Economists Say Extending Tax Credits to Puerto Rico Would Stimulate Economy

Puerto Rico does not have equal access to tax credits designed to support low income working families, including the Earned Income Tax Credit and the Child Tax Credit.  While extending these credits to Puerto Rico has been proposed many times over the years, PROMESA and the renewed commitment of the United States to enhance Puerto Rico’s economic growth mean that the concept is being considered again before Congress, and with greater seriousness.

Economists Arthur MacEwan and J. Tomas Hexner have published research proving that that extending the Earned Income Tax Credit and the Child Tax Credit to Puerto Rico would not only assist individuals and families, but it would also stimulate Puerto Rico’s economy.

The Earned Income Tax Credit(EITC) is available to low-income working parents in the States when they file their income tax returns. Residents of Puerto Rico generally are not required to file income tax returns, and this has been given as a reason that Puerto Rico should not be eligible for the EITC. However, EITC payments are made to low-income families in the States, whether the workers in those families owe any taxes or not. In fact, only $10 billion of the $73 billion paid out in tax refunds in 2015 was actually a refund of taxes paid, according to government figures. The remaining $63 billion was payments to people who paid no taxes — just like the residents of Puerto Rico.

MacEwan and Hexner further point out that the EITC was intended to make up for payroll taxes, which residents of Puerto Rico pay at the same rates as residents of the States. It is, they say, an essential unfairness to make tax credits available to people in the States who do not pay income tax, but not to make it available in Puerto Rico. The goal of the EITC is to help lift families out of poverty, and Puerto Rico has a higher poverty rate than any of the States. Some of those who argue against extending the EITC say that people who are helped by this tax credit in Oklahoma or Delaware might at some point end up paying income taxes. The EITC is therefore an investment in their future prosperity, which they will share with the federal government. Since there are now more Puerto Ricans on the U.S. mainland than on the Island, it is equally reasonable to suggest that families which are helped in Puerto Rico may one day pay income taxes in the States.

In addition, the economists note, the goal of the EITC is to help lift families out of poverty, and Puerto Rico has a higher poverty rate than any of the States. Some of those who argue against extending the EITC say that people who are helped by this tax credit in Oklahoma or Delaware might at some point end up paying income taxes. The EITC is therefore an investment in their future prosperity, which they will share with the federal government. Since there are now more Puerto Ricans on the U.S. mainland than on the Island, it is reasonable to suggest that families which are helped in Puerto Rico may one day pay income taxes in the States.

Regardless, the research is clear that extending the EITC to Puerto Rico would reduce poverty.  Residents of Puerto Rico are as good an investment from a tax perspective and should therefore be helped out of poverty, just as residents of Mississippi and New Mexico are.

The Child Tax Credit is available to parents of three or more children in Puerto Rico, a restriction not faced by families in the States. Those who are eligible for the credit claim it with an income tax return, and this process could be used to cover the EITC as well. Again, it is possible to find arguments against the extension of the Child Tax Credit. The Heritage Foundation, for example, says that “the CTC would do little more than provide windfall benefits to families with children.” In the same opinion piece, we find repeated suggestions that the EITC would help only the “relatively privileged” members of the workforce in Puerto Rico, even though the EITC is a means-tested program, phasing out as income grows.

The EITC has also been found to encourage people in the United States to work, even when taking and keeping a job is made difficult by the costs of transportation and child care, and the pay is not much more than government benefits. EITC funds often go toward repairing a car or paying community college tuition to increase marketable skills.

The Heritage Foundation doesn’t think this would happen in Puerto Rico. The author instead invites us to “just imagine how high the improper payment rate would be in Puerto Rico.”

MacEwan and Hexner disagree with Heritage. They believe that the EITC would encourage both employment and spending in Puerto Rico. “Together, the infusion of funds and the greater engagement in productive work would make a major contribution towards transforming the island’s economy out of relative stagnation onto a healthy growth path.”

Significantly, the EITC would be unavailable for those who participate in the informal economy, accepting payments under the table instead of taxable wages. Extending the EITC would therefore provide an incentive for moving from the informal economy into the labor force. In many cases, both employees and employers in the informal economy could benefit from the EITC, and the increased spending power could help to support the small businesses in the shadow economy. “As a result,” MacEwen and Hexner say, “the informal economy would shrink, the tax base would be enlarged, and local tax payments would increase. Moreover, in moving from informal to formal activity, workers would tend to move to more productive activity.”

The economists provide a specific example of how the tax credits create inequality between families in Puerto Rico and families in the States:

Consider two families whose members are all citizens of the United States. One family is in the states and one in Puerto Rico. Each consists of two parents and two young children. Both families have earned income of $28,000 in 2015. Each family pays $1,736 in Social Security taxes and $406 in Medicare taxes. Neither family has any federal income tax liability, the Puerto Rican family because it is not covered by federal income tax requirements and the family in the states because its income is so low.

The family in the states, however, receives an EITC of $4,622 and a CTC of $2000. Thus, after federal taxes and credits, this family has income of $32,480.

The family in Puerto Rico, not eligible for the EITC and CTC, after federal taxes and federal credits (i.e., none) has an income of $25,858.

The family in Puerto Rico, earning the same as the family in the states, and the same as the family in the states in terms of family members and earned income, has an income $6,622 less than the family in the states after both families’ tax and credit interaction with the federal government. (In percentage terms, the family in the states has a 26% greater income than the Puerto Rican family after federal taxes and credits.)

While the arguments on the grounds of fairness and of economic impact are persuasive for many legislators on both sides of the aisle, there is controversy over whether to administer these tax credits locally or federally.  The Administration has endorsed a locally administered version.  This proposal is an outlier — PROMESA’s scope argues for more federal control, and congressional proposals such as HR 3553 envision a federal administration as well.

Read the full article.

2 Comments

Luis Arroyo

The Heritage Foundation probably thinks PR is full of grass huts,barefoot women & shanty towns. They are obviously smarter than that.
Heritage Foundation protects Anglo Saxon virtues.
England & Spain were rival world powers. Their people were always enemies.
This Anglo anti Hispanic legacy drives Heritage Foundation’s opposition to Puerto Rico Statehood & any help for the island.
Puerto Rico’s newly separatist (ex commonwealth party ) PPD as well as the PIP independence party contribute to Heritage Foundation as an anti statehood lobbyist.

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