Puerto Rican Fiscal Trends

One of the best ways to determine if Puerto Rico is profitable for the United States is to look at its net federal expenditures. The net federal expenditure is simply:

federal dollars received — tax contributions to the Federal Government

After taxes, Puerto Rico received approximately $620 million ($177 per capita) from the federal government in 2016. This figure was calculated by subtracting $3.48 billion in federal tax contributions from $4.1 billion in federal expenditures to Puerto Rico. This figure alone shows that Puerto Rico takes more than it gives to the US government.

Is Puerto Rico unique in this respect? No. Puerto Rico is in the majority. Data show that most US states receive more federal dollars than they contribute in taxes (37/50 states). Furthermore, in 2004 and 2010, 18 US states take more per capita from the US Federal Government than Puerto Rico. The areas taking the most federal dollars per capita are the District of Columbia, New Mexico, and Alaska.

We cannot simply conclude that conservatives are correct, and that anti-colonialists are wrong. As you will soon see, anti-colonialist efforts to repeal the Jones Act may work well with Conservative statehood goals.

The Jones Act and the Puerto Rican Economy

While it is not directly related to the fiscal debate that we have already discussed, the Jones Act is often cited as a source of exploitation of Puerto Rico by the United States.

The Jones Act was passed as a part of the Merchant Marine Act of 1920. It requires goods shipped within the United States to be transported via American vessels. This means that any exports or imports benefiting Puerto Rico and other discontiguous parts of the United States must be shipped with American vessels.

As anti-colonialists in Puerto Rico frequently point out, the Jones Act stifles Puerto Rican economic growth through high business costs. The Jones Act is economically harmful to to Puerto Rico for several reasons:

First, the Jones Act requires ships to be built by American companies. This increases costs for Puerto Rican producers while reducing competition to the US ship-building industry.

The 1920 law also requires all shipping vessels used for shipping within the United States to fly American flags. This subjects shipping companies to costly flag-ship regulations. These costs are inevitably passed on from shipping companies to Puerto Rican businesses.

The Jones Act requires ships to have American crews — a measure that increases shipping costs for Puerto Rican companies.

Economists and anti-colonialists agree that repealing the Jones Act could spur economic growth by reducing import/export costs for Puerto Rican businesses and consumers. However, it would represent a substantial risk to the United States shipping industry. A compromise could be reached with domestic shipping industry where a certain percentage of shipping is guaranteed to them. A portion of these economic gains could be taxed to offset some of the investments needed for the US to develop a more competitive domestic shipping network.

Taxing Through Statehood

There are many tax structures that we could consider to offset the surplus federal expenditures to Puerto Rico, but let’s focus on what would happen in the case of statehood.

Under the current tax system, Puerto Ricans pay federal commodity taxes, import-export taxes, payroll taxes, and employment taxes (FICA, for example). However, most residents of Puerto Rico are exempt from the US federal income tax.

If Puerto Rico were to become a state, most of its residents would be required to pay income taxes to the Federal Government. This obviously increases Puerto Rico’s tax contributions, but it is not immediately clear if statehood would make Puerto Rico a positive revenue source for the Federal Government. This is because many of the US citizens on the island make too little to qualify for Federal Income Tax.

Statehood increases taxes paid by Puerto Rico, but it also expands access to federal programs. Under statehood, federal expenditures to Puerto Rico would increase by $5.4 billion. Corporate taxes would increase by $8.1 billion. Federal income taxes paid by residents would increase from nearly zero to at least $2.2 billion.

Reconciling Statehood and Anti-Colonial Ideas

Data does not necessarily discredit either the conservative statehood advocates or the anti-colonialists in favor of repealing the Jones Act. Repealing the Jones Act could be a way to give Puerto Rico under statehood the extra economic boost needed to further reduce the federal expenditure surplus.

If turning Puerto Rico into a net Federal Income Tax contributor is the goal, statehood activists and anti-colonialists may just need to combine their ideas for a unified solution. Repealing the Jones Act while promoting statehood may be the most effective way to raise federal tax revenue in Puerto Rico.

To put it simply, there seems to be scant evidence to suggest that statehood and reducing the federal expenditure surplus are necessary for economic progress in Puerto Rico. Puerto Ricans interested in economic growth should instead focus on policies that improve market competition and efficiency.

American conservatives should not focus on Puerto Rico’s tax contributions when considering statehood for the island. They should instead, focus on the fact that millions of American citizens do not have equal rights and representation as those living in states.