Congress Should Not Give Puerto Rico Federal Tax Subsidies

Policymakers are considering extending federal tax credits such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC)—but not the rest of the federal tax code—to Puerto Rico as a way to help the island emerge from its economic and fiscal crisis. This would amount to an expensive cash bailout and would not address the core problems that caused Puerto Rico’s crisis.

The EITC would primarily boost the incomes of Puerto Rico’s middle class without helping those who are unemployed, working in the underground economy, or living on welfare benefits. The CTC would shift income toward families without spurring economic growth. Given the highly problematic and costly improper payment rates of the EITC and CTC among federal taxpayers, extending them to non-federal taxpayers would likely result in even higher rates of fraudulent payments.

Eliminating the federal minimum wage, which restricts potential businesses from locating on the island and pushes others into underground operations, would do far more to boost Puerto Rico’s economy and growth potential than the federal EITC. With a minimum-wage exemption, Puerto Rico could implement its own wage subsidy targeted to very low earners. This would help bring more workers into the formal economy where they will pay taxes and help boost Puerto Rico’s revenues. Congress can also help Puerto Rico grow by providing it with an exemption from the maritime Jones Act, which drives up shipping and production costs, and by granting the island more flexibility in how it administers some federal welfare benefits so that they do not discourage work.

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