Reaping the Benefits of Work: A Tax Credit for Low-Income Working Families in Puerto Rico

Reaping the Benefits of Work: A Tax Credit for Low-Income Working Families in Puerto Rico

Published on June 27, 2003

Center for a New Economy

Executive Summary

Puerto Rico has to overhaul its anti-poverty strategy, moving away from programs that create dependency towards programs that promote selfsufficiency.

Current government welfare programs are particularly ill-designed for working poor families. Moreover, regressive excise and Social Security taxes are detrimental to low-income families trying to make ends meet.

An Earned Income Tax Credit Program is a promising route towards improving the standard of living of Puerto Rico’s low-income working families. Such a program would counteract regressive excise taxes as well as other regimes, such as sales and value added taxes. It would also break with dependency by promoting work. In fact, studies for the United States show that the EITC promotes labor force participation, and that it could be more effective than the minimum wage in reducing poverty.

An EITC for Puerto Rico fits well within various efforts now taking place in the government, including the Special Communities Program, the Workforce Investment Act, Temporary Assistance for Needy Families, and continuing ef for ts from the Treasur y to reduce tax evasion.

Lessons learned from the last 25 years of the EITC program in the U.S. will be a valuable resource for the implementation of the program in Puerto Rico and can serve to address, early on, issues related to misreporting of income or other discrepancies.

Some of the specific findings for Puer to Rico in this study are:

  • The credit proposed in this study could increase employment by 20,000 workers and would benefit about 160,000 families and 289,000 children, most of whom are now living in poverty ;
  • Employment outlets for these families could involve large government infrastructure programs such as the proposed Port of the Americas, the revitalization of urban town centers, the proposed Convention Center, and other projects within the Special Communities Program. The tourist and service industries, as well as selfemployment, are other employment options for this population. Employment opportunities may be enhanced through training opportunities from the Workforce Investment Act and Welfare Reform programs;

  • An EITC for Puerto Rico could lift low-income single mothers with one and two children from poverty and could reduce the poverty gap of married couples with children by at least 5 percent ;

  • The credit would cost from $162 million to $183 million depending on the labor force reaction. A conservative estimate of $132 million will be returned to working families in the form of refunds.