A new white paper from the organization known as Right to Democracy addresses a question we had not considered: would revoking the Insular Cases change Puerto Rico’s tax position?
The Insular Cases are a group of Supreme Court cases from a century ago which established the idea of unincorporated territories, making it legal for Congress to leave Puerto Rico and the other inhabited territories in the powerless position of a territory indefinitely. Before these cases, it was understood that territories were on their way to statehood. They didn’t get to become states easily or automatically, but once a territory had a large enough population and a constitution compatible with that of the U.S., it could expect to be admitted as a state.
Taxes and the Insular Cases
Nowadays, the Insular cases are widely seen as racist and outmoded. They are also understood to be part of the problem for Puerto Rico. Not only do they delay statehood, they also allow Congress to treat the territories differently from the states. They could treat the territories better than the states, but in general, they take the opportunity to rack up some savings at the expense of people who do not have voting representatives in Congress. They can’t do this with states, because states have representation and the full protection of the U.S. Constitution.
Income taxes are one of the areas in which Puerto Rico is treated differently from the states. With the idea of allowing Puerto Rico to collect more local taxes, Congress exempted wages paid in Puerto Rico from U.S. federal income tax. Puerto Ricans still pay plenty of federal taxes, but not income tax.
“So while some perceive the differential tax treatment as ‘favorable,’ in the aggregate Territories get a bad deal to the tune of billions of dollars in lost benefits,” says the paper from Right to Democracy. “People in the Territories have lost far more in federal benefits than what they would have paid in federal taxes. What seems like a ‘deal’ is actually no deal at all, with the impact falling hardest on vulnerable, low-income communities. This should come as no surprise, since the 3.6 million people living in U.S. Territories lack any voting representation in the Congress that sets these rules—taxation without representation in the most literal sense.”
The rule about income tax in Puerto Rico is Act 933, which states that “Income earned from Puerto Rico sources is exempt from US income tax.“ This law is part of the IRS tax code and is not related to the Insular Cases at all. There is no conflict between Act 933 and the Insular Cases, and no connection, either.
The white paper says, “Under the Sixteenth Amendment, Congress has broad discretion to levy income taxes and has exercised that discretion to specify that certain
income tax provisions do not apply to the Territories. There is no statutory or constitutional requirement that would mandate the United States apply an income tax to the Territories should the Insular Cases be overruled. The overturning of the Insular Cases would not result in any change to Congress’s ability to exclude people in the Territories from paying federal income tax.”
Would overruling the Insular Cases solve the problems in Puerto Rico?
There are members of Congress and Supreme Court Justices who agree that the Insular Cases should be overturned. The Department of Justice has repudiated them. But while overturning them might help make Puerto Rico an incorporated territory, the Island would still be a territory — or might have no political status at all. Puerto Ricans would still pay federal taxes without representation. The residents of Puerto Rico would still be disenfranchised in presidential elections and receive limited federal benefits.
The economic distress of Puerto Rico would not be resolved by overturning the Insular Cases. Statehood will resolve the problems of Puerto Rico, providing equality, justice, and increased prosperity. Educating Congress about the importance of statehood is still our best path forward.
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