Mr. Speaker, I rise today to call attention to the disturbing economic trends in Puerto Rico detailed in recently released reports by the General Accountability Office (GAO), and the Joint Committee…
Mr. Speaker, I rise today to call attention to the disturbing economic trends in Puerto Rico detailed in recently released reports by the General Accountability Office (GAO), and the Joint Committee on Taxation (JCT). Taken together, these finely written and well-documented studies paint a bleak picture of an island that-- instead of being a model of economic development--has fallen further behind the 50 states.
Nothing could be clearer from these reports than that we have failed the U.S. citizens of Puerto Rico miserably for over 50 years. Not because of bad intentions, or because of some sort of benign neglect, but because of failed policies that have provided few, if any, of their promised benefits. These studies vividly demonstrate the need for a different approach that will more directly benefit the residents of Puerto Rico, including making them eligible for the refundable portion of the child tax credit, which I proposed in legislation introduced earlier this Congress (H.R. 4451).
These studies paint a fairly stark picture of the ways in which Federal policies have markedly neglected working Americans in Puerto Rico, by denying them basic support accorded to families in the rest of the United States who are struggling to make ends meet.
The focus of the GAO report is the economy of Puerto Rico during the phase-out of the Possessions Tax Credit (``Sec. 936''), the cornerstone of the U.S. tax policy in Puerto Rico until Congress repealed it in 1996. GAO (and an independent study by the Brookings Institution), determined that the repeal of Sec. 936 to a significant degree did not cause the companies that had previously taken advantage of the program to flee the island; instead concluding that ``a substantial amount of possession corporation activity has been continued by other types of businesses,'' primarily by the companies conversion to controlled foreign corporations, which do not have to pay taxes on their PR source income. As such, the GAO provides the most comprehensive and objective assessment that while corporate structures have changed, underlying economic activity has not markedly changed during the Sec. 936 phase- out.
The bottom line conclusion is that the tax policies that have been in place have failed to put Puerto Rico on a path toward equality with the mainland. Growth has been insufficient to reduce the gap in per capita income (one third that of the mainland), living standards (four times the number of people live below the poverty level) and unemployment (twice as high as the mainland)--nor improve the abysmally low labor force participation rate. Clearly the data supports the conclusion that the past approach has had little--if any--direct and
positive effect on the welfare of individuals living and working on the island.
The JCT study points out that tax incentives such as Sec. 936 cannot be permanent additions to the Internal Revenue Code, and that there are market distortions associated with these incentives. While not opining on a preferred approach, JCT states that other options might gain a higher rate of return. JCT surveys some of these options, putting them in the context of the various political status alternatives. Unfortunately, JCT articulates the costs, but dodges the really big question of measuring the possible economic benefits of the different status options (independence, statehood, or continued commonwealth status).
Most importantly, the JCT study points out how much misguided federal tax policies have neglected the people of Puerto Rico--and point to a direction that would clearly have a measurable, positive, impact on the very people who need it most: the working poor of Puerto Rico. This is through application of work incentives available to working families in the 50 states: the per-child tax credit (CTC) and Earned Income Credit (EIC), both of which are available to working families on the mainland to offset payroll taxes (which are also paid by residents of Puerto Rico).
By paying payroll taxes for Social Security and Medicare without receiving the earned income tax credit, working families in Puerto Rico face a heavily regressive tax burden. To illustrate, a Puerto Rican on the island who files as a head of household with two children and $20,000 of income has a total Federal tax liability of $792. Yet that filer's brother in New York with the same income and family circumstances would receive a tax refund of $3,708. According to the JCT study, simply making Puerto Ricans eligible for the EITC would provide an annual fiscal stimulus of $540 million directly to the local economy, which some estimates show would reduce tax burdens on over 90 percent of taxpayers (about 950,000 taxpayer returns).
My legislation, making families eligible for the child tax credit (now applicable only to families of 3 or more), would further reduce taxes for another 32 percent of all tax filers or about 560,000 taxpayers (and add another $180 million, annually, to the local economy). Independent analysis shows that these targeted tax credits would be up to 40 percent more effective in stimulating the economy than failed subsidies we have tried, which amount to billions of dollars every year (and continue to this day).
In closing, let me say, I applaud GAO and JCT for drawing our attention to the problem of Puerto Rico's economy. The ball is now in our court. It is the responsibility of this Congress to implement new policies. I am not sure what all these policies should be, but do know that what we have tried did not work, and that we should consider a range of options--including my own legislation--with an eye toward what would best serve the nearly four million U.S. citizens in Puerto Rico, who need and deserve our help. I urge my colleagues to move forward expeditiously in this effort.
