Puerto Rico and the EITC

Puerto Rico and the EITC

Published on November 14, 2019

Rosanna close-up
Director, Washington D.C. Office

There is enough going on in DC to keep our attention from the policy issues that matter for the island.  With the media focused on public inquiry hearings from House impeachment proceedings, it is easy to forget that Puerto Rico is nearing a healthcare funding gap, that disaster funding has been stalled, and other structural issues are not being addressed.  Influencing the federal policymaking process under normal circumstances is a heavy lift in and of itself.  At CNE, we’ve been laser-focused on providing Puerto Rico a fair amount of funding for Puerto Rico’s Medicaid program and have been closely involved in ongoing negotiations to that end.  However, we must not forget that the island still needs tools to encourage work and reduce poverty.

The Earned Income Tax Credit

cid:image003.png@01D59AD0.40F5E6F0Upward mobility has always been a cornerstone of the “American dream”; the opportunities are boundless as long as you put in the work.  Ringing true to that promise, the federal government created the Earned Income Tax Credit (EITC) in 1975 to reduce the tax burden for low- and moderate-income working families. By providing a tax credit for these families, the EITC has become one of the federal government’s largest antipoverty programs.  For Puerto Rico, however, the situation is much different.  By excluding its participation in the federal EITC, there are few tools the island can use to reduce poverty and attract residents into the formal workforce.

Given its effectiveness in the United States, Puerto Rico established a local earned income tax credit as part of its new tax law that is expected to cost an estimated $204 million annually, and offer maximum credits between $300 and $2,000 depending on family size and configuration. On its own, the Puerto Rico EITC is small compared to what similar working-poor households receive on the mainland, given they are eligible for the federal EITC and households in Puerto Rico are not.  In light of this, CNE, alongside the Center on Budget and Policy Priorities (CBPP) – a distinguished think tank in Washington DC – conceptualized and helped develop a federal government proposal that significantly increases, and potentially quadruples, Puerto Rico’s local EITC.

There is widespread support for the earned income tax credit in Puerto Rico – from local government officials to members of Congress, non-profit organizations and members of the diaspora.  To that end, the federal supplement, embedded in H.R. 3300, the Economic Mobility Act of 2019, authored by Ways & Means Committee Chairman Richie Neal, would serve as an incentive for Puerto Rico to increase the size of its EITC, on a three to one ratio, and amplify the credit’s beneficial effects.

Based on the estimated $204 million, an additional $612 million coming from the federal government would increase Puerto Rico’s total annual EITC to $816 million. Such an expansion would not only assist low- and moderate-income families in Puerto Rico, but also help raise formal labor participation.  As a proven tool to boost labor-force participation and reduce poverty, expanding the Puerto Rico EITC would help the Commonwealth substantially in addressing its prolonged economic crisis, to which low labor-force participation and limited purchasing power are contributing factors.

CNE has long advocated for the EITC in Puerto Rico.  In 2003, CNE published one of the first reports highlighting how the earned income tax credit can benefit Puerto Rico. Our work was instrumental to getting the Puerto Rico government to establish a modest EITC in 2006.  That tax credit was expanded in 2010, but given the economic and fiscal crisis, the government decided to repeal it in 2014.  Before the decision was finalized, CNE issued numerous warnings of the negative effects its repeal would have on working families.  It also published a policy primer with Espacios Abiertos to go over the legislative history behind the credit, explain how the EITC works and present evidence on its economic impact.  Puerto Rico has another opportunity before it.  Building upon recommendations from the Oversight Board, the new tax law of 2018 renewed the tax credit. However, in order to gain full advantage and create the economic incentive for people to transition into the formal workforce, the credit must be substantially expanded.  Today CNE released a joint publication with CBPP to garner support for such proposal.

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