U.S. Enhancements Planned for Puerto Rico Earned Income Tax Credit

The new COVID-19 relief bill being debated in Congress this week includes support for the Earned Income Tax Credit in Puerto Rico.

The Earned Income Tax Credit

The Earned Income Tax Credit, or EITC, is a credit on income tax that is designed to encourage low-income people to work. It provides an annual tax credit of $538 to $6,660 per family. If the family owes less than the amount of their credit, they can still receive a “refund” of the full amount of the credit.

While the EITC is available to people with incomes up to $56,844, the goal is to help working people with lower incomes keep working.

For the working poor, it is possible that they could earn more from federal benefits in certain states than they would by working in a minimum wage job. With a full-time minimum wage job, families may face frequent problems with child care, health care, transportation, and other crises that can affect their ability to get to work regularly.

Research shows that people who get and keep even minimum wage jobs are lifted out of poverty within a relatively short time, compared with people who give up on working and rely on federal benefits. However, the challenges faced by the working poor can make it hard to get through the process of working their way out of poverty.

For these families, the EITC can cover some of the costs associated with work. Research also shows that EITC recipients tend to spend the funds on transportation, and sometimes on food and clothing. These items can make it easier for needy people to keep their jobs.

The amount of the credit is also high enough to serve as a reward for working, even if the workers’ income is low compared with available federal benefits.

EITC in Puerto Rico

The EITC was originally designed to offset the cost of payroll taxes for low-income workers, and workers in Puerto Rico pay those taxes at the same rate as workers in the States. Nonetheless, residents of Puerto Rico are not currently eligible for the federal EITC.

Puerto Rico had a local EITC between 2006 and 2014, and reinstated that benefit in 2018. The Puerto Rico Center for the New Economy (CNE) has just published a new report on the EITC in Puerto Rico.

Their conclusion is that the local EITC has been too small and irregular to have the effect the EITC has in the States.

“In Puerto Rico, where 44 percent of the population lives in poverty, it seems logical to extend the federal EITC to reduce poverty and inequality, boost incomes, and increase Puerto Rico’s chronically low labor force participation rate,” the report points out. “Yet, for far too long Congress has refused to do so, relying on the specious argument that the EITC should not be extended to residents of Puerto Rico because they do not pay federal income taxes. While that argument may sound convincing at first and confirm the pre-existing biases that certain lawmakers already hold against the island, the truth is that the EITC was originally designed to offset the regressive effect of payroll taxes, which all Puerto Ricans working in the formal economy pay in full.”

The American Rescue Plan

The COVID-19 relief bill currently under consideration will not extend the EITC to Puerto Rico, but it will provide federal support for the local EITC. The current wording gives three times the local funding to the EITC.

“So, for example,” says the CNE, “if the local EITC has a cost of $200 million, the federal supplement could increase it up to $800 million annually by providing $600 million for Puerto Rico to increase the size of its own program, thereby improving the effectiveness of the Puerto Rico EITC as a pro-work, anti-poverty program.”

The proposal, however, is not a panacea. “Make no mistake,” the recent CNE report explains, “the federal contribution is still far less than what the federal government provides Mississippi, the poorest state, which in 2017 claimed nearly $1.1 billion in federal EITC dollars.”

 

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