Puerto Rico Is Being Far Too Generous With Rich Investors

Since 2012, Puerto Rico has offered investors — primarily mainland Americans — one of the most attractive deals in the world: move to the commonwealth and pay no taxes on interest, dividends or capital gains, all while living on a balmy and culturally vibrant Caribbean island without having to surrender US citizenship. But a decade on, a sweeping Internal Revenue Service investigation has turned up evidence of abuse; struggling Puerto Ricans are growing increasingly frustrated with the obvious favoritism; and you still have to squint to find evidence of trickle-down benefits for the broad economy.

All told, it’s time to consider changes to the program, including less generous terms and more accountability.

Consider how the island got here. Puerto Rico, as a US territory, has a “special” (many would say second-class) relationship with the US mainland. Many of its residents do not have to pay federal income tax. For better or worse, that gives Puerto Rican politicians unique latitude to noodle with tax policy.

Amid a rapidly shrinking population, an explosion of public debt and a sputtering economy, the passive-income program (Act 22) was rolled out as part of a broader series of tax incentives theoretically intended to spur economic activity. A related program of the same vintage (Act 20) extended a 4% corporate income tax rate to export services firms (i.e., marketing and consulting businesses), while a third (Act 273) brought attractive incentives to banking and financial services firms.

All told, the programs — now combined under the umbrella of Act 60 — have attracted thousands of beneficiaries and fanned the growth of wealthy enclaves, including Dorado Beach, a San Juan area suburb. The presence of the investors — including some particularly loud crypto types — has been a charged and recurring subplot that has continued to bubble up even as the island confronted bankruptcy and Hurricane Maria in 2017; widespread street protests and the resignation of Governor Ricardo Rossello in 2019; and the 2022 arrest of former Governor Wanda Vazquez on corruption charges.