Social media has recently been flooded with claims that the GAO, the U.S. Government Accountability Office, said that Puerto Rico as a State would be too expensive for the United States, or that statehood would be bad for Puerto Rico’s economy.
The nonpartisan congressional investigative agency said neither in its report on treating the territory equally with the existing States in program and tax laws released in March.
In fact, the GAO made it clear from the introduction to the report that it did not make any recommendations or reach conclusions. That was not its purpose. Its mission was to estimate how the Federal budget would have been different in a recent year if Puerto Rico had been a State.
The claims now being made online were what leaders of Puerto Rico’s “commonwealth” party hoped the report would say but did not — and what they assert it said even though it did not.
They had sought the report. But they were disappointed with it. Governor Alejandro Garcia Padilla, the party president, extensively criticized it for not seeing questions as his party did. For example, he argued to the GAO that it underestimated the amount that Puerto Ricans would pay if all Federal taxes were extended to Puerto Rico.
Puerto Rico is treated as a State in most, but not all, Federal laws. The primary exceptions to equal treatment are healthcare programs and programs for low-income families and the disabled and tax laws. Puerto Ricans are U.S. citizens and most suffer as a result of those differences, compared with citizens on the mainland. Some affluent individuals and multinational companies benefit at their expense — and the expense of taxpayers in the States.
As a territory (sometimes misleadingly called “commonwealth” after a word in the formal name of the territorial government) Puerto Rico is an economic basket-case: Economic growth has lagged that of the States for four decades. The economy has been on the decline for eight of the last nine years. It has lost 23% of its jobs during this period. There are jobs for fewer than 40% of its people eligible to work. Well over 60% of those eligible in the States have jobs. Per capita income is half that of the poorest State and a third that of the States as a group. Its bonds were recently downgraded to junk status.
Statehood, like nationhood, would require a transition to phase-in or phase-out equal treatment in Federal tax and program laws. Does anyone, though, seriously believe that Puerto Rico would be poorer as a State? The GAO report did note that the economics of Alaska and Hawaii, the last two territories to become States, grew substantially after statehood.
Does anyone believe that Puerto Ricans are less capable than other U.S. citizens? There are now more than five million people of Puerto Rican origin in the States. On average, they are much more prosperous than the residents of the territory.
What the GAO Report Said
The report actually said that statehood would mean billions of dollars a year for Puerto Rico — and individual Puerto Ricans — but also billions for the Federal treasury.
It gave ranges of dollar impacts if Puerto Rico and residents of the territory had been treated equally with the States and their residents in 29 Federal programs in Federal Fiscal Years 2010 and ’11 and in tax laws in 2009 and ’10.
Puerto Rico’s resident commissioner in the U.S. House of Representatives, Pedro Pierluisi, said that it showed “statehood will mean $9 billion to $10 billion in additional Federal funding … on an annual basis.”
The GAO study found that statehood would have changed funding for Puerto Rico and Puerto Ricans in Fiscal Years 2010 or ’11 by —
– $1.5 billion to $1.8 billion more under Supplemental Security Income (SSI) aid to low-income elderly and disabled individuals, providing benefits to 271,000 to 320,000 more Puerto Ricans;
– No more than $1.5 billion more in Medicare healthcare for the elderly and the disabled, with the lower estimate due to increased funding in other programs;
– $515 million to $1.415 billion more in Medicaid healthcare for the poor — while reducing the Government of Puerto Rico’s Medicaid costs by up to $358 million and providing Medicaid coverage to 100,000 to 1.1 million more Puerto Ricans;
– $200 million less to $700 million more in the Supplemental Nutrition Assistance Program, providing benefits to 158,000 fewer to 496,000 more Puerto Ricans; and
– $115 million more in highway construction funding.
The up to $1.415 billion more estimate for Medicaid does not include an additional $1.5 billion more for Medicaid long-term care assistance, which Puerto Rico does not provide now.
Because the report bases its estimates on 2010 and ’11 program amounts, it does not cover some programs created by the 2010 Federal healthcare reform. This includes helping middle-income individuals pay for healthcare insurance.
After consulting with the GAO, Pierluisi said that 160,000 Puerto Ricans receiving $1.5 billion a year in subsidies is “a conservative estimate.”
Elementary and secondary education funding would increase substantially, the GAO report makes clear, although it does not include an estimate. The “weighted child count” on which much of the grant is based would have increased from 744,358 to 1,203,805. Additionally, the “effort factor” in the incentive grants of the program would go up from .95% to 1.05%.
Children’s Health Insurance Program funding, $99.6 million in Federal Fiscal Year 2011, would have decreased due to Puerto Rico’s greatly increased Medicaid funding. The decrease could have been as small as $26.4 million or as much as all of the funding.
The report stated that Pell Grant and Student Loans amounts would rise but it did not provide estimates for the increases.
How Puerto Rico’s funding would have changed under a number of Federal programs was not projected. Most are programs in which national funding is less than $5 billion a year.
Also not estimated, however, was Temporary Assistance to Needy Families. States with circumstances similar to Puerto Rico’s receive several hundred million dollars a year under TANF.
Pointing out that half of all households in the existing States do not have a net Federal income tax liability, Pierluisi also estimated that 70% of Puerto Rican families would not. Individuals do not have a net Federal tax liability if their earnings are too low or if they qualify for Federal payments to the extent that certain tax credits exceed taxes due.
The report estimates that individuals would have paid $2.194 billion to $2.346 billion in Federal income taxes in Fiscal Year 2010. But low-income workers would have received: $525 million in Earned Income Tax Credits, $473 million as cash payments, $137 million in Child Tax Credits, $85 million as cash; and $56 million in American Opportunity Tax Credits, $23 million as cash.
The report’s corporate tax estimates were for Federal Fiscal Year 2009. Corporations would have paid $4.4 billion less to $5 billion more in Federal income taxes that year, in which companies paid $4.3 billion. The very wide range is due to the extent to which companies from the States with foreign manufacturing subsidiaries in Puerto Rico would move insular operations to foreign countries with low tax rates and the fact that there were an unusually large amount of corporate federal income tax payments in 2009.
The likelihood of companies moving from Puerto Rico presumes, however, that Federal tax laws will not change. As the report explains,the operations at issue would be ones that produce products in Puerto Rico developed in the States. The parent companies currently shift to the territory tax ownership of product patents and brand names that together account for most of the value of the products to avoid Federal taxes. Federal tax reform proposals would end the incentive to move the operations abroad by taxing income from product patents and trademarks wherever it is earned.
The report points out, however, that the $4.3 billion in taxes that companies in the States paid on income from Puerto Rico in 2009 was an extraordinarily large amount. More normally, the companies would have paid $1.4 billion. The report does not estimate the changes in tax payments from that amount.
Other changes in tax programs would have eliminated $318 million in grants to the territory of Federal excise taxes on rum and Puerto Rican payment of $232 million in excise taxes on gasoline.
The report notes that its estimates cannot be relied upon for the actual budget impacts of statehood because of a number of variable factors.
One is that its estimates are based on Federal Fiscal Year 2009-11 data. Federal program and tax law equality would almost certainly be phased in over a multi-year period if Puerto Rico were made a State. The full budgetary impacts would not come until after the transition is completed.
The report also does not account for the current costs to the Federal government and State governments of 1,000 or so Puerto Ricans moving to the States each week because of the much greater opportunities in the States than in Puerto Rico due to its territory status.
Nor does the report attempt to quantify the budgetary impacts of Puerto Rico’s economy changing under statehood. Economic changes would affect Federal spending and revenue.
The report understandably also does not project increased Federal benefits due to Puerto Rico having two U.S. senators, five representatives in the U.S. House with votes in the full House unlike the present single representative, and votes in the election of the president and vice-president of the United States. If it were a State today, Puerto Rico would have more political power than two-fifths of the existing States because of its population. This power would certainly change programs to Puerto Rico’s benefit.
In addition, the report does not try to calculate increased Federal purchasing in Puerto Rico under statehood. Currently, the Federal government buys relatively little from the territory in comparison to its purchasing in the States. Increased purchasing would also boost Puerto Rico’s economy.
The GAO is an investigative arm of the U.S. Congress. Its report is entitled, “Puerto Rico: Information on How Statehood Would Potentially Affect Selected Federal Programs and Revenue Sources.”