Puerto Rico: land of sun, sand and — in recent years — American millionaires and billionaires avoiding taxes and potentially defrauding both the United States and Puerto Rican governments. Now, a coalition of activists on the island and in the U.S. are calling on Congress and the federal government to take action as part of the #NotYourTaxHaven campaign.
Thousands of ultrarich individuals are in Puerto Rico thanks to Act 22 (now folded into a broader law known as Act 60), a local law that allows non-Puerto Ricans to pay zero tax on passive income from interest and dividends or capital gains. The theory was that these individuals would invest, create jobs and help prop up a Puerto Rican economy in the midst of a decades-long crisis despite the law having no actual investment or job creation requirements.
The reality has been far different.
An in-depth study by Puerto Rico’s Center for Investigative Journalism found that the tax incentives have failed to spur meaningful economic growth. Instead, they are exacerbating Puerto Rico’s economic troubles. The housing crisis on the island that began after Hurricane Maria has also accelerated as Act 22 beneficiaries displaced locals to acquire properties, driving up home prices.
Puerto Ricans, who cannot keep up with the buying power of these tax-evading millionaires, increasingly find themselves without access to housing. The downstream effects are troubling; for example, Puerto Rican nonprofits recently announced that they’re having trouble finding transitional housing for domestic violence survivors.
These cryptocurrency magnates and real estate speculators do not come to Puerto Rico with the intent of being good neighbors. Many do not even bother to pretend that their relocation to the island is anything but a tax avoidance scheme. Hundreds of articles extol the virtues of Act 22, proclaiming: “The Easy Way To Avoid Federal Income Tax: Move to Puerto Rico.” They have also developed property on what should be environmentally protected areas and often put up barriers that deny locals access to beaches, which are public under Puerto Rican law.
In some cases, they may also be committing outright fraud. Act 22 beneficiaries must establish “bona fide” Puerto Rico residency by spending at least half the year on the island, but there have long been indicators that investors ignore that rule and continue to live mostly in the U.S. Beneficiaries are also supposed to donate to local charities, but according to reports, many do not follow through.
It is not up to the federal government to tell Puerto Rico what laws or tax incentives it can have. But federal lawmakers can and should ensure that they are fully investigating and prosecuting potential fraud among Act 22 beneficiaries, who are ultimately cheating not just Puerto Ricans but also the federal government and the states where they would otherwise be paying taxes. Failing to do so abets these millionaires and billionaires, turning an already vulnerable nation into an exploited tax haven, adding insult to the ongoing colonial injury of Puerto Rico’s relationship with the United States.
Fortunately, thanks to continued community pressure, some of the much-needed enforcement is starting to happen.
Two years ago, the IRS launched an initial review of Act 22 recipients; earlier this summer, the agency announced that it was stepping up some of its investigations. These are positive steps, but they have yet to lead to meaningful change, and political battles about the IRS’s resources and focus could threaten to derail this important work. Congress must ensure that this does not happen by directing the agency to prioritize this issue and by giving it the tools to do so.
In July, Reps. Raúl Grijalva, Nydia Velázquez, Alexandria Ocasio-Cortez and Ritchie Torres sent a letter to the Government Accountability Office requesting a report on the economic impact of these tax incentives in both Puerto Rico and the U.S. — including the residency history of Act 22 beneficiaries that may serve as evidence of potential fraud. The results of such a study would help drive federal oversight and inform local action in Puerto Rico, where many activists are calling for the overhaul or repeal of these tax incentives.
Ultimately, Congress must grapple with the fact that this issue is a mere symptom of Puerto Rico’s political limbo.
The colonial status quo has left Puerto Rico few avenues for sustainable economic development, leading local leaders to rely on attracting wealthy Americans as a substitute for real strategies to address economic development and inequality. That has not only proven ineffective; it has backfired spectacularly to the detriment of Puerto Ricans and honest taxpayers everywhere.
Alberto C. Medina is a Puerto Rico-born, U.S.-based writer, editor and advocate for Puerto Rican sovereignty. He is president of Boricuas Unidos en la Diáspora (BUDPR), an organization of Puerto Ricans in the U.S. who advocate for decolonization.
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