A Federal Income Tax on Puerto Rico is sufficient to fund without harming those near the poverty line
Richard V. Reeves and Katherine Guyot 17, British American writer and scholar and a Senior Fellow at the Brookings Institution and director of the Future of the Middle Class Initiative; Research Analyst with the Center on Children and Families in the Economic Studies program at Brookings, “RESEARCH Keeping our PROMESA: What the U.S. can do about Puerto Rico’s fiscal crisis”, Brookings, September 11 2017, https://www.brookings.edu/articles/keeping-our-promesa-what-the-u-s-can-do-about-puerto-ricos-fiscal-crisis/, NSH-NT
So what if Puerto Ricans did pay the federal personal income tax? Imposing more taxes on an impoverished population sounds counterproductive. But given the high poverty rate, many Puerto Ricans would not be liable for the tax. Even a family with earnings equal to Puerto Rico’s median income, $18,626 in 2015, would receive more in refundable tax credits than they would pay in federal income taxes.3
Revenue from the income tax could pay for more equitable federal Medicaid funding. The GAO estimates that if Puerto Rico had been a state in 2010, the island would have paid as much as $2.3 billion in individual income taxes after accounting for refundable tax credits. Federal Medicaid funding would have been between $1.1 and $2.1 billion in FY 2011 if Puerto Rico were a state, according to the GAO. (Actual funding that year was $685 million.)
This suggests that Puerto Rico could close its Medicaid funding gap without federal aid by imposing a clone of the federal income tax. Of course, any proposal to increase income taxes is bound to be unpopular at a time when the government is trying to save the economy—especially given that Puerto Rico’s income tax rates are already higher than state income tax rates.
What can the u.s. do?
In the immediate future, the U.S. could help Puerto Rico avoid further austerity measures by increasing Medicaid funding. This wouldn’t solve all of the island’s problems, but healthy population makes for a more productive workforce. And it might allow Puerto Rico to free up resources for economic recovery in addition to balancing the budget.
In May, Congress agreed to provide Puerto Rico with an extra $295 million. But this is a Band-Aid. The U.S. could permanently ameliorate Puerto Rico’s fiscal crisis by funding the island’s Medicaid program just like a state’s—something the Obama administration suggested last year.
Disparities in funding may be justified by differences in tax liabilities: but we should be clear about the implications. Puerto Rico is part of the U.S., whether the rest of the country knows that or not. Right now, the implication of federal health care spending is that the health and lives of U.S. citizens in Puerto Rico are worth less than the health and lives of U.S. citizens on the mainland.