An Analysis of the Fiscal Relationship between the United States Federal Government and Puerto Rico

50 States and the District of Columbia, and does not receive federal programs on the same basis. This unique and largely misunderstood fiscal relationship is subject to the control of Congress, which periodically exercises its power through changes to benefit levels or tax credits. Puerto Rican residents and corporations currently do not pay federal income tax on earnings in Puerto Rico, even though Congress has the authority to extend full federal taxes. For many low-income U.S. citizens in Puerto Rico, exemption from federal income taxes actually means exclusion from benefits like the earned income tax credit. Unlike the States, Puerto Rico does not contribute most federal excise taxes or customs duties to the U.S. Treasury. Most federal programs in Puerto Rico, however, are funded on the same basis as in the fifty States, with the exception of several key health and income support programs. B. Purpose and Context Purpose. Tiger Woods recently sailed into the San Juan harbor without radioing ahead, breaking with national security regulations in place after 9/11. The captain had not been aware that US regulations applied to Puerto Rico. American misunderstanding extends beyond boating rules to all aspects of Puerto Rico’s unique relationship with the United States, not least to the strange fiscal relationship that has developed over the past one hundred years. This report endeavors to provide a rough quantitative basis for understanding this relationship. While some commentators have questioned whether Puerto Rico should still be treated as a foreign entity under the U.S. tax code,1 the usefulness of this unique status for Puerto Rico and the rest of the US is beyond the purview of this report. Context. Ignorance and confusion prevail over Puerto Rico’s status as both part of th