Posted on June 20, 2019

America’s Forgotten Colony: Ending Puerto Rico’s Perpetual Crisis

Antonio Weiss and Brad Setser, Foreign Affairs, June 11, 2019

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Since 1898, when Washington took possession of it at the end of the Spanish-American War, Puerto Rico has been neither granted sovereignty nor fully integrated into the United States. Instead, it has remained an “unincorporated territory,” a place that is simultaneously a part of, yet apart from, the rest of the country. Residents of Puerto Rico are U.S. citizens, subject to federal laws and eligible for the draft, but they do not enjoy the same political rights as their fellow Americans. They have only one, nonvoting member in the House of Representatives, and although they can vote in U.S. presidential primaries, they have no Electoral College votes in the general election.

Without any say in the federal policies that govern it, Puerto Rico has for decades been neglected by Washington. Such neglect has been costly: even before Maria, Puerto Rico’s economy had been in sustained decline for years. Between 2004 and 2017, economic output dropped by 14 percent. If Puerto Rico were measured as a country, that decline would rank among the worst in recent history for a nation not at war. This economic crisis has sparked a wave of out-migration: Puerto Rico’s population has fallen from over 3.8 million in 2006 to less than 3.2 million today. The island has a poverty rate double that of Mississippi, the poorest U.S. state: around 45 percent of Puerto Rico’s residents and 56 percent of its children live below the federal poverty line.

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The decision over the island’s future should be left to the people of Puerto Rico themselves, as it is a question not just of economics but also of identity, heritage, and values. But however complex the process, the U.S. government must commit to working with Puerto Rico to resolve the island’s status once and for all. Americans on the mainland must stand ready to support whatever choice the Puerto Rican people make—whether that’s revising the current commonwealth status, becoming an independent nation, or joining the federal union as the 51st U.S. state.

A QUESTION OF STATUS

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A HISTORY OF NEGLECT

The United States has not only asserted political sovereignty over Puerto Rico; it has fundamentally shaped the island’s economy. {snip}

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Puerto Rico has made its share of policy mistakes. The island’s government never fully mastered its own finances, lacking modern systems to control and monitor spending by its constituent parts. It entered into shortsighted, opaque tax agreements with multinational corporations that sacrificed long-term revenue in order to address short-term budget shortfalls. It cut public investment as the economy shrank, weakening the island’s infrastructure, and forwent critical initiatives, such as modernizing Puerto Rico’s dangerously outdated electrical grid. But the U.S. government also bears a great deal of responsibility for the island’s plight. When federal policies that aided Puerto Rico’s economic development were repealed, no enduring replacements were put in place. Washington largely ignored Puerto Rico until it was clear that the island was in severe financial distress and would default on its debt without the protections granted to U.S. municipalities when they file for bankruptcy. {snip}

Yet Congress did nothing to address Puerto Rico’s incomplete integration into the federal safety net, leaving the island’s residents more exposed to poverty than U.S. citizens on the mainland. Residents of Puerto Rico do not receive the federal Earned Income Tax Credit, which supplements the income of poor Americans. EITC benefits can be substantial: on the mainland, a family with two children earning the Puerto Rican median income of $20,000 would receive around $5,600 in tax credits every year. And although Puerto Rico participates to varying degrees in other federal safety net programs, including Medicaid and Medicare, a 2014 study by the Government Accountability Office estimated that Puerto Rico received between $1.7 billion and $5.4 billion less in annual federal benefits than it would if it were a state.

FIRST THINGS FIRST

The first priority for both U.S. and Puerto Rican policymakers must be to reduce the commonwealth’s overwhelming debt burden, which, measured both in per capita terms and relative to GNP, is far higher than that of any U.S. state. {snip} But there is no guarantee that once Puerto Rico, the oversight board, and various creditor groups agree to a debt restructuring, the island will emerge with a truly sustainable debt burden.

After the debt has been restructured, the island must gain access to federal funds to rebuild its critical infrastructure. {snip} The Puerto Rico Electric Power Authority, for example, currently uses 40-year-old power plants that burn oil to generate much of Puerto Rico’s electricity. This electricity is then delivered across the island’s uneven and forested terrain via large transmission lines, which are vulnerable to hurricane-force winds. Puerto Rico’s electrical grid is thus exposed both to higher oil prices and to damage from natural disasters. Puerto Rico needs to improve its electricity generation, reduce its dependence on imported energy by investing in renewables, and create a resilient power grid that can withstand future hurricanes.

Puerto Rico’s government should also take measures to improve the environment for business, while recognizing that now is not the time to implement austerity measures or punitive labor-market reforms. {snip}

The immediate economic crisis must be addressed through an ambitious program to restructure Puerto Rico’s debt, rebuild its infrastructure, and revitalize its economy. But the path forward will be sustainable only if the island’s political status is finally resolved. Although it is for the people of Puerto Rico to decide their future, the federal government has a responsibility to work with them to develop options for a referendum and clarify how each option would be implemented if chosen. The federal government must also make clear that the vote will result in action. Washington must commit, for the first time, to respect the will of the Puerto Rican people, regardless of which path they choose.

None of the options for addressing Puerto Rico’s status is straightforward. {snip}

The first option for resolving Puerto Rico’s status is to revise the current commonwealth arrangement. The initial step for such a revision would be to address the island’s broken economic model. The federal government, for instance, must be willing to provide additional funds for Puerto Rico’s health-care system, which currently relies on Affordable Care Act and Hurricane Maria relief appropriations that will soon run out. A revised arrangement should also ensure that any corporate tax incentives be tied to the creation of jobs in Puerto Rico, rather than providing multinational companies with a convenient tax haven.

{snip} A revised arrangement would need to provide Puerto Rico with greater control over its destiny, through increased local autonomy, a more meaningful voice in the development of national policy, or both. Accomplishing this would arguably require an amendment to the U.S. Constitution, as over a century of federal actions and judicial decisions, including two recent Supreme Court cases, have suggested that Congress will continue to have absolute authority over Puerto Rico under the current constitutional arrangement. An amendment should enshrine Puerto Rican residents’ equal status as American citizens with specific rights to self-government, voting representation in presidential elections, and equal treatment in social safety net programs. {snip}

The second option, independence, has relatively limited support within Puerto Rico, judging from the most recent polls. Independence would offer full policy autonomy, including, if Puerto Rico so desired, an independent central bank, a floating currency, and the ability to craft its own labor, tax, and trade policies. {snip}

Full independence would come at a cost, as Puerto Rico receives substantial economic benefits from being part of the United States. Before any referendum, the federal government and Puerto Rico would have to agree on how independence would be carried out, including a realistic timeline, a plan to replace or maintain the functions currently carried out by the federal government, and clarity about how the federal benefits that currently flow to Puerto Rican residents would be funded during the transition and maintained by the Puerto Rican government after independence. The two parties would also have to define their future trade relationship and determine whether Puerto Rican residents would retain their U.S. citizenship and the right to travel freely to the United States.

At the opposite pole from independence is statehood. Statehood provides a clear alternative to Puerto Rico’s current patchwork of partial federal taxation and access to federal benefits. {snip}

A crucial question is how the United States would respond to a vote in favor of statehood, as admission requires a joint resolution of Congress signed by the president. Washington must make clear that it is prepared to embrace Puerto Rico as a member of the union, including by granting it full congressional representation. Puerto Rico would immediately become the 30th-largest state by population, with two senators and perhaps five representatives. Statehood would also give Puerto Rican residents access to full federal benefits, including the EITC, Medicaid, and Medicare.

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If Puerto Rico became a state, its residents would receive full federal benefits, equal to those enjoyed by citizens on the mainland. Puerto Rico’s population is already aging, and with a low birthrate and high levels of out-migration, the island will soon have the oldest population in the United States. It would benefit in particular from expanded access to federal health-care funding. Many Puerto Rican families would also receive significant EITC benefits when filing federal income taxes. Access to the EITC would not only alleviate poverty but also, by adding incentives for lower-income individuals to work, increase the island’s labor-force participation rate, which, at about 40 percent today, is only two-thirds of the average on the mainland.

Perhaps the most difficult economic aspect of statehood would be the integration of Puerto Rico into the U.S. tax system. Even after the repeal of Section 936, firms operating in Puerto Rico can avoid U.S. corporate income tax, paying the much lower “global minimum” rate applied to foreign intangible income. If Puerto Rico were a state, however, firms operating there would be subject to the federal income tax, eliminating their incentive to shift operations to the island. Individual residents of Puerto Rico would also have to pay federal income tax, making it hard for the island to maintain its high local individual income tax rate, which currently has a top marginal rate of 33 percent. {snip}

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[Editor’s Note: More than 50 percent of the original has been cut. The omitted sections are informative and include both history and details concerning Puerto Rico’s economy.]