Puerto Rico’s legislature has sent a bill to Governor Pierluisi which is designed to allow Puerto Rico to make the most of the EITC provision in the American Rescue Plan Act (ARP). The ARP makes changes to the federal Earned Income Tax credit, but Puerto Rico residents are not eligible for that credit. Puerto Rico has its own version of the EITC, and the ARP, for the first time ever, provides federal money to help fund that credit.
Puerto Rico’s new EITC would have been more generous if the territory were included in the federal law as if it were a state. Nonetheless, the federal subsidy added to Puerto Rico’s local EITC enriches the benefit far beyond its current value. Although recipients would pocket more EITC funds under statehood, the new law promises to have a meaningful impact on family finances.
The Earned Income Tax Credit is a refundable credit (that is, people receive the credit even if they do not earn enough to pay taxes) for working people with low incomes.
Federal support for Puerto Rico’s EITC
The territory’s EITC provided a total of $2 million for eligible families in Puerto Rico. The territory will have to continue to cover that cost. However, federal funds of as much as $600 million will be available to the program.
This supplement will quadruple the benefits available through the program. Puerto Rico will have to increase the amount paid to recipients in order to receive the additional funds.
The ARP also provides funds for the education of recipients about their increased benefit: $1 million per year through 2025. In the past, few people have filed for this tax credit — the territory spent much less than the $2 million budgeted, even though it is generally believed that the $2 million is not enough to meet the needs of all the people who are eligible for the EITC.
The value of the EITC
The EITC has been found to encourage labor participation in the States, where about 20% of tax filers receive it. For one thing, the EITC rewards work, paying more as people earn more. For individuals who could receive government benefits almost equal to what they would earn in a minimum-wage job, receiving the EITC can provide motivation to stick with employment in spite of challenges.
The EITC can also help with the challenges of working. Recipients of the tax credit often spend it for transportation or car repairs, job training, or other expenses that allow them to keep their jobs. Minimum wage jobs often do not provide enough income to allow workers to solve these kinds of barriers without assistance.
Puerto Rico’s labor participation rate is very low — currently less than 40%. The poverty rate is currently 43.5%.
For these reasons, extending the federal EITC to Puerto Rico has been proposed many times as part of the solution for the Island’s depressed economy.
Puerto Rico had a local EITC in effect from tax years 2007 through 2013, but it was canceled in 2014. The current local EITC was passed in 2018 and implemented in 2019.
The ARP will match every local dollar spent on the EITC, above the $200 million base, with three federal dollars.