As a territory, Puerto Rico is not subject to federal income tax as all the states are. As a state, Puerto Rico would be required rot follow the laws about federal income tax as the states do. Most residents of Puerto Rico — like just about half the residents of the states — don’t earn enough to pay federal income tax. The state of Puerto Rico would be able to charge lower state income tax rates, because there would be more federal funding available. Puerto Rico would also be eligible for all tax credits, whereas now residents of the Island sometimes get to participate in tax credits and sometimes do not. So income tax is not a reason to fear statehood.
But what about property tax? We sometimes see a claim that Puerto Ricans would lose their homes if Puerto Rico became a state, because they would have to pay property tax. Is this true?
Where do property taxes come from?
There are federal taxes which all Americans must pay, including income tax, estate tax, and employment tax. These are not the only taxes. States can also have income taxes, but they also have sales tax and property tax. In general, states rely on these three types of taxes for their revenue.
States, not the federal government, set these taxes. Some states have no state income tax. Some have no state sales tax. All states have property taxes, but the rate varies. Hawaii has the lowest property tax rate in the nation, while New Jersey has the highest.
Where would Puerto Rico fall? It’s up to Puerto Rico. As of this writing, Puerto Rico’s property tax rate is the same as Nevada’s. Higher than Colorado’s rate but lower than Louisiana’s.
Yes, Puerto Rico currently has property taxes. Puerto Rico’s income and sales taxes are higher than those in the states, but the property tax in the territory is in the lower range. Not the lowest, but not nearly as high as New Jersey’s.
The point is, property taxes, likes sales tax and state income taxes, are set by the state, not by the federal government. If the state of Puerto Rico chose to have no property tax, that would be completely legal. Since the territory of Puerto Rico has property taxes, the state probably will also have property tax. It’s not up to the federal government, and it’s not a requirement for statehood.
Where does this idea come from?
Anti-statehood factions have trouble coming up with good arguments against statehood, frankly. Once you’ve tried to scare people with beauty pageants, bilingualism, and the Olympics, that’s about all they’ve got. wealthy people using the Island as a tax shelter might realistically be afraid of losing their tax haven, but ordinary residents of Puerto Rico have nothing to fear from statehood when it comes to taxes.
Are there problems with the current property tax system? Sergio Marxuach of the Center for a New Economy told the Senate Finance Committee that “the property tax system in Puerto Rico has not been thoroughly overhauled since the 1950s. This has resulted in a situation that can be charitably characterized as dysfunctional.” Territories which have become states often found that their government systems worked better after statehood, and Puerto Rico might have the same outcome. Historically, a lack of regular assessments of property value and the occasional imposition of extra property taxes in fiscal emergencies have made the system seem arbitrary. As a state, Puerto Rico will have the same level of sovereignty as the other states, and can make decisions about property taxes based on the best outcome for the new state.
While the property tax issue might frighten some people into choosing to remain a territory, we should bear in mind that there are two non-territorial options for Puerto Rico’s political status: statehood and independence. Will there be property taxes in a new nation of Puerto Rico? It’s up to Puerto Rico — just as it will be under statehood. It is impossible to predict exactly how property taxes will be affected by Puerto Rico’s status options. It will depend on the leaders whom voters choose to elect.