The high cost of Puerto Rican statehood

The General Accountability Office has just published its findings on the cost of Puerto Rico statehood and the numbers are not pretty for the U.S. and for the Island. In sum the economic and fiscal costs of statehood would represent an enormous burden for the federal government, U.S. corporations, and every day Puerto Ricans.

GAO reviewed 29 federal programs which account for 86 percent of federal program spending for states or its residents. If Puerto Rico became a state, it could cost the federal government up to $5.2 billion in additional annual funding in those programs alone. According to statements by Resident Commissioner Pedro Pierluisi to the Puerto Rican press, the total sum could reach $10 billion, although he was probably exaggerating.

The cost will not be offset by new revenues.

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GAO estimates that federal individual income taxes from Puerto Rico could total $2.3 billion. It estimates that federal corporate tax revenues under statehood would range between -50 million to $3.4 billion under what GAO considers the likely scenario. The report points out that experts at the Department of Treasury and the Joint Committee on Taxation believe many U.S. corporations that currently operate there as controlled foreign corporations “would likely” relocate “to lower tax foreign locations” if Puerto Rico became a state, thus dampening potential tax revenues to the numbers above. Since $1.4 billion are currently collected from those corporations, the net gain in corporate tax revenues under statehood would range from minus 1.35 billion to $2 billion.

Add another $232 million in gasoline taxes, and the grand total in additional tax revenues from Puerto Rico would lie within a range of $1.1 billion to $4.5 billion. That is considerably less than the $5.6 billion GAO estimates statehood could cost, and astronomically less than the $10 billion the Resident Commissioner tells Puerto Ricans they will get from statehood.

That Puerto Rican statehood would costs billions of dollars is enough for fiscal conservatives to consider the case closed. Liberals might still consider the matter if statehood could do Puerto Rico good. It does not.

Puerto Rico has a $9 billion budget that is so tight it requires constant colossal efforts to balance that consistently fail. Its bonds are now in junk status out of fears regarding liquidity. Factor in the effects of statehood and all you see is devastation. The corporations that GAO believes would relocate to other jurisdictions if Puerto Rico becomes a state currently contribute $1.7 billion to the budget. That is 20 percent of the budget being wiped out. And it is only the beginning.

The report says that Puerto Rico would have to revise its tax structure because it cannot just pile federal taxes on top of its high tax rates. If Puerto Rico brings its state individual income taxes in line with Hawaii’s, the highest of any state, those revenues are reduced by more than $1.3 billion. Throw in a concomitant revision of corporate tax rates, and half of Puerto Rico’s budget is gone.

One can only begin to imagine the effect of losing the 25,000 direct jobs those relocating corporations now contribute, plus its perhaps 50,000 indirect jobs, and the over 100,000 jobs the government would have to sacrifice when its budget is axed right down the middle.

There is a simple reality. Puerto Rico’s small tax base makes statehood inadequate for the U.S. and for Puerto Rico. That is why its proponents frame the argument in terms of poetic yearnings for equality, diverting attention from the economics of statehood.

Hernández Mayoral is secretary of Federal Affairs for the Popular Democratic Party of Puerto Rico.