U.S. Senate Finance Committee: No Quick Fix to Puerto Rico’s Fiscal Problems

The U.S. Senate Finance Committee held a hearing this morning on financial and economic challenges in Puerto Rico. The committee heard testimony from Resident Commissioner Pedro Pierluisi, President of the Government Development Bank of Puerto Rico Melba Acosta, President of the American Action Forum (and former director of the Congressional Budget Office) Douglas Holtz-Eakin, and the Public Policy Director for the Puerto Rico Center for a New Economy, Sergio Marxuach.

The purpose of the hearing was to gather information from the witnesses on what they perceive to be the roots of the current fiscal crisis and what Congress, in conjunction with the Puerto Rican government, can do to change the course of the U.S. territory’s floundering economy.

Senator Orrin Hatch (R-UT), chairman of the committee, opened the hearing by acknowledging the inequalities inherent in Puerto Rico’s current situation and putting the situation in the context of the federal budget:

“[I]t is not surprising to learn that there are inequities and financial harms resulting from the health care law.  Even so, these problems and any proposed solutions are multidimensional and extremely complicated.  Questions of funding and resource allocation are always difficult, and they implicate a number of issues.  It isn’t as simple as just deciding to give more health funds to Puerto Rico, because doing so would necessarily mean reduced funding for other priorities, increased taxes, or even more federal debt.”

Chairman Hatch expressed deep concern that the U.S. has not done its job to help the island, but also laid blame with the government of Puerto Rico. He noted that meaningful solutions will require actions of both the U.S. government and the government of the “commonwealth.” The Chairman also cautioned witnesses to keep their focus on issues under the Finance Committee’s jurisdiction, such as federal tax policy and healthcare policy. He acknowledged the “elephants” in the room – pending Chapter 9 legislation and the still yet-to-be-determined ultimate political status of Puerto Rico.

The Committee’s ranking-member, Senator Ron Wyden (D-OR), agreed with Chairman Hatch that solutions will have to come from both governments working in tandem, but that in order to get Puerto Rico’s economy on solid ground, there must be an understanding of what it is that is holding Puerto Rico back.

Ranking-Member Wyden and the witnesses identified a myriad of issues facing the territory:

• Tax collection in Puerto Rico has been an on-going issue, and it is estimated the island collects less than half of its sales tax;
• The electric utility still burns diesel fuel to generate power vs. cleaner-burning natural gas that would allow the utility to make more money on the power it sells;
• The Medicaid program in Puerto Rico is capped, and Congress has limited Puerto Rico’s share of federal matching funds;
• Puerto Ricans are not eligible for the Medicare Part D, a low-income prescription drug subsidy, and are otherwise treated unequally through the Medicare program; and
• Puerto Ricans are moving to U.S. states in extraordinary numbers, as the moment a U.S. citizen from Puerto Rico relocates to the mainland, he/she receives all of the rights and benefits not available on the Island.

Of these issues, the disparity in federal healthcare funding for the territory was especially prominant at the hearing. Several of the witnesses suggested a more equitable funding system for Medicaid and improvements to Medicare.

Among other solutions offered by several members of the committee and the witnesses were making the Earned Income Tax Credit (EITC) available on the island and increasing the Child Tax Credit so that it is comparable to the credit available to residents of U.S. states. These tax credits offer some support to the most vulnerable of the population living in the 50 states, and those living in poverty in Puerto Rico could greatly benefit from equal treatment. Ranking Member Wyden noted the refundable tax policies have Republican origins.

Despite the committee’s lack of jurisdiction, there was discussion of Chapter 9 access for Puerto Rico and what that would mean for the territory. All witnesses admitted Chapter 9 is not a cure-all or a “silver bullet,” but all witnesses, with the exception of Dr. Holtz-Eakin, support extending the option of Chapter 9 bankruptcy protection to Puerto Rico. Senator Chuck Schumer (D-NY) has introduced legislation to do just that and said he plans to send a letter to Senate Judiciary Chairman Chuck Grassley (R-IA) asking that he hold hearing and mark-up on the bill. Senator Schumer noted that access to Chapter 9 would be another tool available to Puerto Rico as it attempts to dig its way out of the fiscal crisis.

Puerto Rico’s political status was not directly debated, but it was made clear that many of the territory’s problems stem from the fact that Puerto Rico is treated differently because of its status. Senator Wyden cited, for example, the impact of Puerto Rico’s special rum carry-over tax, which was created to help Puerto Rico’s infrastructure but has instead been given directly to rum companies. He noted that the unique federal law for the U.S. territory has not helped as intended.

Resident Commissioner Pierluisi stated that in order “for Puerto Rico to truly prosper, it must be treated equally. And to be treated equally, it must become a state.”

Click here for witness testimony.

Click here for special report from the U.S. Congress Joint Committee on Taxation, “Federal Tax Law and Issues Related to the Commonwealth of Puerto Rico.”