Back Again: This Time Obama Administration Wants a Taxpayer Bailout for Puerto Rico

Less than two months after Congress passed a package aimed to provide financial relief for Puerto Rico, the Obama administration is already at it again—this time seeking an outright taxpayer bailout for the U.S. territory through additional Medicaid funds and access to the earned income tax credit.

Why does Puerto Rico need help? After decades of failed economic policies and rising debt, Puerto Rico began defaulting on some of its debt payments in 2015. Faced with substantial government spending (including massive pension costs), a declining economy, and rising interest rates, Puerto Rico was on track to default on multiple other debt payments.

Under Congress’ attempted relief, most debtors still won’t receive full payment. After all, it wouldn’t be relief for Puerto Rico if it actually had to pay all its bills. Instead, the island will have access to bankruptcy-like proceedings that will allow it to write off a large portion of its debt.

This is precisely what the administration wanted. The island now has access to so-called “Super Chapter 9” bankruptcy that will allow Puerto Rico to write down not only its municipal debts (in the same way that states can choose to do), but also its constitutionally protected territorial debt.

In addition, Puerto Rico has been afforded an unprecedented stay on litigation that will allow the island’s government to operate free of legal challenges for months.

But apparently allowing the island to renege on its constitutional obligations and stripping creditors of their right to access the courts wasn’t enough. Now the administration is back at it again, seeking an outright taxpayer bailout for the island.

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In a letter to the recently appointed Congressional Task Force on Economic Growth in Puerto Rico, the administration called for granting Puerto Rico the same access as states to Medicaid funds and the earned income tax credit.

But Puerto Rico is not a state and its residents are not subject to federal income taxes. So why should U.S. citizens who do pay federal income taxes have to fork over an extra $36.2 billion over the next 10 years to provide benefits to people who do not pay those taxes?

Puerto Rico and other U.S. territories already receive a disproportionate share of federal welfare spending, and they get these benefits without their residents paying federal income taxes.

Providing additional Medicaid funds to Puerto Rico is not really any different than a pure cash bailout. Money is fungible, and what Puerto Rico doesn’t have to spend from its own resources to provide Medicaid, it can use on whatever else it wants.

The same is true for the earned income tax credit, except that the bailout would go directly to Puerto Rican residents as opposed to its government. But Puerto Ricans aren’t subject to federal income taxes, so why should they receive federal income tax credits?

Puerto Ricans aren’t subject to federal income taxes, so why should they receive federal income tax credits?

The administration argues that the earned income tax credit is “one of the most powerful policy tools” to stimulate and encourage work. Stimulating work is an important objective in Puerto Rico where only 38 percent of the island’s working-age population has a job in the formal economy.

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But the tax credit would have little impact in Puerto Rico and would be ripe for fraud and abuse.

For starters, the federal minimum wage in Puerto Rico is as large an impediment to job creation as a $20 per hour minimum wage would be on the mainland. Employers who can’t afford to pay workers the minimum wage will still not be able to pay the minimum wage with an earned income tax credit. Instead, the benefits will primarily flow to Puerto Rico’s more fortunate residents—those with a formal job.

Moreover, taxpayers can expect to foot the bill for unlawful earned income tax credit payments. Even when implemented by the IRS, which has access to taxpayers’ federal income tax returns, this tax credit has an excessively high improper payment rate of about 25 percent.

Just imagine how high the improper payment rate would be in Puerto Rico where residents don’t file federal taxes. Puerto Rico’s Treasury, which would presumably administer the tax credit, would have no incentive to prevent improper payments. After all, mainland taxpayers would be funding the subsidy.

Puerto Rico has the authority to enact and fund its own version of an earned income tax credit. Instead, the territory’s politicians have prioritized maintaining a bloated public sector with much higher pay than the island’s private sector workers.

Congress has already intervened more than it should have in Puerto Rico’s financial crisis. Federal taxpayers shouldn’t be forced to foot the bill for Puerto Rico’s poor economic and fiscal policies.

If Congress does cave in to the bailout demands, states and localities will be encouraged to engage in the same reckless policies so that they too can receive a federal bailout.

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