Introduction and history of the credit for work in Puerto Rico
- The work credit (EITC) is a social welfare program that aims to reduce poverty by encouraging work.
- The EITC, which was developed by the federal government in the mid-1970s, has proven highly effective in encouraging formal work, increasing the labor force participation rate, and reducing poverty in multiple US jurisdictions.
- Despite the challenges of poverty and labor participation, Puerto Rico has always lacked a federal work credit.
- In 2006, Puerto Rico did opt for a credit for locally invoiced work that remained in force between 2007 and 2013. In its last year, the credit benefited some 506,000 families and included a local investment of $152 million and a credit average of $300.
- The credit was repealed in 2014 by the Legislative Assembly and the Executive Branch.
- In the 2018 amendment to the Puerto Rico Internal Revenue Code, the local work credit was reintroduced with a maximum investment of approximately $204 million annually. Thus, the maximum credit was increased from $450 in 2013 to $2,000 in 2018.
- In 2021, the federal government allocated a permanent complementary amount of up to $600 million annually to improve the credit for local work in Puerto Rico.
- In April 2021, through a collaboration with the Center on Budget and Policy Priorities (CBPP), Espacios Abiertos (EA) provided concrete recommendations to the Legislative Assembly to redesign the work credit.
- The new credit incorporated for the first time as full beneficiaries families without dependents, young people between 19 and 26 years old, and the self-employed.
- In the 2022 tax year, the credit benefited around 648,000 families and had an average credit of $1,731, a local investment of approximately $486 million and a federal government investment of about $633 million.
Main measures, impact and evolution
Key features
- For the 2023 tax year, the credit is available to individuals 19 years of age or older who generate income classified as salary, wages, tips, self-employment, and pension.
- The credit varies depending on the amount of gross income earned (less than $48,557), your personal status (single or married) and the number of qualified dependents (daughters or sons of the taxpayer aged under 18 and under 25). years if they study full time).
Maximum credit
- 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.
Total program expenditure
- Total program spending was approximately $1,061 million for 2021 and $1,119 million for 2022 with corresponding local government spending of $461 million and $486 million respectively.
- The Department of the Treasury of Puerto Rico (Hacienda) projects that for the 2023 tax year the program expenditure would amount to $1,293 million.
Credit for average work
- The average value increased by 5.4% and went from $1,642 in 2021 to $1,731 in 2022. That is, taking into account that in 2022 the median household income in Puerto Rico was $24,002, the average work credit of $1,731 would represent a 7.2% of household income.
- The total number of returns filed by taxpayers in 2023, that is, those that pertain to the 2022 tax year, totaled 1,193,510 returns. Thus, the number of families that filed returns between the 2021 and 2022 tax years went from approximately 1.23 million families to 1.19 million, decreasing by almost 3% year-on-year.
Personal status
- During the 2022 tax year, 566,423 families (88% of the total) claimed work credit by submitting an individual return and 80,048 families (12% of the total) submitted joint returns as married couples. Let us remember that married families filing separately do not qualify for the work credit.
- The average credit for claimants who filed returns individually was $1,666 and $2,189 for married couples. That is, on average, families that submit individually have an average credit that is around 24% lower than married couples.
Sex
- During the 2022 tax year, 325,575 returns (around 50% of the total returns claiming the credit) were filed by female taxpayers, 319,246 returns (approximately 49% of the total) by male taxpayers and about 1,650 were not filed. They marked sex.
- The average credit for female claimants was $1,839, $1,623 for male claimants, and $1,238 for claimants who omitted the sex box.
Age
- The age group that received the highest average work credit was people between 35 and 40 years old, who received $2,558 (this group represents approximately 79,775 families, 12% of the total payrolls that claim the credit).
Dependents
- The average work credit for credit claimants without dependents was $1,043, those with one dependent received an average of $2,615, $4,102 for those with two dependents, and $4,780 for those with 3 or more dependents.
- The returns without dependents totaled 453,462 families (70% of the total returns that claimed the credit), those with one dependent were 105,898 families (16% of the total), those with two dependents were 69,799 (around 11% of the total credit claimed) and those with three or more reached 17,312 families (approximately 3% of the total credit claimed).
Occupation
- Of the total returns that claimed the work credit in the 2022 tax year, 435,737 families (67.4% of the total) checked the “other” box instead of choosing the specific name of their occupation from the list offered by the Treasury. This anomaly when filling out the form most likely occurs because they do not find a profession or trade on the list that fits the reality of the current Puerto Rican labor market.
- If we analyze the main occupations of credit claimants, focusing only on the universe of participants who do report their profession, we obtain that the first position is occupied by retirees or pensioners with 79,253 families (around 12% of the total credit claimants). The second is customer service representative, with 15,343 families, followed by sales cashier with 12,384 families, secretary with 10,716 families and office worker with 9,632 families.
Credit for work according to source of highest income
- The average credit was very similar for private business claimants, local government employees and self-employed workers totaling $1,827, $1,821 and $1,818 respectively. Lastly, and with a smaller credit, are federal government employees, with an average credit of $1,478, and retirees or pensioners, with an average credit of $1,098.
- The returns of families that claimed the credit for work that work in the private company totaled 404,138 (62.5% of the total of the returns that claimed the credit), those of families that work on their own account were 92,598 (14.3% of the total), the of retirees or pensioners totaled 79,253 (12.3% of the total), those who work for the local government totaled 62,139 families (9.6% of the total), and, finally, those who work for the federal government amounted to 5,596 families (0.9% of the total). total).
Municipalities
- The five municipalities that have the most families claiming the credit for work are San Juan with 54,746 families (8.5% of the total 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 work credit 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 credit claimants
- Total gross earned income increased between taxable years 2021 and 2022 by 6.6%, going from $9,474.6 million to $10,101.1 million. The maximum average credit for the 2022 tax year, according to the gross earned income threshold, was $2,422 and was given for claimants who had a gross earned income between $14,000 and $14,500, which represents 13,070 families (2% of the total who claimed the credit).
Participation rate
- For returns filed in 2022, the total amount of the work credit claimed amounted to approximately $1,060 million and impacted approximately 645,047 families.
- For that year, and according to the latest available data that Espacios Abiertos obtained from the Treasury, a participation rate in the work credit program was reached of 87.2%. That is, 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 line through the expansion of the new work credit. The study modeled the parameters of the credit expansion that began in 2021 with data from around 1.2 million payrolls from 2019.
- For the 2022 tax year, according to a joint analysis between the Treasury and Espacios Abiertos, 648,359 families improved their economic security through work credit. 298,051 families (46% of the total families that claimed the credit) improved their economic security but did not manage to exceed the federal poverty line, 64,260 families or 126,014 people (10% of the total) exceeded the federal poverty line and 286,048 families (44% of the total) improved their economic security, although they were already above the federal poverty line before receiving the work credit.
- It is important to highlight the progressivity of the work credit incentive. That is, the credit reaches those with the lowest gross income earned in a greater proportion. The average income of the group that did not manage to exceed the federal poverty line was $10,525 and the average credit was $2,115 (17% of their new income is due to the credit). For the average of the total population claiming the incentive, the credit represented 10% of their new income, and, finally, for the group that was above the federal threshold, the credit was on average 5% of their new income.
Poverty rate
- Between 2006 and 2022, according to US Census data, poverty has fallen by 3.7 percentage points. That is, according to the Census, poverty was reduced by 3.7 percentage points in 17 years.
- The 2022 work credit pushed 126,014 people over the federal poverty line. That is, the work credit reduced poverty by 3.9 percentage points in one year, 0.2 percentage points more than poverty was reduced in Puerto Rico in 17 years.
Labor participation
- In the last 18 years, since the 2006 government shutdown crisis in Puerto Rico, the labor participation rate has decreased by 5.1 percentage points.
- Without studies that disaggregate the multiplicity of factors that influence the labor market in Puerto Rico, it is inappropriate to attribute 100% of the increase in the labor participation rate to the work credit program. Although it is true that empirical evidence highlights the possible causal relationship between the impact of the implementation and expansion of credit-for-work programs and the increase in the labor force.
Federal government contribution to the work credit
- The federal government's contribution to the work credit is 56.6% of the island's total work credit. Much lower than the contribution of the federal government to the 50 states and Washington, DC, which amounts to 90.5% of the total work credit received by residents of the states and Washington, DC
- On the other hand, when we talk about the contribution of local governments to credit, there is no US jurisdiction that contributes as much as Puerto Rico. The island contributes to the total credit, financing 43.4% of the program, unlike the 50 states plus Washington, DC, which on average contribute a mere 9.5% to their entire work credit programs.
Net per capita contribution to the federal government
- Puerto Rico is not the only US jurisdiction that has or has historically had a negative per capita financial or economic balance with the federal government.
- In 2022 there are another 25 US jurisdictions that have a negative per capita net contribution to the federal government. However, this fact does not mean that they are excluded from full access to federal programs such as the federal work credit.
- 7 of the 25 states that register a more negative per capita deficit than that of Puerto Rico and, however, receive more than double that of the island in the federal contribution to the work credit.
Recommendation
- Increase in the federal contribution cap from the $668.8 million that will contribute this year to the program to $1,000 million.
- That would mean that if the cost of the program amounts to $1,300 billion (which is around what the Treasury projects it will cost in 2023), Puerto Rico would contribute $300 million and the federal government $1,000 billion, a proportion of effort closer to what was originally planned. it was contemplated that it would exist.