Recientemente Espacios Abiertos published the report titled: Contributionón federal work credit in Puerto Rico: progress, challenges and opportunities, by the author of Daniel Santamaría Ots, Enrique Colón Bacó and José Zavala. Below we include the introduction to the Report and its conclusions and recommendations. Access the full report at this link. (Access this link for the report's English version).
INTRODUCTION
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.
Historically, Puerto Rico has been characterized by having a low labor participation rate and a high poverty rate. In 2023, its labor participation rate is estimated at 43.8%, 5.3 percentage points above the minimum of 38.5% that the island marked after hurricanes Irma and María in October 2017. This figure is still well below the US labor participation rate stands at 62.5%. Puerto Rico's poverty rate also worsens considerably when compared to other US states and remains at 42.2%, well above the three poorest states which are Mississippi, Louisiana and New Mexico with poverty rates of 19.2%, 18.7% and 18.3% respectively.
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 local invoice work that remained in force between 2007 and 2013. In its last year, the loan benefited some 506,000 families and had a local investment of $152 million and an average loan of $3007. The credit was repealed in 2014 by the Legislative Assembly and the Executive Branch. In the amendment to the Puerto Rico Internal Revenue Code of 20188, 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.
Recognizing the great potential of an expanded work credit program to address Puerto Rico's persistently high poverty rate and low labor participation rate, the federal government allocated in 2021 a permanent supplemental allocation 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 redesign of the new credit significantly increased the maximum credits, incorporated future annual inflation increases in the credit, and expanded the program's eligibility categories.
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, with the redesign changes that began in 2021 already implemented, 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 millions.
Taking into account this background on the origin and development of credit for work on the island, the report is divided into four sections addressing several issues:
- Firstly, it will evaluate the main impact measures of the program: total credit, average credit, number of families that claim the credit, credit according to personal status, credit according to sex, credit by age, credit by number of dependents, credit by occupation, credit by source of highest income, credit by municipality, gross earned income of credit claimants and credit participation rate;
- Second, it will analyze the credit's ability to increase the economic security of families that receive the incentive, quantify those that manage to exceed the federal poverty line and evaluate what we can conclude about the impact of the program on the labor force participation rate of the island;
- Third, it will evaluate Puerto Rico's access to federal financing for the work credit program and compare Puerto Rico's local and federal work credit financing with that of the 50 US states and Washington, DC. ; and
- Finally, it will conclude with a set of public policy recommendations.
HERE THE CONCLUSIONS AND RECOMMENDATIONS OF THE REPORT ARE SUMMARY
Firstly, through the analysis of around 1.1 million returns from the last tax year 2022, this study has confirmed that more than five out of every ten returns submitted in Puerto Rico claim the work credit. We were also able to verify that the credit was claimed by some 648,359 families and that their average credit was $1,731. Of the total credit claimants, 566,423 families (88% of the total) submitted individual forms and their average credit was 24% lower than that of married couples. Our analysis determined that 314,124 single women heads of household (49% of the total credit claimed) obtained an average credit 13% lower than that of married women. He The report also shows that the maximum work credit occurs between the ages of 35 and 40 and that 453,462 families (7 out of 10 payrolls that claim the credit) do not have dependents in their care. To better understand what type of occupations the credit reaches, we recommend that the Treasury update its database to the reality of the current labor market on the island to solve the fact that two out of every three applicants do not find a profession that represents them. That way, we can better understand which professions the credit reaches. This investigation also reveals that the maximum credit is given among taxpayers with a gross earned income between $14,000 and $14,500. Finally, Treasury data estimate a credit participation rate (or “take-up rate” for its English terminology) of 87.2%. That places Puerto Rico as having the highest participation rate of any other US jurisdiction. A 100% credit participation rate would have the potential to reach 748,651 families, raising the program's investment to $1,216 billion annually.
Secondly, as we project in 2021, Treasury data obtained by Espacios Abiertos confirmed that 126,014 families managed to exceed the federal poverty line due to the work credit. This study confirms that the weight of the credit for families that do not manage to exceed the federal poverty line amounts to 17% of their new income after claiming the incentive. This article also shows how the credit had a great influence on reducing the poverty rate for 2022 by 3.9 percentage points, an impact of 0.2 percentage points above what the poverty rate has been reduced in Puerto Rico in recent years. 17 years if we exclude the effect of credit. Regarding the relationship between credit for work and labor participation rate, we recommend carrying out a qualitative study through a survey of a representative population sample of credit claimants on the island. Without this, it will be virtually impossible to measure the magnitude of any possible causal relationship between the receipt of the credit and any effect on the recipient's supply of labor hours that ultimately affects a possible increase in the island's labor participation rate.
Thirdly, the study determines that the federal government's contribution to the work credit is 56.6% of the island's total work credit. Very inferior to the federal government's contribution 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, DC56. 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.
Fourth, this report refutes the idea that Puerto Rico is the only US jurisdiction that has or has historically had a negative per capita financial or economic balance with the federal government. We show that, like Puerto Rico, in 2022 there are 25 other US jurisdictions that have a negative net per capita contribution to the federal government. However, this fact does not mean that they are excluded58 from full access to federal programs such as the federal work credit. We also show that there are 7 of the 25 states that register a more negative per capita deficit than that of Puerto Rico and, yet, they receive more than double that of the island in the federal contribution to the work credit.
Finally, the brief recommends that for the renegotiation of the TCJA expiration at the end of 2025, local and federal work credit financing efforts be rebalanced. We propose an increase in the federal contribution cap from the $668.8 million that will contribute to the program this year to $1,000 billion. 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.