Puerto Rico is currently a possession, or territory, of the United States. It could also become a State or a nation with its own sovereignty.
As a nation, Puerto Rico could sign a Compact of Free Association (COFA) with the United States, creating especially close ties as a Freely Associated State. Either nation could unilaterally terminate the relationship.
For decades, some leaders in Puerto Rico have claimed that Puerto Rico could become an “enhanced commonwealth.” Sometimes called “perfected commonwealth” or “developed commonwealth,” this idea includes cherry-picking among federal laws in their application to Puerto Rico and creating a completely new relationship between Puerto Rico and the United States. All three branches of the federal government have rejected this option.
As it has become clear that “enhanced commonwealth” is a non-starter, some of its supporters have started suggesting that Puerto Rico can have that brand new relationship under “Free Association.”
In 2017, the Department of Justice (DOJ) expressed concern that voters might confuse the two options. In rejecting the text of a proposed plebiscite ballot, the DOJ made sure Puerto Rican voters understood that “Free Association” is an option that requires separate sovereignty. The Compact of Free Association between the United States and the nations that are now Freely Associated States are deals between sovereign nations, not between a territory and the United States.
In Free Association arrangements, either side can change the deal at any time. Puerto Rico cannot, for example, guarantee that the United States will allow citizens of a republic of Puerto Rico to keep their U.S. citizenship forever. See how the law works.
Puerto Rico could become a Freely Associated State, but it’s necessary to be aware of the possible drawbacks.
As Puerto Rico moves forward, it’s essential that voters and lawmakers alike understand what a Freely Associated State is and how that status would affect residents of Puerto Rico.
Updated August 20, 2019
The Implications of being a U.S. Territory
On June 11, 2017, Puerto Rico held a plebiscite in which 97% of the voters rejected the island’s current status as a U.S. territory in favor of statehood.
An independence/free association option received 1.5% of the vote, and 1.3% of the voters chose for Puerto Rico to remain a U.S. territory.
Statehood opponents dismissed the vote due to low voter turnout. Statehood proponents called on Congress to act, noting a long history of plebiscite votes rejecting Puerto Rico’s territorial status.
As a U.S. territory, Puerto Rico can request statehood, but ultimately only Congress has the power to determine Puerto Rico’s future.
While the issue of statehood – commonly known as Puerto Rico’s “status” – stagnates, implications are felt on a daily basis. Disaster aid for hurricanes and earthquakes trickles out slowly from Congress. The federal Financial Oversight and Management Board exercises authority in Puerto Rico’s governance. Medicaid funding and nutrition assistance, which are not limited in states, are capped in Puerto Rico. Meanwhile, Puerto Rico’s young men and women continue to serve in the U.S. armed forces with distinction. Puerto Ricans are voting for statehood with their feet, moving to the 50 states in record numbers, where they automatically receive the full panoply of democratic rights that are – with the exception of Puerto Rico – the hallmark of the United States.
The Federal Income Taxes Puerto Ricans Pay
Posted November 30, 2012
Unequal treatment of Puerto Rico under federal law has frequently been justified on the grounds that Puerto Ricans do not pay federal income tax on Puerto Rican based income. As we’ve stated in previous posts, this argument becomes unconvincing when half of all U.S. citizens have no federal income tax obligations.
But there is another reason to question the unfairness—and often total exclusion—of Puerto Rico’s treatment in federal laws: it turns out that Puerto Ricans are contributors to our nation’s bottom line.
In 2011, Puerto Ricans contributed $3.3 billion to the United States Treasury, approximately as much as Vermont. In past years, Puerto Rico’s liability has exceeded Vermont’s. In 2010, for example, Vermont’s tax liability was only $3.2 billion, while Puerto Rico’s was nearly $3.6 billion.
Puerto Ricans are required to pay federal income taxes on income from federal sources outside of Puerto Rico; otherwise they are exempt from federal income taxes. The wages of Puerto Rican federal judges and other federal workers is fully taxable, for example, as is investment income from U.S. sources, such as dividends from investments of companies located in the fifty states.
All employers and employees in Puerto Rice are still subject to payroll taxes as imposed by the Federal Insurance Contribution Act (FICA), including Social Security, Medicare, and unemployment taxes. The Social Security and Medicare taxes are withheld from Puerto Ricans’ paychecks just as they are for workers living within the rest of the United States. The current Social Security tax rate is 6.2%, and the current Medicare tax rate is 1.45%. Puerto Rican employers must also pay unemployment taxes, the current rate for which is 6.0%. For low income workers, these taxes are more significant than income taxes because they pay a larger share of their income in payroll taxes than high income people do. Finally, the federal government taxes Puerto Ricans on any of their investments made in the mainland United States.
Conversely, Puerto Ricans do not receive many of the same tax incentives as their fellow U.S. citizens living in the mainland. For example, Puerto Rican families must have at least three children before they are eligible to receive the refundable portion of the Child Tax Credit, and no one in Puerto Rico can qualify for the Earned Income Tax Credit, both of which are proven work incentives. In the states, the Earned Income Tax Credit and the Child Tax Credit were responsible for lifting 9 million working people out of poverty in 2010 and reducing child poverty by 7% in 2014. Puerto Rico’s working poor cannot access these poverty-fighting measures even though Puerto Rico’s poverty level is higher than that of any state. For a detailed analysis of Puerto Rico’s tax treatment, see the Joint Committee on Taxation’s “An Overview of the Special Rules Related to Puerto Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative Options” (JCX-24-06, June 23, 2006).
Editor’s Update: In Fiscal Year 2015, Puerto Ricans paid over $3.5 billion into the U.S. Treasury through federal taxes ($3,524,557). Click here for the 2015 data, broken down by state. Click here for a related link to the IRS website, listing annual tax collections by state/territory. Also, we thank Marianne for her observation that military pay is considered Puerto Rico source income for Puerto Ricans and not federally taxed. We have updated our article to reflect related information contained in IRS Pub 570.
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