex the various territories in their possession, so they set up laws that would enhance their ability to be self-supporting.
Nissman offered the following quote from Herbert Hoover, U.S. president 1929 to 1933, to characterize the thinking of the day: "We acquired an effective poorhouse, comprising 90 percent of the population. The people cannot be self-supporting either in living or government without discovery of new methods and resources. The purpose of transfer of administration from the naval to a civil department is to see if we can develop some form of industry or agriculture which will relieve us of the present costs and liabilities in support of the population of the local government from the federal treasury or from private charity. Having assumed the responsibility, we must do our best to assist the inhabitants."
What the Treasury Department and Internal Revenue Service did in pushing Congress to change the laws, was to undermine what had been an offshoot of the thinking of the early 20th century – that the EDC program offered a way for the V.I. to be more self-supporting.
Nissman was "adamant" that it was time for the inhabitants to "get off our knees in Washington."
"You don't structurally interfere with a valid U.S. economic development policy," Nissman said. "They threw out 100 years of U.S. history in the middle of the night."
Nissman pointed out that when the EDC laws were first hammered out in 1986 it was through a partnership with the IRS. But what happened over the last year has been far from a partnership.
"The IRS is dictating to the BIR," he said.
V.I. government officials received no warning about, much less any invitations to participate in the revisions – though V.I. lobbyists did a lot of running around trying to cut deals prior to the weekend massacre of the EDC program."
Of great concern to another witness was that the audits currently being conducted by the IRS on EDC beneficiaries – as a result of the changed tax laws – are being conducted without any guidelines.
Hurdle Trip Lea III, chief executive officer of Margate Management, an EDC company, said the V.I. needed to "Demand written guidelines," for the audits.
Lea called the new federal regulations, which changed residency and source income definitions overnight and sent some beneficiaries running for cover, if not the door, "onerous and injurious."
Lea said one third of the designated service businesses, the category being zeroed in on by the new federal regulations, have closed their doors. Another third have told their employees they are closing, according to Lea.
Nadine Marchena, assistant chief executive officer of the Economic Development Agency, disagrees with Lea's assessment, and is quick to point out the affected businesses are only a part of those participating in the program. Along with the designated service business, manufacturing companies, service businesses, and even the local phone company are or have been beneficiaries – and they are not affected by the new regulations.
Nevertheless, no one in government is unconcerned about the potential fallout.
That was Berry's intention in drafting legislation that would address some of what is perceived as the IRS concerns, as well as those of current or potential beneficiaries.
Included in the legislation that is to be sent back to the Economic Development, Agriculture and Consumer Protection Committee for review are provisions to:
– Limit the number of shareholders in a company, and require notification when any new partners or shareholders are added.
– Change the basis upon which a partner in an EDC company is taxed on allocations that may not actually be distributed to the partner.
– Allow beneficiaries to make investment loans of over $1 million in the territory and receive tax breaks on the interest earned.
– Increase the cap on what is considered a small business from $1 million to $4 million in annual receipts to keep pace with inflation and to allow more small businesses to enter the program.
– Reduce the application fee and increase the benefit period for small businesses.
Objections to at least one of the proposed amendments were registered.
Attorney Tom Bolt showed up to represent the bankers on the lending issue. Bolt expressed concern that the law wasn't specific enough and could lead to financial shenanigans if it wasn't carefully reviewed and tightened up.
Berry told Bolt she thought the law was fine the way it was written, but said his concerns would be taken into consideration.
By the end of the meeting, the passion had petered out and it wasn't clear exactly what the next move would be.
The public comment period for the recently clarified rules and regulations pertinent to the change in the tax law ends July 31.
Sen. Terrence "Positive" Nelson said he would be happy to go to Washington and make the case for the V.I. Nelson said, "We are half-citizens." He said, "I voted for President Clinton when I was a student in North Carolina. I come back here and I can't vote for nobody."
Nissman said it would be a good idea for as many government officials to go to Washington as possible.
Nissman also said it was important to get as many U.S. Senators and government officials to the V.I. as possible to show them "who we are."
An effort has been underway by several EDC beneficiaries to do just that. And a few U.S. senators have been brought to the territory. But the cost is high. As part of the carrot to get them to make the trip, they have been promised as much as $50,000 in contributions.
Numerous efforts on the part of the V.I. government up to now, including a letter sent by Gov. Charles W. Turnbull to Treasury Secretary John W. Snow April 28, have seemingly had little affect upon Washington officials.
In fact, between the enactment of the American Jobs Act in October 2004, and the publishing of the regulations governing the law in April, the rules have gotten tighter and worse.
Sen. Ronald Russell said he thought it was in
the interest of the Congress to, "chop away at any benefits we have. They are our competitors."
Sen. Neville James asked Nissman what might have happened if the territory had enacted it's own residency laws governing the EDC program prior to the shoe-drop last fall. "Have we been as aggressive as we should have been?" James asked.
"There was a window of opportunity," Nissman said, "But that's over now."
Frank Schulterbrant, chief executive officer of the EDA, and tax attorney Marjorie Rawls Roberts also provided testimony at the hearing.
All senators except Norman Jn Baptiste checked in at the meeting, which started an hour late, but Sen. Celestino White was not seen again on the floor after he logged in.

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