White House Cites Puerto Rico’s Economic Challenges, Ongoing Efforts to Help Through President’s Puerto Rico Task Force

At the regular White House news conference today, Press Secretary Josh Earnest was asked about the administration response Puerto Rico’s failure to pay most of its $58 million Public Finance Corporation (PFC) bond payment due yesterday and possible concerns of the default’s impact the broader U.S. economy.

“I’m not going to be in a position to comment on any specific decisions that Puerto Rico’s leaders have made regarding their debt obligations,” Earnest answered, “but I will reiterate that we believe Puerto Rico needs an orderly process to restructure its unsustainable liabilities.”

U.S. Department of Treasury Secretary Jacob Lew has written that “[u]nder the status quo, without a tested legal regime in place, a resolution of Puerto Rico’s financial obligations would likely be chaotic, protracted, and costly both for Puerto Rico and more broadly for the United States.”  He has further noted that “a central element of any federal response should include a tested legal bankruptcy regime that enables Puerto Rico to manage its financial challenges in an orderly way.”  Legislation is pending before Congress to extend protections under Chapter 9 of the federal bankruptcy code to Puerto Rico.

At the press conference today, Earnest further explained that “Puerto Rico’s significant financial challenges didn’t begin overnight and this latest development is set against the backdrop of ongoing broader economic challenges across the island.”  He added that “the president did establish a task force on Puerto Rico, essentially an intergency task force on Puerto Rico, to try to leverage available federal assistance to assist Puerto Rico’s leaders as they confront these significant financial challenges, and the work of that task force and our ongoing commitment to coordinating our efforts with leaders in Puerto Rico continues.”

The President’s Task Force on Puerto Rico’s Status released its report in 2011.  The report included a number of proposed reforms across a variety of areas, including economic growth, education, energy and health care.

With respect to economic growth, one prominent suggestion in the President’s Task Force report was to fully expand the Child Tax Credit to Puerto Rico.  As the report explained:

“Puerto Rico faces serious long-term economic challenges, in particular low labor force participation and high poverty rates. The employment-to-population ratio in Puerto Rico in 2009 was lower than that of any State, and the intersection between payroll taxes and social programs creates some disincentives to labor force participation. The Task Force believes that tax policy provides a vehicle for strengthening Puerto Rico’s workforce, as well as the well-being of Puerto Rican families with children. Under current law, the child tax credit allows a credit of up to $1,000 per child. Because Puerto Rico residents are generally not liable for Federal income tax on Puerto Rican earned income, the credit is not usable to most residents except to the extent it is refundable. The credit is partially refundable under two alternative formulas: (1) to the extent that the taxpayer’s federally taxable earned income exceeds a certain threshold; or (2) for taxpayers with three or more children, to the extent that the taxpayer’s payroll taxes exceed the earned income credit. Since Puerto Rican earned income is generally not federally taxable, most families cannot claim a refundable child tax credit under the first formula, but can under the second formula because Puerto Rican earned income is subject to payroll taxes. Thus, in practice, Puerto Rican families with fewer than three children are generally not able to claim the child tax credit even if they are paying Federal payroll taxes.”

The Task Force recommended “extending the child tax credit to allow households with one or two children to claim a partially refundable child tax credit to the degree they have labor market earnings. Extending the child tax credit to Puerto Rican residents with fewer than three children could help reduce poverty and strengthen the labor force in Puerto Rico, because the credit is conditional on labor earnings.”

Another recommendation for economic growth contained in the 2011 report called for the creation of Economic Empowerment Zones within Puerto Rico.  The original Empowerment Zone program was launched in 1994 as a combination of tax incentives and grants for distressed communities. The 2012 Obama budget included a proposal for a new, national competition to identify 20 Growth Zones designed to build on the successes of Empowerment Zones. The zones were intended to receive flexible grants for planning, seed capital, technical assistance, and other activities through the DOC Economic Development Administration (EDA), Federal program flexibility, and two tax incentives: an employment incentive and an investment incentive.

Neither economic proposal has progressed through Congress.