Puerto Rico and Federal Income Tax

As Americans become increasingly aware that Puerto Ricans are our fellow citizens, there is a similar growing recognition that Puerto Ricans do not  pay federal income tax in the same way that stateside Americans do.

This is federal law.

At first glance, it appears that the federal law benefits Puerto Ricans.  After all, who wants to pay income taxes?  The truth is more complicated.

Do residents of Puerto Rico pay any federal taxes?

Yes, Puerto Ricans do pay some federal income taxes in addition to the local income tax they pay in Puerto Rico.  They pay the federal tax that funds Social Security and Medicare (the Federal Insurance Contributions Act (FICA) tax).  There are also exceptions to the general rule.  Employees of the U.S. government must file a federal income tax return; their income is understood to come from the States, so they may owe federal income taxes. And any resident of Puerto Rico who earns money from outside of the territory must file a tax return.

The Federal Income Taxes Puerto Ricans Pay

 

How is this really different from the States?

In the 50 states, everyone who earns $10,400 or more must file a federal income tax return. This doesn’t mean that everyone pays income taxes. Many people who describe themselves as taxpayers actually do not end up paying any money to the federal government in the form of income taxes.

In fact, as then-Presidential candidate Mitt Romney stated, only about half of American adults pay income tax. The median income in the U.S. in 2017 was about $31,000. According to the Pew Research Center, two thirds of people in the States who earn $30,000 or less per year pay no income tax.The average income in Puerto Rico in 2017 was roughly $19,000, which means that most Puerto Ricans would not have had to pay federal income taxes even if the federal law applied to the territory.

In addition, many tax filers in the U.S. receive additional credits — more than they paid in — including the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) which aren’t offered in Puerto Rico as they are in the states.

Low income workers in Puerto Rico may be better off if they had to file a U.S. tax return.  They may be missing out on refunds they would have qualified for, such as the EITC and CTC.  Considering the societal benefits of the EITC and CTC, it is possible that Puerto Rico more broadly is missing out as well.

How else does this affect Puerto Rico?

The fact that Puerto Ricans do not pay the same federal income taxes as their fellow U.S. citizens in the states is often used  to justify unequal treatment of Puerto Rico under federal programs.

Puerto Rico is treated unequally in Medicaid, Medicare, Social Security Insurance (SSI) and Nutrition Assistance Programs

The implications of decades of unequal treatment were brought into the open after Hurricane Maria hit Puerto Rico.  The weak Puerto Rico health care infrastructure reflected billions of dollars in Medicaid funding never received over the years.  The mass migration to the states was inspired in part by more generous benefits that would be granted to recipients in the states.  There have been numerous claims that Puerto Rico would be treated better post-Hurricane Maria if it were a state.

Taxation without representation was a rallying cry against England during the American Revolution, and opposition to this concept remains a key tenant of our democracy.

In the case of Puerto Rico, a lack of representation even with reduced tax obligations does create equality with the rest of the United States.

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