How will the United States Control Puerto Rico’s Financial Situation

The United States and Puerto Rico have a very interesting relationship. Many, including some residents of both countries have no idea if Puerto Rico is its own nation or a part of the United States. We see a lot of confusion on this point and I expect it to have a major impact on the 2020 Presidential elections.

Puerto Ricans have been US citizens since 1917, when the United States Congress passed the Jones Act. Although their relationship with the United States is similar to that of a state of the Union, they were allowed to draft their own constitution to manage their internal affairs.

Puerto Rico also has its own tax laws. Thus, they can offer US citizens that move to the island deals not available in the mainland. In the US, you must always pay Federal income tax on your profits no matter in which State you live. While Nevada and Texas might not have an income tax, you still pay Federal tax.

When a US person moves to Puerto Rico and qualifies for one of the tax holidays, they pay zero tax on capital gains and 4% on business income tax. That is, residents of Puerto Rico pay no US Federal income tax. Puerto Rico can offer whatever deal it wants and US states can’t compete.

For more on this topic, see: Big Changes Coming for Puerto Rico’s Act 20 Tax Incentive Program. Be careful when searching the web for these tax holiday programs. Trump’s 2018 tax law had a major impact! As a result, older posts are no longer accurate.

Notwithstanding the above, Puerto Rico is subject to the full powers of the US Congress through the Territorial Clause. This means that the power to exercise its sovereignty falls on the United States Congress and the existing powers on the island, as it does not enjoy protection in the US Constitution, are revocable.

For the last few years Puerto Rico has been experiencing a low key financial crisis that doesn’t seem to have a clear solution. The United States is keen to help and even though some programs have started there has yet to be a clear answer on how this will be done.

Last year, Puerto Rico became the first territorial jurisdiction to file for bankruptcy in federal court. The negotiation of a portion of the debt of more than $70,000 million through a process similar to Chapter 9 bankruptcy began in federal court in San Juan on May 17, 2017.

In order to have a complete overview of the situation Puerto Rico was currently experiencing the United States set up a control board in the country. A control board is a fairly regular process for the United States to impose on its cities having financial troubles, but it entailed something different in Puerto Rico.

In some cases, the state imposes the fiscal control board. In others, cities or counties they ask the State for intervention, and sometimes they regret this decision because it results in massive layoffs.

The fiscal control board that the United States imposed on Puerto Rico began to generate negative reactions since its implementation, among them, those of the mayor of San Juan Carmen Yulín Cruz Soto and that of Senator Thomas Rivera Schatz, who warned about the risks and the meaning of this measure.

The US senator warned about the deception and demagoguery of the declaration of then President of the United States Barack Obama, in which he made it his purpose to add the largest number of Puerto Ricans to the fiscal control board possible.

Some people and lawyers believe that this measure by the United States to handle the debt in Puerto Rico may be unconstitutional. Several unions, civic groups and individuals sued in the US District Court to challenge the constitutionality of the fiscal control board.

As part of the lawsuit, they sought to include the US government in the legal action not only to take a position on their claims but also to assume each and every one of the constitutional and legal responsibilities that should be forced to assume on the public debt of the government of Puerto Rico.

All of this legal action and protests and justifiable, but this is doing nothing to help pay or handle the large debt in which the island currently sits on. Placing a legal battle on top of the debt seems overkill.

There is no doubt that the debt of Puerto Rico is unpayable, most economists argue that the island must not only restructure its debt to pay part of it, but it must do something if it ever wants to regain the confidence of creditors in the market. This is proving to be something extremely hard to do.

One version of the Fiscal Plan of the central government, which should determine the future of Puerto Rico and give some degree of certainty to citizens, businesses, and investors to bet on the dying economy of the island, was built on totally incompatible economic projections with the historical experience of the places that have been destroyed by hurricanes in the United States and the world.

Despite all the investment of public time and funds, all the plans coincide in general terms with the measures based on projections of growth of the economy of Puerto Rico not supported which demonstrate the high level of uncertainty that permeates the process. This made the United States create and impose their own fiscal plan.

On July 1, 2018, a federal control board of the United States approved its budget version for Puerto Rico after the island government did not do it. Many expect the measure to lead to a legal battle as US territory struggles with austerity measures, claiming they will worsen an 11-year recession.

The board said it approved a budget of 8.760 million dollars, which went into effect on Sunday, after local lawmakers did not submit a draft budget before the June 30 deadline, in compliance with a recently approved tax plan.

The approved budget cut government spending by 345 million dollars, including a cut of 24 million dollars for the Legislature, which will now operate with 111 million dollars for fiscal year 2019.

And here’s why this all matters in the 2020 Presidential election. Hundreds of thousands of US citizens (everyone born in Puerto Rico is a US citizen) moved to the United States after Hurricane Maria. Most of these have landed in Florida. Let’s be blunt that most of these are Democratic voters.

President Trump won Florida with 48.6% of the vote compared to Hillary Clinton at 47.4%. This is a difference of 166,911 votes.

It is very possible that the influx of US citizens from Puerto Rico will turn the state and be a deciding factor in the 2020 election.

I hope you’ve found this article on Puerto Rico to be helpful. For more information, or for assistance in starting a business offshore, please contact us below by filling out the form, Thank you.

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