Why Act 22 Must End in Puerto Rico

Opinion for The Latino Newsletter

SAN JUAN — Puerto Rico has become a financial paradise for crypto bros, tax evaders, money launderers, and financial fraudsters from the United States and other countries. They have descended on the island under Act 22 (now Act 60), which exempts most investment income, dividends, and interest of new residents from local and federal taxes and is insidious for Puerto Rico and the United States. 

Act 22 is the most unique tax exemption in the world because it has turned Puerto Rico into the only place a U.S. citizen can move to without paying federal income taxes, not lose their passport, and reap the rewards of what is essentially predatory tax evasion. It relies on a clause in the federal tax code, section 933 of the Internal Revenue Code, which exempts income generated in Puerto Rico from federal income taxes. That benefit was for residents and immigrants naturalized in Puerto Rico, not outsiders. 

This unparalleled tax break frankensteined the clause into a blunt instrument of modern-day colonialism, revenue loss, increased inequality, and reduced public services. It hurts Puerto Rico and defrauds US states and local governments, causing them to lose millions in tax dollars. 

A Tax Loophole

The only way to solve this problem is for Congress to close the tax loophole. The federal government does not impose on Puerto Rico what tax laws it should enact. It boils down to a rare instance of mutual benefit for the U.S. Treasury, U.S. national interests, and Puerto Rico's national interests.

Recently, the IRS announced that it's targeting U.S. citizens who avoid taxes under Act 22 but has yet to release any information or collect any taxes due. The announcement came on the heels of an Internal Revenue Service insider accusing the agency of failing to police the tax break. 

There has also been sporadic noise from U.S. politicians, like Rep. Nydia Velázquez, D-N.Y., who pointed out the marginalization and displacement of Puerto Ricans brought on by Act 22.

“The IRS and the Treasury Department should make enforcement of Act 22 a priority and shed light on their oversight of Americans who illegally claim benefits under this law," she said.

Still, in the end, it was lip service and not much else. 

Unlikely to Change

The truth is that no amount of oversight or arrests will fix this—absent a change in local law (which is unlikely) or a change of government in the next Puerto Rican elections. Local politicians, especially pro-statehood Partido Nuevo Progresista (PNP), continue to push Act 22 as a lifeline for an ailing economy and tout Puerto Rico as a “hotbed of innovation” and a “thriving entrepreneurial scene.”

It's not. 

“America's Last Tax Haven” has attracted a host of unsavory characters but little of the investment a cash-strapped island was hoping for. Its byproduct, rentier capitalism, has forced thousands of Puerto Ricans from their homes, gentrified environmentally protected lands, and stripped the archipelago's coffers of an estimated $2.2 billion in tax revenues since 2017, according to a recent Puerto Rico tax expenditure report. 

And while Puerto Ricans on the island suffer daily blackouts, a collapsing educational and health system, rising food and housing costs (average rent on the island increased by 593 percent since Hurricane Maria in 2017), and pay around 33% of their income in taxes, Act 22 beneficiaries live behind gated enclaves in multi-million dollar homes, send their children to private English-speaking schools and tend not to mix with the “locals.”

This contradiction has fueled a profound anti-American feeling among many Puerto Ricans and a radical shift in the island's political architecture, empowering opposition parties that no longer focus on the island's colonial status but on its well-being. Almost 60 percent of Puerto Ricans —both on the island and in the Diaspora— oppose Act 22 and want to see the loophole stitched shut. 

The hard truth is that whatever Act 22 intended (although anyone with common sense could have foreseen the outcome), it has failed.

Congress needs to act by taxing Act 22ers and protecting the federal tax exemption for Puerto Ricans and long-time tax-paying residents. Oddly, this would be good for Puerto Rico and the United States. 

About the Author

A former News Director for Univision Puerto Rico and conflict correspondent, Susanne Ramirez de Arellano is now a cultural critic and writer based in Old San Juan.

_{The Latino Newsletter welcomes opinion pieces in English and/or Spanish from community voices. You can email our interim publisher, Julio Ricardo Varela. The views expressed by outside opinion contributors do not necessarily reflect the editorial views of this outlet.}