By Eram Ahmed
In just six years from 2017 through 2022, Puerto Rico gave up almost $86 billion in tax revenue to entice people under the age of 36 to stay or move there.
Act 135, as the Commonwealth’s relocation incentive is known, is by far the costliest of Puerto Rico’s tax breaks given to grow its economy. Other programs benefit industries, including crypto mining, film production, and pharmaceuticals, as well as investors with capital gains income.
Good Jobs First analyzed six years of Puerto Rico’s audited annual spending reports. The reports include a note that shows how much tax revenue the government, but for the tax break programs, would have received for schools, roads, parks, healthcare and other vital public services. Since 2016, the Governmental Accounting Standards Board Statement has required most governments to make such disclosures via Statement No. 77 on Tax Abatement Disclosures (learn more about that here).
Act 135, the “Young Entrepreneurs Incentive and Financing Act,” gives an income tax exemption for people under 27 on their first $40,000 in income. For people through age 35 starting new businesses, it gives a three-year set of tax exemptions on the first $500,000 of annual income. From 2017 through 2022, Puerto Rico gave up $85.9 billion to these Act 135 tax breaks.
The next costliest group of incentives comes via Act 60 (formerly Acts 20 and 22), which provides tax breaks for businesses that relocate to the island and gives companies and individuals tax breaks on capital gains income (capital gains tax cuts are regressive since high-income people have a disproportionate share of such gains).
Act 60 gives relocating businesses an effective corporate tax rate of 4%, compared to the United States’ statutory federal rate of 21% (though many businesses actually pay far less, as the Institute for Taxation and Economic Policy has documented). Relocating firms also get a 50% tax abatement on municipal taxes and a 75% reduction on municipal and state property taxes. Individuals receive a long-term capital gains tax of 0%, instead of the mainland rate of up to 20%.
Act 60 also includes a 100% tax exemption from Puerto Rico income taxes on all dividends, all interest, and all short-term and long-term capital gains, including on all cryptocurrencies and other crypto assets. Act 60 cost Puerto Ricans nearly $3.2 billion in the six years.
Puerto Rico also provides subsidies to tourism, along with separate incentives for film and commercial production. The latter are massive tax-revenue losers, typically returning about two dimes on every dollar spent by a jurisdiction.
Puerto Rico lost nearly $330 million from both these tourism and film industry incentive programs altogether.
In the same period Puerto Rico gave away $89.6 billion, Puerto Rico had a total GDP output of $632.67 billion, according to the World Bank, meaning the abatements would roughly equal 14% of the island’s GDP.
These figures don’t even include the federal Opportunity Zones (OZ) program, which provides another route for individuals and companies to shelter capital gains. OZs cover 98% of the island. Puerto Rico separately approved legislation that mirrors the federal tax incentives (it’s even more generous, actually), which enables Puerto Rico to combine their tax incentives with the ones allowed in the federal Opportunity Zones program.
The influx of new investors who reap the benefits from these incentives is causing a strain on existing residents of the island, where schools are struggling to accommodate the new students without the tax revenues necessary to pay for them and where housing costs are rising as wealthy outsiders scoop up land and property. Since Act 20/22 (now Act 60) was enacted in 2012, almost 4,300 applications for these wealthy investors to relocate to the Commonwealth and take advantage of these tax breaks, have been approved, according to the New York Times. (Source)
In fiscal year 2023, Puerto Rico’s budget included $2.6 billion for education, $1.2 billion for public safety, $600 million for the University of Puerto Rico and $555 million for its health department – a small fraction of what it gave away that year.
Perhaps the island should consider investing in services that benefit more of its long-time residents, rather than giving so much to newcomers.