Taxing Puerto Rico to Death

Puerto Rico Needs a Marshall Plan - the cry for help fell on Donald Trump's deaf ears.,Evan Vucci/AP // U.S. News & World Report

There is a national misperception of taxpayers in Puerto Rico: that they pay less than their fair share, and are leeching off the mainland economy. Yet the exact opposite is true. Puerto Ricans on the island are the most heavily taxed of all U.S. citizens.

Puerto Ricans pay Social Security, Medicare and other payroll taxes – but unless they are federal employees, they do not pay federal income taxes. With an island per capita income of $11,688, a single filer using the standard 2017 deduction would owe only $534. This Puerto Rican “tax preference” of $534 is offset by all of the following:

For the past 98 years, the Jones Act has raised the price of all goods in Puerto Rico by 15 percent to 20 percent, to the point where the same car costs $6,000 more in San Juanthan it does in Miami. Economists have estimated the island-wide consumer cost of the Jones Act to be $1.7 billion per year. With an island population of roughly 3.4 million, the Jones Act is thus a de facto tax of $500 on every person in Puerto Rico. The Jones Act alone, virtually wipes out the $534 “income tax preference” in Puerto Rico. But here is what Puerto Ricans additionally face:

From 2013 to 2014, 105 different taxes were raised in Puerto Rico.

Over a 19-year period, from 1990 to 2009, Puerto Rico paid more federal taxes than six U.S. states.

From 2011 to 2016, the island government raised the sales tax to 11.5 percent, hiked the water rates by 60 percent, raised local corporate tax rates to 39 percent, raised the gasoline tax, and electricity rates skyrocketed. In fact, Puerto Ricans pay nearly three times as much (300 percent) for their electricity than we do in the mainland. Food costs twice as much in Puerto Rico as in Florida. This too, is a de facto tax.

And then, in 2017, the U.S. Congress dealt the coup de grâce: a 12.5 percent tax on all goods exported from Puerto Rico through a U.S. corporation. Embedded in the GOP tax plan, the economic havoc of this 12.5 percent export tax will be swift, severe and will engulf the entire island. Pharmaceutical companies are currently the largest private employer on the island. They generate roughly 90,000 jobs, provide over half the manufacturing, and supply an estimated 30 percent of the island’s tax revenue. But this 12.5 percent export tax will force the pharmaceuticals and medical manufacturers to leave Puerto Rico, and seek a more hospitable tax climate.

A 12.5 percent tax on all of Puerto Rico’s crops, if sold through a U.S. corporation, will doom them in the U.S. market. In addition, this tax arrives after hurricanes Irma and Maria wiped out 80 percent of the island’s crop value, killed over 2 million chickens, and killed or severely affected 4,200 cows.

Entrepreneurial efforts, nascent industries, technology start-ups and alternative energy exports will also be relegated to second-tier status in the U.S. market, by this export tax. All the best intentions, and all the “small business incubators” in the world, will come to nothing when their end product has a 12.5 percent albatross strapped around their necks. This programmed failure will, of course, be blamed on the Puerto Ricans themselves.

All across the island, a downward spiral will set in: with shrinking markets, dwindling access to capital and an eroding tax base creating an inevitable shutdown. Businesses will become fatally cannibalistic: selling only to each other, on an island with an 11.5 percent sales tax and a per capita income of $11,688 – roughly half that of Mississippi, the poorest state in the U.S.

For all these reasons the governor of Puerto Rico, the mayor of San Juan, Democratic Sen. Bill Nelson of Florida and many others have declared that the GOP tax plan will wreck what little is left of Puerto Rico’s economy – as badly, or even worse, than Hurricane Maria.

It doesn’t have to be this way. Congress could act consistently, treat Puerto Rico as a U.S. territory, and exempt it from this lethal 12.5 percent export tax. It could also exempt Puerto Rico from the Jones Act, just like it did with the U.S. Virgin Islands. Congress should work toward a fundamental rebirth of Puerto Rico's economy, rather than embalm it as a tax haven for the well-connected and captive market for U.S. consumer products.

Members of Congress better do it quickly. As of this moment, Puerto Rico is projected to have the worst economy on the entire planet in 2018.

[Nelson A. Denis, a former New York State assemblyman, is the author of “War Against All Puerto Ricans: Revolution and Terror in America’s Colony.”]

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