Implications of Puerto Rico’s Territory Status in 2021 Economic Stimulus Spending

The American Rescue Plan Act (ARPA), which was enacted into law in April, will ultimately provide Puerto Rico with over $10 billion to respond to the immediate economic implications of the COVID-19 pandemic. An infusion of this amount of funding in an economy with a $70 billion GNP is quite significant, and these new resources can be expected to provide a major boost to the island’s economy. The expansion of consumer spending will further create some incentives for new production and some new investment, however limited.

Yet it is also worth noting that if Puerto Rico had been treated in the ARPA equivalently to the states, the influx of funds would have been much larger—perhaps almost twice as large if the ARPA funds were distributed to states and Puerto Rico in accord with their populations.

Second-class citizenship for island residents continues in the economic as well as the political realm.

Nonetheless, in some important ways, the ARPA does treat Puerto Rico in the same manner as the states. The clearest and perhaps most substantial case of equal treatment under ARPA is in payments to individuals, which provide each qualifying person in Puerto Rico with $1,400. “Qualifying” means an individual with an adjusted gross income (AGI) up to $75,000, a head of household with an AGI of up to $112,5000, or members of a family headed by a couple with and AGI up to $150,000; children are included. Thus, with per capita personal income in Puerto Rico only about $22,000, the great majority of the 3.1 million people on the island are receiving these payments.

Roughly 2.5 million people, over 80% of the population, will receive these $1,400 payments in 2021—a total of $3.5 billion of federal funds coming to the island. Moreover, the stimulus plan enacted in late 2020 provided $600 payments to individuals, and those payments arrived in early 2021. So overall in the current calendar year, the total of the federal stimulus payments to individuals will come to $5 billion.

The second largest set of funds that Puerto Rico will receive under ARPA will be $3 billion for support of the schools, as “Elementary and Secondary School Emergency Relief” (ESSER). While this is a substantial amount of funds to the Puerto Rican schools, Puerto Rico was not been treated in an equal manner with the states under the 2021 law. For example, Wyoming with a population 20% as large as Puerto Rico’s and North Dakota with a population 25% of Puerto Rico’s will each receive slightly more ESSER funds than Puerto Rico.

Examples of other funds provided to Puerto Rico under ARPA include:

  • The Child Tax Credit (CTC) will be increased to $3,600 for children under 6 and to $3,000 for children 6 through 17 for 2021. Of great importance, families in Puerto Rico will be permanently eligible for the CTC if they have one or two children, while previously only families with three or more children had been eligible for the credit. The law integrates Puerto Rico into its provisions fully, as if it were a state, positioning the territory for increases in its CTC automatically if state levels increase.
  • With the Earned Income Tax Credit (EITC), most Puerto Ricans do not file a federal income tax return, and this fact is used to exclude them from eligibility for the federal EITC. But the federal government will add $3 for every dollar provided by the Puerto Rican government in its own EITC, for a total of up to $600 million in 2022. This federal supplement to the Puerto Rican EITC is permanent and includes an inflation update. Puerto Rico, however, continues to be excluded from the federal EITC; were Puerto Ricans on the island eligible for the federal EITC, this would provide a much larger lasting benefit.
  • Puerto Rico was included in the $300 weekly federal supplemental unemployment benefit, raising the average weekly benefit from $200 to $500. Additional funding was provided to Puerto Rico for rental, mortgage, and homeless assistance ($370 million) and childcare ($308 million).
  • In the realm of nutritional assistance, Puerto Rico, along with the Northern Marianas and American Samoa, will receive $1 billion in the ARPA and another $614 million from the legislation passed at the end of 2020. These funds can be used through 2027. Puerto Rico’s share will be about $1.52 billion. Puerto Rico’s basic block grant for nutritional assistance is $1.8 billion annually. If the new $1.52 billion is spread evenly over the 2021 to 2027 period, it will increase the funds for nutritional assistance by $212 million, or 12%, on top of the basic grant. This provision of additional nutritional assistance funds is helpful, but if Puerto Rico were treated as the states are treated—i.e., with sufficient funds for all who are eligible rather than with a capped block grant—Puerto Ricans would be much better off.

The $10 billion provided by the ARPA and by legislation in late 2020 will provide a substantial stimulus to the Puerto Rican economy in 2021. In spite of the stimulus provided by the 2020 CARES Act, overall economic activity in 2020 was 6.4% below the 2019 level (as measured by the average of the monthly Economic Activity Index). This corresponds roughly to a loss of $4.5 of GNP. Depending on the course of Covid-19 in Puerto Rico, the stimulus provided by federal legislation suggests that economic activity could rise at least back to its 2019 level, and perhaps significantly higher.

Several leading Puerto Rican economists, while recognizing the value of the federal stimulus to the Puerto Rican economy, have emphasized that its short run nature and its limited direct focus on the expansion of productive capacity will do little to repair the long-run malaise of the Puerto Rican economy. The very low rate of investment and the very low rate of labor force participation are unlikely to be altered substantially by the ARPA funds.

Moreover, although in some important realms the stimulus legislation treats Puerto Rico in the same manner as the states, there is still much work to be done towards putting Puerto Rico on a level playing field with the states. As pointed out above, overall, the $10 billion provided for Puerto Rico amounts to only slightly more than half of what the island would receive were the ARPA’s $1.9 trillion distributed among the states and Puerto Rico in accord with population. The other important particular examples of the unequal treatment noted above include the continuing exclusion of Puerto Ricans from the federal EITC, the treatment of Puerto Rico compared to the states in the funds provided for schools, and the island’s poorer treatment in the provision of nutritional assistance. There are, of course, several other programs, not affected by the ARPA, under which Puerto Rico is not on a level playing field with the states, with Medicare and Medicaid as outstanding cases.

The mixed treatment of Puerto Rico in the Act—sometimes treated in the same manner as the states, sometimes treated more poorly than the states—highlights the vulnerable status of the island. Yet on strictly economic terms, the stimulus of the federal funds makes a positive difference, helps get Puerto Rico through the COVID-19 period, and potentially provides a foundation for economic growth.

 

 

 

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