Puerto Rico’s tax system under scrutiny: Study reveals heavy burden, structural gaps

The Puerto Rico Treasury building in San Juan. Research conducted between 2022 and 2024 by the local think tank Instituto de Libertad Económica noted that Puerto Rico ranks last among U.S. jurisdictions in economic freedom and ease of doing business, largely due to its complex tax environment.

By THE STAR STAFF

A study by the Instituto de Libertad Económica (ILE; Economic Freedom Institute) has shed light on Puerto Rico’s tax system, revealing significant disparities compared to the 50 U.S. states.

The research, conducted between 2022 and 2024, noted that Puerto Rico ranks last among U.S. jurisdictions in economic freedom and ease of doing business, largely due to its complex tax environment.

The report, which comes after the government proposed the second phase of a tax reform, notes that Puerto Rico’s tax structure is highly concentrated, with nearly 70% of state and local revenues coming from consumption and corporate taxes. Property taxes, by contrast, account for just 7.3%, far below the U.S. average of 27.4%, reflecting weak enforcement and low property valuations.

Federal tax collections on the island totaled $5.39 billion in fiscal year 2023, surpassing local tax collections of $2.31 billion. Residents paid $2.33 in federal taxes for every dollar in local taxes, despite Puerto Rico’s partial integration into the federal tax system. Overall, individuals and businesses paid $23.28 billion in combined taxes -- 87% concentrated in income, consumption, and social security contributions.

The study also underscores the system’s reliance on high-income taxpayers: 7% of filers, earning over $100,000, contributed more than 62% of individual income tax revenue. Meanwhile, 40% of taxpayers had no tax liability.

Puerto Rico’s tax burden exceeds that of all 50 states when measured by gross domestic product (GDP) and gross national product (GNP): “The total combined burden -- including federal, state, and local taxes -- amounts to 18.2% based on GDP and 23.9% based on GNP.” This figure, the report notes, is “greater than or comparable to that of 24 states where all federal taxes are paid.”

The report by the ILE -- a non-partisan, non-profit think tank founded in 2019 in San Juan and dedicated to promoting individual liberty, free markets, and limited government to foster economic growth and opportunity -- aims to inform ongoing government efforts to simplify the tax system, promote fiscal equity, and reduce the burden on individuals, offering a comprehensive analysis of structural weaknesses and comparative benchmarks.

The report also seeks to fill a critical gap in comparative tax research, noting that “Puerto Rico is absent from comparative studies on taxation conducted in the United States and other countries due to the lack of reliable data on its tax types and rates.”

The study underscores the uniqueness of its scope: “In Puerto Rico, there is no record of prior work comparable in scope and objectives to the one proposed in this study.”

While past reforms have focused on fiscal adjustments, the report argues they have failed to address structural issues: “Such reforms have included changes to tax rates as well as other specific adjustments, without addressing the system as a whole from a structural and comprehensive perspective.”