Federal Fiscal Senior Policy Analyst-Elevating Puerto Rico
Low- and moderate-income families in Puerto Rico would get a significant income boost from the Working Families Tax Relief Act, which would substantially expand the Child Tax Credit (CTC) in Puerto Rico as well as nationally and also help the Commonwealth expand its own, recently implemented Earned Income Tax Credit (EITC). The bill, which Senators Sherrod Brown, Michael Bennet, Richard Durbin, and Ron Wyden introduced recently, would reduce poverty and increase economic security for millions of working families in the United States, including Puerto Rico.
The bill would make the CTC fully refundable so children in lower-income households (including those with little or no income) could receive the full $2,000-per-child credit. It also would create a Young Child Tax Credit for families with children under age 6, raising the CTC for young children to $3,000. These changes would dramatically reduce child poverty in the 50 states and District of Columbia.
The changes would also erase a longstanding disparity in the CTC for families in Puerto Rico; today, families there must have three or more children to qualify, and those who do qualify generally get a smaller credit than families on the mainland. The bill would make families in Puerto Rico (including those with one or two children) eligible for the same credit as the rest of the country.
The Working Families Tax Relief Act also would allow the federal government to supplement Puerto Rico’s new, locally funded EITC. Under the bill, Puerto Rico could essentially double the size of its EITC, and the federal government would cover the added cost of the expansion. While Puerto Rico’s EITC is an important step toward helping low-wage workers, it’s quite modest — especially when compared to the federal EITC, which Puerto Rico residents generally aren’t eligible for. Of particular concern, the Puerto Rico EITC phases in at a much lower rate than the federal EITC, and as the graph below shows, the maximum credit for a single parent with two children in Puerto Rico is $1,500, compared to $5,828 under the federal EITC. (The gap is even larger when one considers that 29 states and the District of Columbia have their own EITCs that supplement the federal credit.)
Puerto Rico’s labor force participation (40 percent in March) is well below the national average (63 percent), and the Financial Oversight and Management Board—which has overseen Puerto Rico’s fiscal and bankruptcy matters since 2016 — touted the Commonwealth’s new EITC as a tool to “raise formal labor force participation significantly” in the fiscal plan it certified last October. But the Puerto Rico EITC appears too modest to have as large an effect on labor-force participation (and on poverty) as the Commonwealth needs. The enlargement in Puerto Rico’s EITC that would occur under the Working Families Tax Relief Act would help address this matter and make the Commonwealth’s EITC still more effective at drawing workers from the informal economy into the formal economy, where firms and workers pay taxes. This is an important step for the Commonwealth’s economy and its long-term fiscal stability.