Introduction and history of the Earned Income Tax Credit in Puerto Rico
- The Earned Income Tax Credit (EITC) is a social welfare program aimed at reducing poverty through work incentives.
- The EITC, which was developed by the federal government in the mid-1970s, has proven to be very effective in incentivizing citizens to join the formal workforce, increasing the labor force participation rate, and reducing poverty in multiple U.S. jurisdictions.
- Despite poverty and challenges in labor force participation, Puerto Rico has always lacked access to the federal EITC program.
- In 2006, Puerto Rico did bet on a local EITC program that remained in effect from 2007 to 2013. During its final year, some 506,000 families received the credit’s benefits. The Puerto Rico government invested $152 million in local funds for an average credit of $300.
- The program was repealed in 2014 by the Legislature and the Executive Branch.
- In the 2018 amendments to the Puerto Rico Internal Revenue Code the local EITC was reintroduced with a maximum annual investment of approximately $204 million. Thus, the maximum credit increased from $450 in 2013 to $2,000 in 2018.
- In 2021 the federal government assigned up to $600 million in annual permanent supplemental funds to improve the local EITC program in Puerto Rico.
- In April 2021, Espacios Abiertos (EA), in collaboration with the Center on Budget and Policy Priorities (CBPP), provided concrete recommendations to the Legislature with the goal of restructuring the EITC.
- For the first time, the new credit included families without dependents as full beneficiaries, along with young people between 19 and 26 years of age and self-employed workers.
- In the 2022 fiscal year, once the changes to the redesigned program were in place, approximately 648,000 families received the benefits of this local EITC with an average credit of $1,731. The local government invested some $486 million and the federal government provided approximately $633 million.
Impact Analysis for the EITC’s Main Metrics
Main Characteristics
- For tax year 2023, the credit is available to individuals aged 19 and older who generate income that can be classified as wages, salary, tips, self-employment, and pensions.
- The credit varies depending on the amount of gross income earned (less than $48,557), personal status (single or married) and the number of qualifying dependents (taxpayer’s children under age 18 and under age 25 if they are full-time students).
Maximum EITC
- The maximum credits are $1,656 for families with no dependents, $3,864 for families with one dependent, $6,072 for families with two dependents, and $7,173 for families with three or more dependents.
EITC’s Total Cost
- Total program spending was approximately $1.061 billion for 2021 and $1.119 billion for 2022 with a corresponding expenditure for the local government of $461 million and $486 million, respectively.
- The Puerto Rico Treasury Department (Treasury Department) projects that for the 2023 tax year, program spending would amount to $1,293 million.
Average EITC
- The average value increased by 5.4% and went from $1,642 in 2021 to $1,731 in 2022. Considering that in 2022 the median household income in Puerto Rico was $24,002, the average EITC of $1,731 represents 7.2% of household income.
- There were 1,193,510 income tax returns filed by taxpayers in 2023 (tax returns pertaining to tax year 2022). Thus, the number of families that filed tax returns between tax years 2021 and 2022 went from approximately 1.23 million families to 1.19 million, a year-over-year decrease of almost 3%.
Personal Status
- During the 2022 tax year, 566,423 families (88% of total families) claimed the EITC by filing individual tax returns, and 80,048 families (12% of total families) filed joint tax returns as married couples. As a reminder, married families filing separately do not qualify for the EITC.
- The average credit for individual filers was $1,666 and $2,189 for married couples. In other words, on average, the credit amount received by families filing individually is about 24% lower than the amount received by married couples.
Sex
- During tax year 2022, 325,575 income tax returns (approximately 50% of the total tax returns claiming the credit) were filed by female taxpayers, 319,246 tax returns (approximately 49% of total returns) were filed by male taxpayers, and 1,650 tax returns did not indicate the taxpayers’ sex.
- The average credit for female claimants was $1,839, $1,623 for male claimants and $1,238 for claimants who omitted to check the sex box.
Age
- The age group recipient of the highest average EITC was the 35- to 40-year-old group, which received $2,558 (this group represents approximately 79,775 families, 12% of the total tax returns claiming the credit).
Number of Dependents
- Taxpayers with no dependents received an average EITC of $1,043, while those with one dependent received an average of $2,615, $4,102 was the average for those with two dependents, and $4,780 for those with 3 or more dependents.
- The tax returns claiming no dependents totaled 453,462 families (70% of the total number of families claiming the credit), those who claimed one dependent were 105,898 families (16% of total claimants), those with two dependents amounted to 69,799 (about 11% of the total credit claimed) and those with three or more dependents reached 17,312 families (approximately 3% of the total credit claimed).
Occupation
- Of the total number of tax returns claiming the earned income tax credit in 2022 tax year, 435,737 families (67.4% of total claimants) checked the box marked as “other” instead of choosing one of the specific occupations from the list offered by the Treasury Department. This anomaly when filling the tax return is most likely because they do not find a profession or occupation on the list that fits the reality of the current Puerto Rican job market.
- If we analyze the main occupations listed by credit claimants, focusing only on the universe of participants who do report their profession, we see that retirees or pensioners have first place with 79,253 families (about 12% of the total number of credit claimants). The second place in the list is for the customer service representative category, with 15,343 families, followed by the sales cashier with 12,384 families, secretary with 10,716 families and office clerk with 9,632 families.
Average EITC by Largest Source of Income
- The average credit was very similar for people in the private business sector, local government employees, and self-employed workers, totaling $1,827, $1,821, and $1,818, respectively. Federal government employees had a lower credit amount with an average credit of $1,478, as well as retirees or pensioners, with an average credit of $1,098.
- The number of families claiming the EITC who work in the private sector totaled 404,138 (62.5% of the total number of families claiming the credit), self-employed families totaled 92,598 (14.3% of total claimants), retirees or pensioners totaled 79,253 (12.3% of total families), those working for the local government totaled 62,139 families (9.6% of total families), and finally, those working for the federal government totaled 5,596 families (0.9% of total families).
Municipalities
- The five municipalities with the most families claiming the EITC are: San Juan with 54,746 families (8.5% of the total number of families claiming the credit), Bayamón with 33,954 families (5% of the total), Carolina with 28,016 families (4% of the total), Ponce with 27,899 families (4% of the total), and Caguas with 22,954 families (3.6% of the total). On the other hand, the municipalities with the fewest EITC claims are: Culebra (259 families), Vieques (1,026 families), Maricao (1,246 families), Las Marías (1,860 families), and Maunabo (2,104 families).
Gross Earned Income of EITC Claimants
- Total gross earned income increased between the 2021 and 2022 tax years by 6.6%, from $9,474.6 million to $10,101.1 million. The maximum average credit for the 2022 tax year, based on the gross earned income threshold, was $2,422 and it benefited claimants with gross earned income between $14,000 and $14,500, representing 13,070 families (2% of the total of those claiming the credit).
Participation Rate (“Take-Up” Rate)
- For tax returns filed in 2022, the total sum of the EITC claimed amounted to approximately $1.06 billion and impacted approximately 645,047 families.
- For that year, and according to the latest available data that Espacios Abiertos obtained from the Treasury Department, the participation rate in the EITC program was 87.2%. That is, out of 748,651 families that would potentially qualify for the credit, 645,047 families claimed it.
Economic Security
- In 2021, Espacios Abiertos projected that about 125,000 people would improve their economic security by exceeding the federal poverty threshold through the expansion of the new EITC. The study modeled the parameters of the credit expansion beginning in 2021 with data from about 1.2 million 2019 tax returns.
- For tax year 2022, according to a joint analysis between the Treasury Department and Espacios Abiertos, 648,359 families improved their economic security through the EITC. 298,051 families (46% of the total number of families claiming the credit) improved their economic security but failed to surpass the federal poverty threshold, 64,260 families or 126,014 people (10% of the total) exceeded the federal poverty threshold, and 286,048 families (44% of the total) improved their economic security, although they were already above the federal poverty threshold before receiving the EITC.
- It is important to highlight the progressive nature of the EITC program. That is, claimants with lower gross earned income receive a greater proportion of the credit. The average income of the group that did not make it above the federal poverty threshold was $10,525 with an average credit of $2,115 (17% of their new income is due to the credit). For the total population claiming the incentive, the credit represented 10% of their new income, and, finally, for the group that was already above the federal poverty threshold, the credit averaged 5% of their new income.
Poverty Rate
- Between 2006 and 2022, according to U.S. Census data, poverty has been reduced by 3.7 percentage points. That is, according to the U.S. Census, poverty declined by 3.7 percentage points in 17 years.
- The 2022 EITC pushed 126,014 people over the federal poverty threshold. In other words, the EITC reduced poverty by 3.9 percentage points in one year, that is 0.2 percentage points more than the reduction in poverty Puerto Rico had seen in the previous 17 years.
Labor Force Participation Rate
- In the last 18 years, since the 2006 government shutdown crisis in Puerto Rico, the labor force participation rate has declined by 5.1 percentage points.
- Without studies that separate the multiplicity of factors that influence the labor market in Puerto Rico, 100% of the increase in the labor force participation rate cannot be attributed to the EITC program. While empirical evidence suggests that there is a possible causal relationship between the impact caused by the implementation and expansion of EITC programs and the increase in the labor force.
Federal Contribution to Puerto Rico’s EITC
- The federal contribution to Puerto Rico’s EITC program is 56.6% of the total credit, a much lower proportion than the federal contribution to the credits received by residents of the 50 states and Washington, D.C., which totals 90.5%.
- When it comes to local contributions in the 2022 tax year, in percentage terms, no state or jurisdiction contributed more to the EITC of their residents than Puerto Rico. On average, the 50 states and Washington, D.C. only contribute 9.5% to their respective state or jurisdiction’s EITC. However, Puerto Rico contributes 43.4% to its locally funded EITC. No state or jurisdiction exceeded this amount in 2022.
Federal Government Net Contribution per Capita
- Puerto Rico is not the only U.S. jurisdiction to have, or to historically have had, a negative per capita financial or economic balance with the federal government.
- There were 25 other U.S. jurisdictions with a deficit in net federal expenditures in 2022. However, that fact does not exclude them from full access to federal programs such as the federal EITC.
- Seven of the twenty-five states have greater deficits in net federal expenditures per capita deficit than Puerto Rico yet receive more than double the island’s federal contribution to the EITC.
Recommendation
- An increase in the federal contribution cap from the $668.8 million the program will receive this year to $1 billion.
- That would mean that if the cost of the program amounts to $1.3 billion (which is approximately what the Treasury Department projects the program will cost in 2023), Puerto Rico would contribute $300 million and the federal government $1 billion, an effort ratio closer to what was originally contemplated.