The Case For A Boricua Earned Income Tax Credit

by John Marino

October 17, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. Last week, a San Juan think-tank, The Center for the New Economy, released a report on the benefits of instituting an Earned Income Tax Credit in Puerto Rico.

If Puerto Rico were to enact such a scheme, it would be following in the footsteps of several states which, having saw the positive results of the federal EITC first instituted in the 1970s, sought to magnify its effects by bringing it to the state level.

But for Puerto Rico, which has a separate taxing jurisdiction from the federal government, the move would bring the power of the combined federal and state EITCs all at once to the commonwealth -- all the more reason for it to institute such a scheme now. And because of the island’s persistent poverty problem, a local EITC makes all the more sense.

Recent events may also be conspiring to lay the groundwork for the plan.

Gov. Calderón’s $1 billion Special Communities Program, aimed at improving the lives of residents in 686 poor barrios, has spotlighted the problem of persistent poverty in Puerto Rico.

While nobody would deny the infrastructure improvements planned in these communities, which have suffered disproportionately in water, power and telecommunications problems, are a good idea, many doubt whether the government give-aways in housing and other benefits under the program will do anything to end Puerto Rico’s chronic poverty over the long haul.

But Special Communities has highlighted the fact that despite the economic strides taken by Puerto Rico over the decades, poverty continues to persist on the island. A recent study of the communities, based on a survey of 76,000 families, shows about 65 percent live below the federal poverty level and about 32 percent receive federal welfare benefits. A single female heads 34 percent of the families.

The EITC has been hailed as the best anti-poverty program ever invented. It puts cash into the hands of poor, working families, and does not punish them for earning more. That provides the big incentive to work one’s self out of poverty, according to proponents.

First launched in 1975, the program has been expanded by Republican and Democratic administrations and has lifted about 5 million people above the poverty line, according to proponents.

"It makes a very big difference in the welfare vs. work equation. It dwarfs all other [aid] programs in terms of how many kids it lifts out of poverty," said Robert Greenstein, founder and director of the U.S. Center for Budget and Policy Priorities.

In Puerto Rico, the EITC would affect 160,000 families and 289,000 children, according to the study. It would also spur the entrance of 20,000 workers into the formal economy.

The study reckons the tax program, which would provide up to $1,500 annually to poor working families, would cost the commonwealth as much as $180 million annually, but Center for The New Economy director Miguel Soto-Class argues that the benefits far outweigh the costs. Calderón’s anti-poverty program is costing $250 million a year.

Recent news reports have spotlighted the problem that small business owners have in trying to find steady help, despite the island’s high unemployment rate. Many of the merchants interviewed paid as much as 50 percent over the federal minimum wage, but could still not attract enough workers. The reason: welfare, housing and other social program benefits. These give beneficiaries a relatively comfortable life, which would be threatened if they earned too much, the merchants said.

Economist María Enchautegui, who authored the report, argues that the EITC would encourage the poor to work, while existing aid programs encourage them to stay at home. Under the proposal, poor workers would get a tax credit mirroring what they would owe in taxes. And they would not lose benefits like federal nutritional assistance for increasing their earnings.

The report also comes amidst mounting evidence that Congress is not interested in extending the federal industrial tax incentive program for Puerto Rico, which has bolstered the island’s manufacturing economy over the decades but is set to end in 2006.

Allowing U.S. companies operating in Puerto Rico to repatriate profits tax-free to the mainland was justified for decades as an important component to maintaining the commonwealth’s economic health. But in recent years, the huge tax breaks on company profits have become increasingly difficult to defend, especially given the relatively few direct jobs created by corporate beneficiaries.

Efforts by the Calderón administration to extend such federal tax breaks through its 956 plan have been met with Congressional indifference. Even Resident Commissioner Aníbal Acevedo Vilá, the Popular Democratic Party’s 2004 gubernatorial candidate, has acknowledged winning such incentives will increasingly be a longshot.

Meanwhile, Sen. Bob Graham, D-Fla., has introduced a bill that would grant the benefits of the federal EITC to working families in Puerto Rico. Few believe such an initiative would be easy to pass, but it is another development in what appears to be a new philosophy emerging in Washington.

A recent report by conservative think tank, the Institute for Policy Innovation, lashed out at the federal corporate tax breaks that have served as the basis of Puerto Rico’s industrial lure for the past 60 years. "They perpetuate the myopic policy of subsidizing a few large off-island and largely itinerant companies in particular industries without building a vibrant local economy with indigenous Puerto Rican businesses, entrepreneurs and jobs," it argued.

The report recommends extending the Supplemental Security Income and Earned Income Credit programs to the island — which would transfer an estimated $2 billion to Puerto Rico residents. It also recommends exempting Puerto Rico from federal maritime laws.

Congress may be just as skeptical of extending these federal programs to commonwealth residents, who generally don’t pay federal taxes, but a push on that front could be made.

Meanwhile, officials from all three political parties, including Acevedo Vilá of the PDP and former Gov. Pedro Rosselló of the New Progressive Party, have expressed support for a local EITC program.

With candidates talking about further middle class tax relief, and the Legislature mulling a sales tax to replace the local excise tax and lower income tax rates, it’s a good time to enact the EITC in Puerto Rico.

John Marino, City Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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