Misunderstandings About Puerto Rico’s Territorial Status

Conservative columnist Rick Wells wrote an article for UniversalFreePress.com that illustrates some of the persistent misunderstandings about Puerto Rico’s territorial status.

“For many of us the benefits and disadvantages of status as a territory versus statehood are vague, virtually meaningless abstract ideas that have nothing to do with our daily lives,” the article begins, and that is certainly true. The 32 territories that ultimately became U.S. States have been states for as long as most of us can remember. The last two, Alaska and Hawaii, joined the Union in 1959, and most of the territories gained statehood in the 19th century or even earlier.

So the difference between a state and a territory may not always be on our minds.

One big difference is that residents of a territory cannot vote in presidential elections. Territories are also not represented by senators and congressional representatives, but just by a Resident Commissioner, who cannot vote as the States’ congressional representatives do. Essentially, territories do not have a voice in the democratic process as states do.  This may sound theoretical or academic, but there are practical consequences of this arrangement.

Another big difference is that Congress is allowed to treat territories differently from states; the U.S. Constitution has been held not to apply to territories equally, so there is no requirement for equal treatment. In the case of Puerto Rico, we see this in the inequality of healthcare benefits as one example.

Wells doesn’t focus on these differences. He focuses instead on the fact that residents of Puerto Rico do not have to file federal income tax returns for income earned in Puerto Rico.

“Would a vote for statehood carry an automatic tax equalization,” Wells asks, “or would they continue to be afforded equal but better status by the federal taxman?”

Once Puerto Rico becomes a State, federal tax law would likely transition Puerto Rico to have tax obligations in line with the other states.

“[A] tax plan that requires Puerto Ricans to pay the same tax obligation as the rest of us would be a welcome component to a more equitable tax code,” Wells suggests, after some paragraphs bemoaning the way Puerto Rico and other “special interests” get special treatment that puts them in a better position than “the American people at large.”

In fact, Puerto Rico currently loses out in comparison with other U.S. citizens under one key part of the tax code governing individuals. While nearly half of citizens on the U.S. mainland do not pay federal income taxes — usually because they don’t earn enough –many of those citizens receive a payment from the government in the form of the Earned Income Tax Credit or Child Tax Credit, which are given to working families even if they have paid no income taxes at all.  Poor working families in Puerto Rico would therefore likely benefit from equality under the tax code.

Yet it is U.S. based companies with even minimal presence in Puerto Rico that have benefits most under the federal Internal Revenue Code.  These companies – whether through now-expired Section 936 of the Internal Revenue Code or present law provisions governing Controlled Foreign Corporations – have benefited greatly from special treatment under federal tax law.  Not only do these tax carve-outs represent “special interests” in action, but the benefits have not trickled down to the people of Puerto Rico.  These interests have also fought statehood for Puerto Rico as a new political status would jeopardize their special tax treatment.

The exemption of Puerto Rico-sourced income from federal income tax liability has also been used repeatedly to deny Puerto Rico equal access to Medicare, Medicaid and other federal programs.

It may be that Puerto Ricans would be significantly better off financially if federal tax liability applied fully to the U.S. territory.  Yet, in 2015, it is doubtful that the federal government would impose new taxation without granting full representation.  The next step in this progression is statehood.