Nomad Capitalist Andrew Henderson wrote about moving to Puerto Rico for the tax benefits under Act 22. He expressed uncertainty that the tax loopholes would last. “I imagine that, like so many things, the IRS and Congress would let Puerto Rico attract a few rich people… until it got out of hand. Then, the tax incentives would be targeted,” he wrote. “Now, there is an entirely different threat: Puerto Rican statehood.”
Statehood a threat?
There has been a statehood movement in Puerto Rico for more than a century, so any potential threat to tax dodgers is hardly new. The Nomad Capitalist was responding to the headlines at the time. The rest of the article meanders to a recommendation not to use Puerto Rico for tax dodging, but it’s worth considering the initial question: Will the tax loopholes end when Puerto Rico becomes a state?
If Puerto Rico became a state, Act 22 tax loopholes would probably disappear
The core reason for this is that Act 22 is based on the unique territorial status of Puerto Rico. It offers tax incentives to individuals and corporations that establish residency on the island. In theory, this is supposed to encourage economic growth, and some analyses say that it has done this. Others say that it has led to gentrification, pushed local people out of the housing market, and increased colonial inequality. Wherever you stand on the benefits or harms of the law, it is based on the territorial status.
Once Puerto Rico becomes a state, it would be subject to the same federal tax code as the other 50 states. The cornerstone of Act 22, the federal tax exemption for Puerto Rico-sourced income, would cease to exist. Puerto Rico would probably implement its own state income tax, like most other states. Corporate tax rates and structures would need to align with federal standards. In essence, the tax landscape for individuals and corporations in Puerto Rico would drastically change, eliminating the primary benefits offered by Act 22.
Will beneficiaries of Act 22 work against statehood?
For most residents of Puerto Rico, statehood will be entirely positive. Puerto Rico will have full protection under the U.S. Constitution, a full voice in American democracy, equal access to federal benefits, representation in the Senate and the House, a say in presidential elections, a level playing field economically, improved infrastructure, an expanded tax base, and all the rights and responsibilities of a state.
For those who use part-time residence in Puerto Rico to avoid paying taxes, statehood will mean the jig is up. It may be in their best interests to oppose statehood and try to maintain the current colonial status. When you hear arguments against statehood, it’s worth considering whether they might come from that source.
However, when we look to the history of the current states, we see that admission as a state led to generally increased prosperity, often at an amazing rate. A rising tide lifts all boats, and the end of the colonial relationship — even if it is temporarily uncomfortable for the colonizers — is better for everyone in the long run.
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