Federal Taxes Would Benefit More Than Burden Most Puerto Ricans

An article in a major Puerto Rico newspaper yesterday reported that a 1996 study by the U.S. Government Accountability Office (GAO) calculated Puerto Ricans would pay about $1.197 billion more in Federal taxes annually if the Federal tax code were applied to Puerto Rico as it is to the States.

The article misreported the 1996 findings. It also did not note the findings in a similar 1998 report by the GAO, Congress’ investigative agency.

The 1996 study estimated that individuals in Puerto Rico as a whole would have received $15 million more back from the Federal income tax system in 1995 than they would have paid into it if Puerto Rico were taxed equally with the States.

The 1998 study projected that Puerto Ricans would have received somewhat under $200 million more back from the Federal income tax system than they would have paid into it that year.

The Federal tax system makes payments to low-income workers as well as collects payments from upper-income individuals.

The 1998 report explained regarding the 1996 study, “We determined that the taxes paid by some residents would have been completely offset by the earned income credit refunds received by other residents.” It went on to note that, “We assume that, if Puerto Rico were a state in 1998, the aggregate federal individual income tax payments and tax credits of Puerto Rican residents would still roughly offset each other, before taking the new child tax credit into account. We estimate that the potential cost of that credit in Puerto Rico likely would be less than $200 million in 1998.”

Both reports assumed increased Federal income tax revenue from businesses, however, primarily from Puerto Rico operations of companies headquartered in the States. The 1998 study reported that the amount “could be as little as a $1 billion gain or as large as a $4.6 billion gain” each year for the Federal treasury.

The 1996 study did not attempt to estimate the increased tax payments from businesses but included various calculations from the Congress’ Joint Committee on Taxation and the U.S. Treasury Department in the range of a few billion dollars a year in increased Federal revenue.

The 1996 study estimated that fewer than half of the households in Puerto Rico with incomes high enough to potentially owe Federal income taxes — greater than $25,000 in 1992 — would have actually owed tax.  (The majority of Puerto Ricans not owing tax would be larger when households earning too little to have a Federal tax liability are added.)

More than half of individuals and families earning enough to potentially owe Federal income tax tax would have received payments from the Federal government instead.  This is because refundable tax credits to which they would have been entitled would have been larger in amount than their tax due.

The 1998 study was more precise. It estimated that only 41% of Puerto Ricans with incomes high enough to trigger Federal tax filing that year would have had a net tax liability.

Fifty-three percent would have received payments from the Federal government.

And six percent would have neither owed tax nor been entitled to a tax credit payment.

In local campaigns on Puerto Rico’s political status, ‘commonwealthers’ have used Federal income taxes as a major argument against statehood for the territory. A primary contention is that it would be an additional financial burden for most Puerto Ricans.

The 1996 and 1998 GAO studies make clear that the truth is just the opposite: Federal income taxes on local income would put money in the pockets of most Puerto Ricans.

The situation is not unique to Puerto Rico.  According to the Congress’ Joint Taxation Committee, in 2009, only 49% of  residents of the States and the District of Columbia had a Federal income tax liability.

‘Commonwealthers’ also assert that the islands have ‘fiscal autonomy,’ suggesting that the Federal government cannot tax Puerto Ricans under the current territory status misleadingly called “commonwealth” without the insular government’s consent.

In fact, the Federal government can extend whatever taxes it wants to the territory but has chosen to not tax local income.  It does, however, tax income of Puerto Ricans from the States and has extended employment taxes to residents of the territory.  Puerto Rico’s fiscal autonomy is merely similar to the local tax authority of the States and the other territories.

The newspaper article that misreported on the 1996 GAO study accurately reported that a GAO study underway on the possible Federal budgetary impacts of statehood is taking longer than expected.  It is now projected to be completed late this year.  Statehood would require application of tax laws to Puerto Rico equally with application to the other States.