Statehood as an Economic Threat?

on November 13, 2024

Puerto Rico has voted once again for statehood, and there is no real uncertainty about the fact that the majority of voters want Puerto Rico to become a state. However, there are still those who argue against statehood. Independence got a much higher proportion of votes in the most recent plebiscite than in any previous vote, and the new Resident Commissioner is a supporter of the “commonwealth” status quo. Arguments against statehood include fear of losing Puerto Rico’s unique culture, the Olympics team, or the benefits of Act 60. But we still occasionally see the claim that statehood would be an economic threat to Puerto Rico. In fact, we see this suggestion in a new book by Faith Wilson, Puerto Rico’s Status Quo: Relationship with the U.S. and Its Quest for Identity.

An economic threat?

It’s hard to take the idea of statehood as an economic threat seriously. Puerto Rico, while it is better off than its Caribbean and Latin American neighbors, has a lower average income and a higher poverty rate than any U.S. state. Specifically, Puerto Rico’s average household median income in 2021 was $22,734, while New Mexico’s was $58,709. Nearly 20% of Mississippi households are below the poverty level, but 43% of Puerto Rico’s are.

If Puerto Rico is poor compared with all 50 states, how could becoming a state hurt Puerto Rico’s economy?

Autonomy?

Here’s Wilson’s take:

“While statehood could potentially increase federal benefits and aid, opponents claim that the rise might not make up for extra tax burdens and the loss of local authority over economic decisions.” And a bit further on, “Puerto Rico’s agriculture and small firms may struggle to compete with larger mainland companies if the island were subject to the same federal rules and labor laws as other states. This could lead to increasing unemployment and economic deterioration in sectors that are currently protected under territory status.” Finally, “Many Puerto Ricans respect the degree of self-governance they presently possess as a commonwealth and believe that statehood will restrict their ability to make decisions customized to the island’s particular requirements.”

In other words, Puerto Rico’s territory status gives it greater freedom and self-governance than states have. With local authority over economic decisions, Puerto Rico can have special labor laws and make customized decisions reflecting Puerto Rico’s particular requirements. Really?

Reality

In fact, Puerto Rico is subject to federal laws, including labor laws. While the “enhanced commonwealth” fantasy usually includes the idea that Puerto Rico should be able to pick and choose among federal laws, that isn’t actually the case. A few of the federal labor laws that apply in Puerto Rico:

National Labor Relations Act
Fair Labor Standards Act
Title VII of the Civil Rights Act
Americans with Disabilities Act

States are not legally allowed to have labor laws that are less protective than federal labor laws. For example, a state cannot set a minimum wage lower than the federal minimum wage. However, states can have higher minimum wage. States also determine the laws in their own state covering overtime pay, meal breaks and rest breaks, child labor, paid leave, and scores of other issues.

Under the 10th amendment to the U.S. Constitution, anything that is not covered by the Constitution is up to the states. Cities and counties also have their own laws. Territories, however, are under the control of Congress.

We have no idea what sectors are “currently protected under territory status.” Wilson doesn’t specify. However, unemployment in Puerto Rico, while it has improved significantly in recent years, continues to be much higher than in the states. Labor force participation in Puerto Rico is at 23%, compared with 62.6% for the U.S. as a whole.

Sovereignty

States have significantly more autonomy than territories; states in fact have sovereignty. States make their own labor laws, while following the same federal labor laws territories must follow. Beneficiaries of Act 60, high income individuals who can avoid income tax by living part-time in Puerto Rico, may find that their financial situation is not improved by statehood — at least not in the short run. The majority of residents of Puerto Rico will not pay federal income tax if Puerto Rico becomes a state, and local taxes are likely to decrease.

Apart from Puerto Rico’s tax dodges, claims that the territory benefits from local authority over economic decisions are just part of the fantasy of “enhanced commonwealth.”