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Statehood: Economic And Political Implications


October 14, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Over the past 50 years, the statehood party has become a strong political rival of the island’s commonwealth party. Statehood supporters advocate permanent union with the U.S. to end colonialism in Puerto Rico, leading toward political equality and economic prosperity.

Support for statehood has increased substantially over the past several decades. In the 1968 elections, the pro-statehood New Progressive Party received 400,815 or 43.6% of the votes. By 1996, the number of votes for the party had reached over one million or 51.1% of the voters, although it dropped to 919,194 in the 2000 elections.

In the 1967 plebiscite, statehood received 39% of the votes or 274,312. By 1993, in the second status plebiscite, support for statehood increased to 46.3% or 780,296 votes. It increased further in the 1998 plebiscite to 46.5% of the votes.

Permanent union with the U.S. can be attained only through statehood. Treaties, compacts, agreements, and a territorial status can’t guarantee such permanency. Although many Commonwealth advocates dispute the point, most U.S. constitutional scholars agree that the U.S. Congress can dispose of a territory and change the rules that apply to a territory as it pleases, including changing Puerto Rico’s existing status.

Statehood means Puerto Rico would become a state of the U.S., with the same rights, responsibilities (including taxes), and benefits as the 50 states. Puerto Rico would retain sovereignty in those matters not delegated to the federal government by the U.S. Constitution.

Citizens residing in the state of Puerto Rico would have the right to vote for president, two senators, and approximately six members of the House of Representatives. Citizenship would be guaranteed to Puerto Ricans and their descendants by the U.S. Constitution and not by any statute or law. Puerto Rico could create and enforce local laws that don’t conflict with the U.S. Constitution or with federal laws, as the 50 states do, and could elect its own state legislators and governor as it does now.

With statehood, the ambiguity concerning the issue of Puerto Rico’s political status would end. It would also mark the end of Puerto Ricans who reside on the island being "separate and unequal," as Federal Judge Juan R. Torruella has described the consequences of U.S. Supreme Court decisions regarding Puerto Rico. The island would stand on equal footing with the 50 states in all respects.

Under commonwealth, not all provisions of the U.S. Constitution are fully applicable to Puerto Rico. If Puerto Rico were to become a state, however, the island would be subject to the entire U.S. Constitution. Similarly, Puerto Rico’s admission as a state might subject it to additional federal statutes created solely for the states. However, Congress already has the power to pre-empt Puerto Rico laws, as it does with any law of the states or territories.

Puerto Rico’s lack of full representation in Congress, its inability to vote in presidential elections, its discriminatory treatment in federal programs, its disproportionate allocation of funds in comparison with the states, and its partial exemption of federal taxes are the major differences between the island’s present commonwealth status and statehood.

Full political representation

Statehood would give Puerto Rico full political empowerment, which would translate into economic empowerment. Puerto Rico currently doesn’t have any political power in terms of congressional decisions regarding the island, much less economic power. Congress can decide to do whatever it wants with Puerto Rico, and there is nothing the island can do to prevent it. The House of Representatives must pass all spending bills before they go to the U.S. Senate, but both sides must pass a bill for it to become a law. Puerto Rico doesn’t have a vote in either chamber.

As a state, Puerto Rico would elect two senators to the U.S. Congress the same as every other state. The maximum number of senators elected per state is two, for a current total of 100 senators. Each senator is elected to a six-year term. The vice president of the U.S. presides over the Senate and can cast a deciding vote in case of a deadlock. The Senate ratifies treaties and confirms the appointments of cabinet members, Supreme Court and federal court judges, and other officials. Under commonwealth, Puerto Rico doesn’t have any representation in the U.S. Senate, which has the constitutional power to ratify nominations by the president for the highest federal posts.

The number of seats in the U.S. House of Representatives has remained constant at 435 since 1911, except for a temporary increase to 437 when Alaska and Hawaii were admitted as states in 1959. For the congressional elections in 1962, the number of seats in the House was again lowered to 435, based on the population figures in the 1960 census. Historically, however, Congress has permanently increased the number of House seats when new states are admitted. So, it would be up to this legislative body to decide which procedure to use if Puerto Rico were admitted as a state.

The current method of creating congressional districts has been used in every census since 1940. First, each state is assigned one congressional seat, as provided by the Constitution. The remaining 385 seats are allocated one at a time to each of the 50 states until all 435 have been assigned. The goal of apportionment is to produce the most equitable distribution of congressional seats among the states based on population. The method of equal proportions attains this by minimizing the percentage differences in the sizes of the congressional districts.

The number of congressional representatives a state can elect to the House changes with its population in proportion to the U.S. total. For example, Connecticut, with a population of 3.4 million, lost one representative (dropping from six to five) in the apportionment of the 2000 census. Florida gained two representatives (going from 23 to 25) because of its population growth, primarily thanks to the influx of thousands of Puerto Ricans. South Carolina, with a population of four million, didn’t undergo any change, holding on to its six seats in the House. Had Puerto Rico been included in the apportionment, it would have got five or six seats, a number equivalent to or greater than that possessed by 26 states in the union.

Although voters elect their members of Congress, the elected officials represent people, not only voters. In the 2000 census apportionment, citizens, noncitizens, and undocumented residents (aliens) in the 50 states were included, as were children under age 18, although they aren’t allowed to vote. Also included in the count were U.S. citizens living overseas (military and civilian) and dependents residing with them who could be assigned to a home state. Being registered to vote or voting isn’t a requirement for inclusion in the apportionment among the states. Nevertheless, this process is irrelevant to U.S. citizens residing in Puerto Rico since the island doesn’t participate in the "equitable" apportionment. Under commonwealth, Puerto Rico is only permitted to elect a resident commissioner to the House of Representatives, who isn’t allowed to vote.

As a state, instead of being considered a single congressional district, Puerto Rico would be divided into five or six districts with boundaries determined by population, much as the island is currently divided into senatorial districts. These five or six representatives would be looking after the interests not only of the residents of their respective congressional districts, who elected them, but also of all Puerto Rico residents. To illustrate the point, there could be a member of Congress representing the district of Ponce, another for Mayaguez-Aguadilla, and others for Caguas-Humacao, Carolina, San Juan, Guaynabo-Bayamon, or for any alternative districts created using the U.S. census population numbers.

Instead of having a resident commissioner as the sole representative of all Puerto Ricans, the island could have several members of Congress with different views and from different areas, proportionally representing people who share views and priorities. Not all Puerto Ricans think alike. Residents of different parts of the island have different problems and priorities that could be better addressed by their own member of Congress. Having a sole resident commissioner, with his own political agenda and priorities, which frequently differ from those of the majority of Puerto Ricans, has profound implications for Puerto Rico’s economic and political future.

Presidential votes

The president of the U.S. is elected through the Electoral College system, which comprises electors, or individuals, who cast electoral votes for their particular states. Originally, electors were free to vote as they chose. Today, electors are bound by state law to vote for the candidate who receives the most popular votes in their state. With the exceptions of Maine and Nebraska, states cast all their electoral votes for the candidate who wins the majority of popular votes. Puerto Rico could opt to give all its electoral votes to the winner of the popular vote, or the votes could be allocated proportionally to different presidential candidates.

The total number of electoral votes in the Electoral College is 538: one for each of the 100 senators and 435 representatives plus three allotted to the District of Columbia under the 23rd Amendment of the Constitution. Each state has a number of electoral votes equal to the number of its senators and representatives. The state of New York, for example, elects two senators and 31 representatives, which translates into 33 electoral votes.

The political parties in each state select their electors. When voters cast their ballots in favor of a presidential candidate, they are actually voting for electors of that candidate’s political party. When a candidate wins the popular vote in a state, he or she wins that state’s electoral votes. The electors chosen to represent the winning candidate’s party in each state formally cast the votes.

Under commonwealth, Puerto Rico can’t vote for president of the U.S. because states’ representatives are the ones who constitutionally, through the Electoral College system, cast the votes for president. The only other way is through a constitutional amendment, as in the case of Washington, D.C. A constitutional amendment must be approved by at least a two-thirds vote in the House and the Senate and ratified by three fourths of the state legislatures.

There are two major differences between the situation of Washington, D.C., and that of Puerto Rico. First, Puerto Rico isn’t the seat of the U.S. government as specifically provided for in the federal constitution; second, the majority of the island’s residents don’t pay federal income taxes, as do the residents of Washington, D.C. If Puerto Rico were to become a state, it could have seven or eight electoral votes for president and vice president of the U.S. (from its two senators and five or six representatives), which would be more electoral votes than 50% of the states.

Convergence and faster growth

A 1998 report by J. Tomas Hexner, chairman of Hex Inc., and Glenn Jenkins, former director of the International Tax Program at the Harvard Law School and fellow of the Harvard Institute of International Development, concluded that Puerto Rico’s economy isn’t a model of economic growth, contrary to the opinion of many. It has been besieged by slow growth, high unemployment, and little advance in productivity.

The report further concluded that Puerto Rico’s economic potential couldn’t be fully realized without a resolution of the island’s political status. Failure to resolve this issue has hindered development efforts, and will continue to keep any economic development strategy from yielding long-term results. To optimize growth, Puerto Rico must converge with the U.S. economy, instead of continuing its path of convergence with the Caribbean and Latin America.

Hexner and Jenkins believe comparisons with developing economies in the Caribbean and Latin America mask the failure of Puerto Rico’s economy and development policies. Given its close political, economic, geographic, and social ties to the U.S., Puerto Rico should be matched up with the 50 states, they said. In 1970, the island’s per capita income was one third of the U.S. average; more than 30 years later, it remains at the same level, demonstrating there has been no real improvement.

The Hexner-Jenkins report also revealed that statehood would stimulate Puerto Rico’s economy to grow 2.2% to 3.5% faster. Modern analyses indicate that less developed regions of an integrated economy catch up with the more affluent regions over time.

Had Puerto Rico become a state instead of remaining a territory even after the adoption of the Commonwealth Constitution, U.S. citizens residing on the island would have been earning $6,000 more per year by 1998, simply through greater integration with the U.S. economy, according to Hexner and Jenkins. If Puerto Rico had achieved statehood in 1994, real per capita income would have grown $1,343 more by 2000 than it did under the commonwealth status and $2,641 by 2005.

Poorer states in the U.S. have been growing faster and catching up with the richer states. Full integration in the U.S. has stimulated convergence, or had the so-called catch-up effect. Mississippi, for example, has grown twice as fast as wealthier Northeastern states since 1940, when it earned only 22% as much as the richest state. Through faster growth, it has narrowed the gap to 50%.

Puerto Rico’s per capita income in 2003 was only $11,279. If Puerto Rico had been able to catch up to the average per capita income in the U.S., island residents would now be earning $31,632, or $20,353 more per year. Had it been able to catch up to Mississippi, the poorest state, the island’s average per capita income would be $23,448, or $12,169 more per year.

Under commonwealth, Puerto Rico is ineligible for many federal programs or receives less funding than the 50 states. With statehood, Puerto Rico would receive the same benefits as any other state. The difference would be that Puerto Rico would be paying its share of federal taxes and wouldn’t be dependent on charity, which promotes greater dependency.

The island would have taxation with representation, whereas, under commonwealth, Puerto Rico is partially taxed without any representation or equal rights. Because of Puerto Rico’s high levels of poverty in comparison with the states, locals would pay much less in federal taxes than they currently pay to the commonwealth government.

Federal funds

Had Puerto Rico’s salaries and wages been converging with the higher U.S. levels and the commonwealth been able to generate enough employment for the local population, the island’s contribution to the Social Security System would also have converged with that of the states. Puerto Ricans would have received, on a per capita basis, an average of $2,105, in Social Security benefits or $737 more than the $1,368 received in 2002. This would have meant a total $8.126 billion instead of $5.281 billion, or $2.845 billion more funds coming into the island’s economy. If Puerto Rico could have reached just the level of Mississippi, the poorest state, it would have meant $469 more per capita, or a total $7.092 billion, which is $1.811 billion more than the island received in 2002.

Had the U.S. citizens in Puerto Rico been treated like those on the mainland, other direct payments to locals from programs such as Medicare, earned income tax credits, food stamp payments, and housing assistance would have amounted to $1,454 per capita, or more than double the $689 per capita Puerto Rico actually received in 2002. In the analogy with Mississippi, instead of receiving $689 per capita, Puerto Rico would have received $1,741 or an additional $4.061 billion for a total of $6.729 billion.

In the area of grants, if Puerto Rico had received per capita treatment equal to Mississippi, the poorest state, the island would have obtained a total of $6.78 billion, or $1.9 billion more than its $4.88 billion share in 2002. Congressional representation could also have made a major difference in the area of procurement, helping to attain equal per capita treatment for Puerto Rico. If the island had been treated like Mississippi, it would have meant a potential increase for Puerto Rico from $365 million to $3.674 billion. In terms of federal salaries and wages, increases to an amount equivalent to the average per capita in Mississippi would have represented a total $2.472 billion, substantially higher than the $930 million Puerto Rico actually received.

If per capita federal expenditures in Puerto Rico had achieved the level of those in Mississippi, Gov. Luis Muñoz Marin’s economic target in 1949, they would have amounted to more than $26 billion in 2002, almost double the approximately $14 billion the island actually received. This was the approximate amount in federal funds received by states with comparable populations in 2002. South Carolina and Connecticut, with populations of 4.1 million and 3.5 million, respectively, got $26.1 billion and $25.4 billion, compared with Puerto Rico’s $14 billion.

All these federals funds wouldn’t immediately flow to Puerto Rico. First, the island would have to start converging and integrating more with the mainland, begin paying federal income tax, and achieve full political representation as a state of the union. But the only way Puerto Rico can start moving to improve its economic performance and standard of living is through statehood.

By assuming full responsibilities as a state, Puerto Rico would be guaranteed full participation. Only as a state could Puerto Rico share in the equitable distribution of federal funds. Also, as a state, Puerto Rico would fall under the Tax Uniformity Clause of the Constitution, which requires that all duties, imposts, and excises imposed by Congress shall be uniform throughout the U.S.

Federal taxes

According to the General Accounting Office, under the Jones Act, Puerto Rico is part of the U.S. for the purposes of acquiring citizenship of the U.S. by place of birth. This means a person born in Puerto Rico is typically considered a U.S. citizen for U.S. tax purposes and is subject to the U.S. Internal Revenue Code (IRC), as approved by Congress.

The IRC currently provides different tax rules for the residents of Puerto Rico than for residents of the U.S. mainland. The most important of these rules is Section 933, which exempts U.S. citizens residing in Puerto Rico from paying federal income taxes on income derived from Puerto Rico sources. This exemption has nothing to do with the island’s commonwealth status and everything to do with Section 933, which is a federal law that can be amended, phased out, or eliminated by Congress at any time, just as Section 936 was eliminated.

Section 933 doesn’t exempt residents of Puerto Rico from paying federal taxes on U.S. or foreign-source income. Nor does Section 933 affect the federal payroll taxes that residents of Puerto Rico pay. Federal employment taxes for Social Security, Medicare, and unemployment insurance apply to residents of Puerto Rico on the same basis, and for the same sources of income, that they apply to residents of the U.S. mainland.

Commonwealth immunity from federal taxes is a myth. Puerto Ricans have been paying federal taxes for decades in the form of Social Security, Medicare, and unemployment insurance. Federal employees in Puerto Rico also pay federal income taxes.

For Puerto Rico, the problem isn’t the federal income taxes but the commonwealth taxes. If island residents had been contributing their fair share of federal income and corporate taxes, Puerto Rico would be receiving more in return, in terms of federal funds and services.

The high commonwealth taxes are the problem. The commonwealth imposes taxes, as if it were a national government, at rates higher than the states’. Puerto Rico residents pay taxes at the federal, central commonwealth, and municipal levels. This applies to individuals and corporations, which pay income taxes, employment taxes, real and personal property taxes, and an inefficient excise tax.

Under the federal government’s tax system, most Puerto Ricans wouldn’t pay any federal income taxes, and a majority would get money through the Earned Income Tax Credit (EITC). This credit was designed to support working families in the U.S. Two thirds of families in Puerto Rico would pay no federal income taxes, according to the Hexner-Jenkins report. More than half of all local taxpayers would actually receive a check from the federal government. As a matter of fact, Puerto Ricans who don’t earn sufficient income to be required to file returns wouldn’t owe any federal income taxes and could receive money back.

With statehood, Puerto Rico tax rates could be reduced so the average taxpayer pays less than or the same as he or she did under commonwealth. Increased federal transfers and improved efficiency would more than make up for the Puerto Rico government’s lower revenues from taxpayers. The big injection into the economy from additional federal funds would also make up for the taxes that Puerto Ricans would pay the federal government. Under statehood, Puerto Rico would get the opportunity to revamp its whole tax system and harmonize it with those of other states. Overall, individuals’ tax liability with the commonwealth government would be mostly reduced or unchanged if Puerto Rico were a state. Economic performance is not a static concept. Improved economic activity would also induce growth in tax revenues. Overall, individuals’ tax burdens would be mostly reduced or unchanged if Puerto Rico were a state.

According to the Tax Foundation, most states receive more in federal expenditures than their residents pay in taxes. In 2002, 34 states received more than they paid in taxes. By comparing each state’s share of federal spending with its share of federal taxes, we can see what each state might call the bang for its buck.

According to a Tax Foundation analysis, New Mexico was the biggest beneficiary in 2002, with a federal spending-to-tax ratio of 2.37 to 1. That’s another way of saying that for every tax dollar the federal government takes from the people of New Mexico, $2.37 in federal money goes back to the state. This high ratio is the result of New Mexico’s relatively low per capita federal tax burden, which is 63% of the national average, and of its large share of per capita federal spending, which is 148% of the national level. Mississippi, the poorest state, received $1.89 for every dollar in taxes paid. Its per capita federal tax burden, as a percentage of the national average, was 61%, while federal expenditures in Mississippi represented 116% of the national average.

The Tax Foundation said federal spending on procurements are often funneled to the states of powerful members of Congress; states can also obtain more federal grant money by manipulating their spending to comply with federal regulations. Demography also plays an important role, as states with a larger number of residents receiving Social Security, Medicare, and other entitlements tend to rank high. States with higher income per capita also pay higher federal taxes on a per capita basis, as a result of the progressive structure, which increases the amount of federal taxes per dollar of federal spending received in return. Puerto Rico has the lowest per capita income of any of the states.

Net revenue to the commonwealth’s General Fund during fiscal year 2001 was $6.95 billion, of which $4.87 billion, or 70%, was derived from income tax, according to a March 2004 study by the Puerto Rico Society of Certified Public Accountants. Of the total taxes collected by the local Treasury Department (Hacienda) in 2002, 39% were obtained from individual taxpayers, up from 15.9% in 1950. Income taxes from corporations represented 14.7% of total collections in 1950; by 2002, however, corporations and businesses were carrying 36.6% of the tax burden.

Excise taxes declined from 48.1% of the total in 1950 to 22.8% in 2002. The various excise taxes accounted for $1.34 billion in 2001. According to a 2003 report by Lawrence Hunter for the Institute for Policy Innovation, entitled "Leave No State or Territory Behind," the Puerto Rico government could collect this tax in a less economically destructive manner if it were assessed as a consumption tax (a retail sales tax), as is the case in most states. This would tax all goods sold to consumers equally and impose no taxes on business-to-business transactions. Unlike the currently constituted excise taxes, an end-point tax wouldn’t cascade. In other words, there would be no situations where a tax would be imposed on a tax.

The Society of Certified Public Accountants made a similar recommendation in 2004, based on a compilation of reports by the International Institute for Advanced Studies, Inc. from Cambridge, Mass, local consultants and the Society’s Sales Tax Study Committee made up, among others, of three former undersecretaries of Hacienda under different administrations. With an effective sales tax, Puerto Rico would be able to collect revenue from a considerable part of the estimated $26 billion informal economy, reducing the impact on individual and corporate revenue collections by the local government.

The study concluded that the present excise tax creates both a cascade (efecto cascada del impuesto) and pyramidal effect (piramidacion del impuesto) on consumer prices and production costs for local manufacturers.

Large corporations that have been substantially tax-exempted for decades would carry the largest share of the federal income corporate tax burden in Puerto Rico.

According to a report from the Tax Foundation, in 2000, there were more than five million corporate income tax returns filed on the U.S. mainland. Of these, 2.8 million reported net income. The total corporate income taxes collected, after credits, amounted to $207 billion, the bulk of which came from a few relatively large corporations. In 2000, companies with over $250 million in assets (not many local corporations have that amount in assets) represented 0.2% of all corporate tax filings, yet they paid over 82% of the total corporate income taxes collected.

In the case of federal individual income taxes, the situation isn’t much different. In 2002, out of 128 million federal returns with adjusted gross income (AGI) of over $6 trillion and almost $900 million in federal taxes collected, those with AGI of over $92,754 paid 65% of all taxes. The bottom 50% of all tax filers, those with AGI of under $28,528, paid just 3.9%. The top 1%, those with AGI of over $292,913, paid almost 34%. The average household income in Puerto Rico is approximately $14,500 a year. It should be noted that a substantial amount of individual income tax is collected on the U.S. mainland through S corporations, which allows corporations with fewer than 75 shareholders to file individual tax returns to avoid double taxation.

Tax Foundation economists estimate that for tax year 2004, a record 44 million tax returns will be correctly demanding the return of every dollar (or more) that was withheld from filers’ paychecks. In other words, after taking all the available credits and deductions, tax filers will owe no income taxes and may well be owed money by the government.

In addition to these zero-tax filers, roughly 14 million individuals and families will earn some income but not enough to be required to file a tax return. When these nonfilers are added to the zero-tax filers, they add up to 58 million income-earning households that will be paying no income taxes. Even 58 million isn’t the actual number of people, however, since each tax return often covers several people. When all of the dependents of these income-producing households are counted, roughly 122 million Americans–44% of the U.S. population–are outside of the federal income tax system.

Individuals and families who will earn enough to be required to file a tax return can eliminate their tax liability through credits and deductions in the federal tax code. Many of these credits and deductions are familiar to all federal tax filers: the personal exemption was $3,050 in 2003, and the standard deduction was $4,750 for singles and $9,500 for married couples. Taxpayers with children can subtract $1,000 from what they owe for every child under 17, and if they’ve paid for child care, they can take the child-care credit. For tax filers who itemize deductions because they exceed the standard deduction, there are the amounts paid for mortgage interest or given to charity as well as various education-related deductions. Business owners can take advantage of an even wider array of credits and deductions to reduce their tax liability. In addition, the federal government sends about $40 billion in checks to families and single individuals who qualify for the EITC.

The 44 million zero-tax filers will be largely low-income. Indeed, 75% of them earn less than $20,000 per year, and 97% earn less than $40,000. Less than 1% will earn more than $75,000 per year, a group composed largely of business owners whose tax liabilities will be erased due to business losses or carryovers from payments made in previous years.

Under the commonwealth’s form of government, Puerto Rico has provided, often to the detriment of local taxpayers, economic incentives to multinational corporations, which has inhibited Puerto Rico’s convergence and integration with the national economy. Commonwealth has been a burden to U.S. citizens residing on the island and to taxpayers on the mainland for too long. It has been proved, however, that Puerto Rico can achieve real economic growth and development by acquiring rights equal to those of the 50 states in the union, and by its residents accepting their full responsibilities as citizens.

Economist Manuel Maldonado assisted with this series. Elisabeth Roman edited the articles.

This Caribbean Business article appears courtesy of Casiano Communications.
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