The expansive Republican rewrite of the federal tax code being voted on in the House of Representatives this week contains a provision to increase the Child Tax Credit (CTC) to $1,600 per child in the fifty states. While under consideration by the Ways and Means Committee, two amendments were introduced to expand the child tax credit fully to Puerto Rico. Both were rejected.
The first amendment, by Rep. Linda Sanchez (D-CA), would have expanded the Child Tax Credit nationally for families with young child; the second amendment, by Rep. Bill Pascrell (D-NJ), contained its CTC extension to Puerto Rico in a broader tax package of help for Hurricane disaster recovery. Neither amendment was accepted by the Ways and Means Committee and, as a result, are not included in the bill expected to be approved this week.
The new subsection would have done just one thing. It would have allowed American families in Puerto Rico to use the Child Tax Credit for their first or second child as American families do in all 50 states. At present, Puerto Rican families cannot use this credit until they have three children or more.
The Child Tax Credit currently allows families to receive up to $1,000 as a refundable credit, even if they have no tax liabilities. That is, families that don’t pay federal income tax are eligible to receive as much as $1,000 as a “refund” under this credit.
The Child Tax Credit is available to workers in the States with any number of children. The refundable portion of the credit, based on payroll taxes that the Americans of Puerto Rico pay equally with residents of the States, is available to Puerto Rican workers with three or more children but not to Puerto Rican workers for thier first two children.
A proposal to repair this inequality was a unanimous recommendation by the eight-Member bipartisan, bicameral Congressional Task Force on Economic Growth in Puerto Rico, established by the Puerto Rico Oversight, Management, and Economic Security Act (PROMESA), which released its final report in December 2016.
U.S. Senate Committee on Finance Chairman Orrin Hatch (R-UT), who also chaired that Task Force, omitted Puerto Rico’s full inclusion in the federal Child Tax Credit out of the Senate version of tax overhaul legislation pending before his Comittee, which was released earlir this week.
The devastation of the recent hurricanes appears to have made more Americans aware that individuals born in Puerto Rico are U.S. citizens. Neither this growing awareness nor the obvious financial need facing the residents of the severely damaged island caused Washington to repair the inequality.
But Puerto Rico doesn’t pay income tax — right?
Residents of Puerto Rico generally do not pay federal income taxes on income earned in Puerto Rico. They do pay Social Security and payroll taxes. And they are eligible for the Child Tax Credit — if they have three children.
People living in States are eligible if they have just one child. They receive up to $1,000 as a “refund” even if they don’t pay any income tax at all. Roughly half of all Americans do not pay any income tax, generally because they do not earn enough to owe taxes.
If Puerto Rico were to become a State, residents would be required to file income tax returns, but many would not pay federal income taxes due to their low incomes, just as many low-income workers living in states do not have a tax liability.
Some people have made the argument that an individual New Yorker who receives a Child Tax Credit almost certainly doesn’t pay federal income taxes, but other New Yorkers do. Under this argument, the State of New York pays enough in federal income taxes to subsidize New Yorkers receiving the Child Tax Credit.
Under this view of refundable tax credits, one could say that the 5 million taxpayers of Puerto Rican heritage in the States can subsidize the people living in Puerto Rico.
These arguments about taxes are just abstractions. When Puerto Rico voted for statehood in 2012 and 2017, the voters expressed their willingness to accept both the rights and the responsibilities of statehood. Congress hasn’t taken action on those votes, and residents of Puerto Rico do not make individual decisions on whether and how to pay taxes. It is unreasonable to argue about tax credits as though they were rewards or punishments for individual behavior.
What is the effect of the inequality?
Income taxes are actually intended to reward — or to incentivize — certain kinds of behavior. Income tax laws are designed to reward behavior like giving to charity, buying a home, getting married, and other actions believed to be beneficial for the nation.
The unequal treatment of Puerto Rico under the Child Tax Credit could be said to encourage residents of Puerto Rico to have large families and to move from the Island to the States. Are these actions that benefit Puerto Rico or the United States?
Regardless of the rationale behind Puerto Rico’s CTC policy, one thing for certain is that refundable tax credits like the CTC reduce child poverty, serve as a work incentive and stimulate the economy.
Puerto Rico’s economy has been in a depression that began in 2006 and was projected before the devastation of Hurricane Maria in September to last until 2025. Prior to the hurricane, the economic crisis had already cost the territory more than one-fifth of its jobs and caused more than one-eighth of the Americans of the islands to move to a State. The mass migration exacerbated by disaster conditions in the islands is expected to persist well into next year at least and is imposing substantially increased social program costs on States as well as on the Federal government.
Smarter economic decisions would encourage people to live and work in Puerto Rico, to build businesses there, and to invest in the Island.