Anti-statehood factions bring up the topic of taxes with the object of frightening voters into thinking they’ll have to pay federal income taxes if Puerto Rico is admitted as a state. In fact, most households in Puerto Rico will not have to pay income tax, just as about half of the households in the states do not. Remember that when someone grouses that taxpayers would have to cough up money to support Puerto Rico — in addition to the other problems with that claim, many of the people saying it are not actually taxpayers
But taxes are not just an expense. They are also revenue. Puerto Rico, like all states and territories and most countries, relies on taxes to cover the costs of the government and public amenities.
Puerto Rico’s status affects the amount of taxes collected by the territorial government, as well as the amount of taxes paid by residents.
The cost of outmigration
In 2014, according to Jorge Duany of the Cuban Research Center, Puerto Rico lost 68,099 residents to states. The amount of taxes they would have paid had they stayed in Puerto Rico: $86 million. Duany further points out that those migrants did not buy food or household goods in Puerto Rico any longer, so they didn’t contribute with sales tax either.
Migration from Puerto Rico to the states has increased since 2014. Census data shows that 100,000 more people left between 2014 and 2018. Numbers fell during the pandemic, but currently about 2/3 of all Puerto Ricans live in a state, with just about 1/3 remaining on the Island.
The Island’s tax base is obviously shrinking.
Puerto Ricans who leave the Island typically explain that they have done so because they needed better opportunities, healthcare, or education. They may value the opportunity to vote in presidential elections and to have full representation in Congress. In short, they are generally leaving Puerto Rico because it is a territory. This leaves Puerto Rico with an aging population that needs more support from the government and pays in less than working-age people do, with fewer doctors than the population needs, and with labor shortages that hinder development.
The cost of tax-free migrants
At the same time, Puerto Rico is luring people from the states to move to the Island with promises of low income tax rates — even 0% for some businesses and individuals. An IRS report in 2020 reported that individuals taking advantage of Act 60 that year had paid $558 million in federal income tax the previous year. That’s the loss to the United States. The loss to Puerto Rico is less clear, with estimates ranging from $111 million per year up.
Advocates of the tax program claim that the territory gained $210 million between 2015 and 2019. This figure includes jobs and investments, however, and is separate from the loss to the Puerto Rico government’s coffers in the forms of taxes. Since Act 60 companies need have only one employee in Puerto Rico and that can be the owner of the company, it is not certain that this economic activity helps to cover the costs of public amenities.
As a state, Puerto Rico will have the right to make its own tax regulations as all states do. States set their own tax rates and rules, though they can’t opt out of federal income tax for their residents.
But with statehood Puerto Rico can expect a growing population instead of a shrinking one. It will be able to end the ruinous tax deals that benefit wealthy part-time residents more than local people. And as the Island grows more prosperous — as every territory has done when it became a state — the citizens of Puerto Rico will contribute more to their state and nation.
Won’t you reach out to your congressional representatives today and ask them to support the Puerto Rico Status Act?