The American Rescue Plan Includes Proposal From CNE

The American Rescue Plan Includes Proposal From CNE

Published on February 15, 2021

Director, Washington D.C. Office

Within his first week in office, President Biden laid out his priorities for the American Rescue Plan.  The emergency legislation seeks to address the public health crisis and mitigate the nefarious effects of the COVID pandemic on individuals, schools, communities, and businesses. In response, the House Ways and Means Committee released legislation last week that outlines specific measures proposed in the $1.9 trillion stimulus plan.  For Puerto Rico, the bill includes a meaningful expansion of tax credits.  CNE had a direct role in the policy design and inclusion of Puerto Rico’s expanded Earned Income Tax Credit (EITC) in the legislation. 

For decades, Puerto Rico has been excluded from the federal EITC program, in spite of the fact that the tax policy has been proven to boost incomes, encourage work, and reduce poverty ‚Äď precisely some of the biggest challenges confronting Puerto Rico. That is why, since 2003, CNE has stressed the importance of the program.¬† The first¬†report¬†was instrumental to convince the local government to establish a modest EITC in 2006.¬† That tax credit was later expanded in 2011, 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.

Our research has helped garner widespread support ‚Äď from the Oversight Board to local elected officials to bipartisan members of Congress, and non-profit organizations. ¬†But if you sit around a table and start a conversation on the EITC, or any tax policy for that matter, heads will surely turn. Take my word for it. And that is because the inner workings of the EITC are complicated, and if the policy is not adequately designed, the increase to individual wages can largely go unnoticed.¬† But make no mistake,¬†this policy could have great economic benefits for the island.

In December of 2018, Puerto Rico established a locally-funded and administered EITC to reap the benefits of a larger workforce.  However, on its own, the Puerto Rico EITC is too modest to have a meaningful effect on the broader economy.  The benefits for households are also quite small if we consider the benefits provided to similar working-poor households in the mainland.

That is the reasoning behind the new federal bill; it harnesses Puerto Rico’s existing EITC and expands its size by a product of three.  If, for instance, the local EITC has a cost of $200 million, the federal supplement can expand it up to $800 million annually by extending Puerto Rico $600 million to increase the size of its program. The federal three to one match provides a significant income boost for low- and moderate-income families and serve as a powerful incentive to draw workers from the informal economy into the formal economy.

This three to one match is the product of years of well-documented research on the importance of this tool for Puerto Rico.  CNE, along with our partners and policy experts at the Center on Budget and Policy Priorities (CBPP), worked on the design of the credit that was ultimately incorporated into the most recent legislative proposal.  While the federal contribution is still far less than what the federal government provides Mississippi, the poorest state, which in 2017 claimed nearly $1.1 billion in federal EITC dollars, the federal supplement would ensure the credit’s sustainability.

In the midst of the crisis that Puerto Rico and the entire world are experiencing, it is possible that Puerto Rico has before it a new opportunity to create an economic incentive that helps working families in Puerto Rico. We trust that the language the House has introduced will remain intact, pass the Senate, and get signed into law, extending Puerto Rico the much-needed help.