Workers in Puerto Rico pay payroll taxes — the Social Security and Medicare taxes that are deducted from American’s paychecks across the country. These taxes cover unemployment insurance, Social Security, and federal health care costs.
Bona fide residents of Puerto Rico do not have to pay income tax on the wages they receive from Puerto Rico based work. In fact, most people who live and work in Puerto Rico don’t even have to file a federal tax return. Sometimes this fact is presented as a benefit for Puerto Rico — a good thing about the current territorial status. Is it?
Which is more significant: payroll or income tax?
Two thirds of Americans pay more in payroll tax than they do in income tax.
The Tax Policy Center figures that for the 2018 tax year, 44.4% of Americans will pay no income tax at all. Many of these people will actually get a refund larger than the amount they paid in during the year, because of the EITC or Child Tax Credit. These credits are refundable — meaning that people receive them even if the refund is larger than the amount they paid in.
Among that 44.4% of people who will not pay income tax, most will pay payroll taxes. These people — nearly half of all U.S. workers — are in the same position as workers in Puerto Rico. They don’t pay income tax, but they do pay payroll tax.
Just the top 20% of households by income pay more income tax than payroll taxes. This includes people who are independently wealthy and do not work, but have income from non-work sources. It also includes people in the highest tax bracket, who pay so much in income tax that it ends up being a larger sum than what they pay for payroll taxes.
15.5% of Americans will not pay either payroll or income tax. These are individuals who do not work, and so don’t have any payroll taxes deducted, and who also don’t earn enough to pay income tax. Many of these people are students, elderly people, and unemployed people who do not have to file at all.
Leaving out these extreme cases, the great majority of Americans pay more in payroll tax than they do for income tax.
What does this mean for Puerto Rico?
The perception that people living in Puerto Rico do not deserve the same benefits as other Americans because they pay less into the system glosses over some important points. The situation is more nuanced than it may initially appear. The Island’s workers pay the same payroll taxes as their fellow U.S. citizens, and yet Puerto Rico gets less funding for Social Security and Medicare than the states do, as well as a host of other programs.
Nearly half of American workers pay no income tax, and 2/3 pay less income tax than they do payroll tax. That doesn’t add up to a big difference between taxpayers in Puerto Rico and the States, although the differences in benefits can be considerable.