States get some revenue from the federal government, but they rely heavily on taxes from their residents. So do cities and counties. Taxes come in three types: income tax, property tax, and sales tax. Different states choose different mixes of these three — some states don’t have all of the three types, for example — but all states collect taxes.
Puerto Rico currently has high taxes for the average resident. The sales tax in Puerto Rico is the highest in the United States. Groceries are generally taxed at 7%, which is less than the Island-wide 11.5% on other goods, but is more than any state. Most states don’t tax groceries at all.
Property taxes in Puerto Rico are right in the middle of U.S. property taxes, like Indiana and many other states.
Income tax in Puerto Rico is high. The reason Puerto Ricans don’t have to pay federal income tax on wages earned on the Island is that the federal government thought Puerto Ricans would not be able to pay both local and federal taxes. Congress decided that Puerto Rico could impose a local income tax and the federal government would exempt workers in Puerto Rico from the national income tax. Puerto Rico charges a progressive tax, from 0% for the first $9,000 in earnings to about 33% for any earnings over $61,500. Just as is the case with federal income tax in the states, about half the workers don’t pay any income tax at all. However, those who do are likely to pay more than they would in a state.
U.S. federal income taxes also have brackets, like Puerto Rico’s, ranging from 10% to 37%. But someone earning $50,000 per year in the states will pay 10% on the first $24,800 and 12% on the rest. In fact, so will someone earning $100,000 a year, because that’s how high the 12% bracket goes. The average worker in Puerto Rico would pay 10% on their income if they paid federal income tax– except that they would also receive deductions and credits.
False claims about taxes
Separatists sometimes argue that statehood would cost Puerto Ricans more in taxes. “You’re already paying 33%,” they say, “and then you’d have to pay 37% on top of that. That’s 70% of your income.”
The 37% federal tax rate begins at $768,701 per year. Puerto Rico’s 33% starts at $61,500 — which would be just 12% under the federal tax rates. Income up to those dollar amounts is taxed at a lower rate. A resident of Puerto Rico earning $50,000 per year may pay 11% total (effective tax rate) on his or her tax return — and that’s just about the same rate a resident of a state will pay in federal income taxes. If Puerto Rico kept its current tax rates as a state, the total could be 22% altogether.
However, it is possible, if you itemize on a federal tax return, to deduct state income tax. If you take a standard deduction instead of itemizing, your taxable income is reduced. In reality, then, the tax burden is never just the percentage of national income tax plus the percentage of state income tax.
What’s more, as a state, Puerto Rico will not need to have such high tax rates. Income tax rates and sales tax rates both can be reduced, once Puerto Rico’s federal benefits are equal to those of the other states.
Tax reform
States set their own tax rates. Simon Carlo Valentín shared with George Laws Garcia on Mano a Mano that it makes sense for Puerto Rico to begin reforming taxes now. We don’t have to wait till we get statehood before we simplify the tax code in ways that ensure that the local government gets the revenue they need without discouraging business or creating hardship for individuals. “If we have the will,” he said, “we can start with that process now.” Developing a transition process now will shorten the transition process after statehood is achieved.
No responses yet