A famous surf town in western Puerto Rico seriously battered by Hurricane Maria in 2017 has become a hot spot for crypto traders. Along the coast, Puerto Ricans who have lived their entire lives in tight-knit communities near the beach or with breathtaking mountain views allege they are being priced out of their neighborhoods because wealthy developers are buying up nearby residential properties.
What’s driving the change are tax breaks that incentivize thousands of investors, traders and other kinds of wealthy people to partially relocate to Puerto Rico. The benefits have become a source of heated debate and controversy on the island.
YouTuber Logan Paul and crypto billionaire Brock Pierce are among the most well-known beneficiaries of one of the tax breaks.
Opponents say they create a “predatory tax evasion” landscape that harms Puerto Rican communities and lead to “significant tax avoidance” by wealthy individuals from the U.S. mainland and some businesses. Supporters, meanwhile, defend the modest economic impact of such policies.
Here are the ins and outs of the issue.
Pressure from Congress
Puerto Rican groups from the island and the mainland that are opposed to the tax laws met this week with lawmakers and congressional staffers in Washington, D.C., to discuss parts of Puerto Rico’s tax code.
Their efforts came as the U.S. Government Accountability Office confirmed Tuesday it had accepted a request from members of Congress to review parts of the Puerto Rico tax incentives law (Act 60) over concerns that they allow wealthy individuals from the U.S. mainland and some businesses to avoid significant taxes.
Four Democratic members of the House Natural Resources Committee, which oversees Puerto Rico affairs in Congress, made the initial request to GAO nearly two months ago. These were Reps. Nydia Velazquez, Alexandria Ocasio-Cortez and Richie Torres of New York, as well as Rep. Raul Grijalva of Arizona.
The Internal Revenue Service has said it’s already investigating about 100 cases involving people who benefitted from the Puerto Rico tax breaks without meeting the appropriate requirements, in an attempt to avoid U.S. taxation.
How it started
The Puerto Rican government first created these tax incentives, initially known as Acts 20 and 22, in 2012 to attract wealthy investors from outside the island, as well as corporations that could export goods and services. Government officials at the time believed the tax breaks would help generate more jobs and increase treasury revenue as Puerto Rico was reeling from an economic recession.
Both laws, alongside a slew of other tax incentives, were consolidated under Act 60 in 2019, but people on the island still refer to the tax breaks by their original names.
Marlyn Goyco-Garcia, a national organizing manager with the advocacy group Center for Popular Democracy, is among those who have questioned whether the laws have done enough to deliver on their initial promises.
Qualifying businesses, foreign or local, with an office in Puerto Rico get a 4% fixed income tax rate under Act 20 for exporting services.
Under Act 22, the most controversial of the two, individual investors looking to benefit from the tax breaks must not have lived in Puerto Rico between 2006 and 2012. They need to buy a residency on the island and live there at least half of the year. They also have to donate $10,000 to a nonprofit approved by the Puerto Rican government. In exchange, they get a 0% tax rate on capital gains such as profits from selling estate stocks or cryptocurrencies.
As residents of Puerto Rico, they also save money by not paying federal income taxes, since Puerto Ricans don’t have voting representation in Congress as a U.S. territory.
In Puerto Rico, all residents pay local income, payroll, property and municipal taxes. The island also has the highest sales tax of any U.S. jurisdiction (11.5%). Residents also pay higher prices for imported goods such as cars and food.
Since Act 20 was enacted in 2012, the Puerto Rico Department of Economic Development has approved at least 3,198 tax exemption decrees, according to data from the Puerto Rico Institute of Statistics.
While they are meant to attract businesses from outside Puerto Rico, about 40% of such exemptions were granted to local firms, according to Carlos Fontan, director of the incentives office at the Puerto Rico Department of Economic Development. But roughly a third were granted to individuals who also benefit from Act 22.
An estimated 6,000 tax exemption decrees have been approved under Act 22 since it was enacted, according to Fontan. As such, in 2020, the most recent data available, these beneficiaries paid a total of $160 million in local income taxes and $10 million in municipal taxes, he told NBC News.
Meanwhile, data from the latest Puerto Rico tax expenditure report shows that the island has lost an estimated $2.2 billion in tax revenues related to Act 22 since 2017. For Act 20, revenue losses are estimated at more than $1.5 billion over the same period.
A 2021 study commissioned by the Puerto Rico Department of Economic Development found that Acts 20 and 22 created approximately 33,000 new jobs on the island, with an average yearly salary of $36,000 between 2012 and 2017. The median household income in Puerto Rico is about $22,000.
This helped bump Puerto Rico’s employment rate by 3% and total production by 2%. Without the tax breaks, Puerto Rico’s economic activity index would have been 2.64 points lower, according to the study.
While Fontan praised the increase, Goyco-Garcia told NBC News it serves as very little comfort to the Puerto Rican families and communities who are being priced out of their neighborhoods as more high-net-worth individuals flock to the island and buy properties.
What’s at stake?
Fontan said $1.3 billion in real estate investment in Puerto Rico can be attributed to Act 22.
Incoming capital from these investors compounded with a rise in short-term rentals and lack of affordable housing contributed to a rise in the average price of properties for sale in Puerto Rico between 2012 and 2021, making it more difficult for working-class residents to find a home, the Center for Investigative Journalism in Puerto Rico reported.
Goyco-Garcia, who is also part of the #NotYourTaxHaven organizing campaign, participated in a briefing for congressional staffers Tuesday alongside Rep. Velazquez. Goyco-Garcia said the briefing focused mainly on the origins of the tax breaks, its impact on community displacement on the island and tax revenue losses in Puerto Rico as well as in the mainland U.S.
“If you’re not paying taxes in Puerto Rico, you’re not paying taxes in your state, then this means that your state is also losing taxes,” she said.
While there’s no official data, Puerto Rican residents and local press have documented multiple instances in which Act 22 investors have bought residential buildings to resell at higher prices, develop them or convert them into short-term vacation rentals, Goyco-Garcia said. Residents in the towns of San Juan, Quebradillas, Aguadilla, Luquillo, Rincón and in the island-municipality of Vieques have requested Puerto Rican legislators repeal Act 22.
There is also an ecosystem powered by former officials who were previously involved in the creation of Acts 20 and 22 and are now serving as intermediaries and providing services to those looking to sign up for the tax incentives, the Center for Investigative Journalism in Puerto Rico reported.
Chuck Young, a GAO spokesperson, told NBC News in an email Tuesday they will start reviewing the tax incentives “as soon as staff become available.” It’s unclear how soon that will be. Once assigned to investigate, it could take the office up to a year or more to produce a final report, he said.
Fontan said Puerto Rico’s Department of Economic Development has been collaborating with the IRS in their investigation of about 100 cases involving possible Act 22 fraud. ‘”We all have the same goal of only providing tax benefits to whoever is complying,” he said.
The IRS has said it expects many of these cases to be the subject of criminal investigations.
Fontan said his office has revoked 320 Act 22 decrees over the past year-and-a-half due to noncompliance. While he sees this as evidence of his office’s capacity to oversee such incentives, Goyco-Garcia sees it as proof that the Puerto Rican government has not been able to properly oversee the tax breaks.
“We obviously want to move forward with elimination of these tax decrees,” she added.
Fontan has said that removing the tax breaks would create a “legal limbo” that would be difficult for his office to navigate.
The 2021 study commissioned by the Puerto Rico Department of Economic Development instead made about a dozen recommendations to amend the tax incentives to “maximize their potential,” such as adjusting investment requirements, improving how the economic impact of these policies is evaluated, and increasing the amount of time Act 22 individuals would need to physically be in Puerto Rico.
None of these recommendations have been adopted.