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POLICY INSIGHT
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Tax Credit Expansions Expected to Significantly Reduce Poverty in Puerto Rico

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The American Rescue Plan’s expansions of the Child Tax Credit and Earned Income Tax Credit (EITC) are expected to significantly reduce poverty in Puerto Rico, according to two studies published by organizations based in Puerto Rico. The two credits combined could provide more than $2 billion to Puerto Rico families in 2022 as they file their 2021 taxes.

The expansions are critically important for Puerto Rico, which has among the highest poverty rates in the country: 44 percent for its general population and an even higher 57 percent for children. Moreover, the measures are welcome relief following years of economic decline, an ongoing bankruptcy process, devastating natural disasters, and the pandemic.

Last March’s Rescue Plan permanently fixed a long-standing flaw that limited the Child Tax Credit to families with three or more children in Puerto Rico. Now, for the first time in nearly 20 years, families with one or two children can claim the credit — a move that makes roughly 89 percent of, or 304,000, families with children in the territory newly eligible. That’s according to a study by the Youth Development Institute (YDI), a public policy institute focusing on child poverty in Puerto Rico, which also found that a full 97 percent of families in the territory are now eligible for the credit.

Puerto Rico is also benefiting from the temporary expansion of the Child Tax Credit that the Rescue Plan made available across the country. Among other improvements to the credit in 2021, that law boosted the maximum credit amounts from $2,000 per child to $3,600 for children under age 6 and to $3,000 for older children, and made the full credit available to families with low or no earnings in a year (often called making the credit “fully refundable”).

The combination of the local, permanent expansion of Child Tax Credit eligibility with national, temporary expansion of the credit is expected to boost the median income of Puerto Rico families living under the poverty threshold by 53 percent this year, as they file their 2021 taxes, the YDI study finds.

To expand Puerto Rico’s local EITC program, meanwhile, the Rescue Plan permanently extended to the territory an annual federal supplement of $600 million (that will be adjusted for inflation). This represents the first-ever federal EITC dollars for Puerto Rico since the federal credit’s creation nearly half a century ago, and allows the territory to roughly quadruple its EITC, making it more comparable in size to the federal credit.

Last August Puerto Rico took advantage of the federal supplement by expanding its local EITC, significantly boosting benefits and expanding eligibility. The maximum credit now ranges from $1,500 for workers with no children to $6,500 for workers with three or more children, up from previous amounts of $300 and $2,000, respectively. Moreover, workers aged 19 and up are now eligible (compared to those 27 and up before), as are self-employed workers (who previously were only eligible at the discretion of Puerto Rico’s Treasury secretary). And both the minimum and maximum income levels at which people qualify have also been significantly expanded.

The EITC expansions are expected to benefit an additional 211,500 households in Puerto Rico, according to a study by Espacios Abiertos (EA), a public policy institute focusing on government transparency and accountability. The new EITC would now reach as many as 466,000 households in Puerto Rico, nearly double the 255,000 households previously eligible. Some 55,000 newly eligible households would be lifted above the poverty threshold.

The studies don’t examine the combined effect of the Child Tax Credit and EITC on poverty in Puerto Rico, though illustrative examples show significant impacts. This year, for instance, a single mother who is making the federal minimum wage (roughly $15,000 annually) and has a 5-year-old daughter would be able to claim a Child Tax Credit of $3,600 and an EITC of $3,500. That would boost her annual income by $7,100, or 47 percent, and bring it above the poverty threshold of about $18,700.

It’s worth noting that while the fix for the Child Tax Credit’s family-size exclusion is permanent, the national expansion of the credit is only temporary. Congress should therefore act to make full refundability of the credit permanent as well as additional improvements in the credit. If they don’t, the credit’s anti-poverty effects in Puerto Rico (and elsewhere) will surely decline.

It’s also important to note that families in Puerto Rico claiming the Child Tax Credit must do so directly with the IRS, whereas they can claim the EITC through Puerto Rico’s Treasury Department. Given the historical absence of these credits in Puerto Rico and the novelty of the expansions, uptake is expected to build gradually over time. Intensive outreach efforts, including campaigns from EA and YDI, will help as many families as possible take advantage of these credits.