What Bad Bunny teaches us about Puerto Rican tax law

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0:13In January, Puerto Rican musician Bad Bunny released a new album. And this album was distinctly Puerto Rican. It sampled salsa and old school rhythms from the territory. It was also full of messages ruing what was being lost on the island, in large part due to economic forces.

0:47They want to take my river and my beach too. They want my neighborhood and your kids to leave.

0:57What Bad Bunny is beating his drum about is part of a long history of political leaders trying to turn Puerto Rico into a tax haven. This is The Indicator from Planet Money. I'm Darian Woods. And I'm Waylon Wong. Many countries try to boost their economies by attracting wealthy people. President Trump recently announced a gold card visa for people willing to pony up$5 million. On today's show, we're looking at how Puerto Rico tried to escape a grinding recession through tax breaks to newcomers. and what Puerto Rico's experience can tell us about whether this approach works. This message comes from NPR sponsor U.S.

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2:27Watch the Zendesk AI effect. Find out more at Zendesk.com. Our guide through Puerto Rican economic history today is investigative journalist Louise Valentin. And it's fair to say Louise's household is a fan of the new Bad Bunny album. My baby actually loves the album, which actually makes her really calm for some reason. To understand Bad Bunny's sadness around changes to Puerto Rico, Luis says it's good to recap a bit of history. Puerto Rico is a self-governing territory of the United States in the Caribbean. The U.S. gained control after the Spanish-American War in 1898. And 100 years ago, it was a fairly low-income agricultural place.

3:12So throughout the 20th century, there were efforts from both the U.S. federal government and lawmakers in Puerto Rico to turn the island into a tax haven. The hope was that this would attract money. In the 1970s, a federal law gave corporations tax incentives to move there. Set up shop in Puerto Rico and your profits there will essentially be tax-free. And Luis says that did entice businesses, especially in manufacturing. It created a lot of jobs. I mean, like, even my mom worked for such a manufacturing company. Luisa's mother was an environmental engineer for General Electric, which took advantage of those incentives.

3:52But the program was expensive for the U.S. government. A Treasury report in the 1980s estimated the government lost out on at least$1.50 in taxes for every dollar paid to Puerto Ricans in wages. So in the mid-1990s, the federal law was phased out. It ended in 2006. Combined with global forces like the rise of Chinese manufacturing, automation, and the Great Recession, Puerto Rico slumped into an economic depression. Then in 2009, Puerto Rico got a new governor, Luis Fortunio. Fortunio says the state of the government's books was dire. We didn't have enough money to meet our first payroll January 15th.

4:32We had to rush to the market, take loan money against the sales tax collections to be able to pay the payroll. That was the context, really. Unemployment hit 17 percent because businesses had left Puerto Rico and people were leaving the island by the tens of thousands. So we needed people and money. That was it. Fortunio asked his team to come up with policies that might bring those people and that capital. And along with a range of other policies, Fortunio's team came up with the idea to try to attract wealthy individuals to the territory. Most of them were going to be type A individuals. They will not sit around just playing golf and watching TV.

5:17They're going to engage in the local economy. This new tax law was Act 22. Act 22 allowed people to move to Puerto Rico and pay no taxes on capital gains. So say you own a bunch of property or shares and want to sell them. There's no tax for their growth in value while you were in Puerto Rico. Now, there were certain conditions for people taking advantage of Act 22. They had to live on the island for more than six months of the year. They needed to buy a house. And every year they needed to donate$5 ,000 to local charities and file a report to the Puerto Rican government, though this wasn't always enforced.

5:55Roughly 2 ,300 people took advantage of Act 22 in the years before the pandemic. This included American boxer and influencer Logan Paul. Leader cryptocurrency entrepreneur Brock Pierce also joined. After several years, the department that administers the scheme commissioned a report to measure the economic benefits. One of the authors was Jose Caraballo, a professor of economics at the University of Puerto Rico. They didn't like it because I think they were expecting me to defend Act 22 as it is, and I said no. And I found that Act 22 is creating a very low number of jobs. The unemployment rate did decline significantly during this time.

6:38It's now 5.5%. But according to Jose's report published in 2021, only a small share of those jobs created could be attributed to Act 22, and that's about 6 ,000 jobs. Now, 6 ,000, it compares against an island of 3.2 million people. We brought these lackluster findings to the former governor of Puerto Rico, Luis Fortunio. The paper you sent me concludes, seven years after the enactment of these acts, we still observe modest results. Is that disappointing to read? So it is not a home run, and I never expected it to be a home run. It's just one of many measures that have been taken. I never thought this was going to be a similar bullet, never sold it that way.

7:22Just thought it was one of many measures that was going to help us retain people, bring people, new people to the island and generate new economic activity. So it's worth considering Act 22 is almost a symbolic center of a package of changes that are affecting Puerto Rico. The most contentious effect is the cost of housing. At the same time as Act 22, the Fortuno administration was also encouraging banking and tourism through lower tax rates. There was also a global tourism boom in the 2010s, with backlash from Barcelona to the beaches of Thailand. And the rise of Airbnb meant that properties near attractions like the colorful streets of Old San Juan spiked in value.

8:04Long-time renters in those neighborhoods ended up as collateral damage. That said, there is no robust economic analysis teasing out the specific effect of Act 22 on housing prices in Puerto Rico. Prices have gone up everywhere. Go to Florida, go to Texas, go to New York, everywhere. So that is a result of something else, but not in these neighborhoods as a result of Act 22. The growth in rental prices in Puerto Rico is comparable with the U.S. as a whole, which also faces a housing shortage. That said, the anecdotes of displacement on the island are widespread. Luis Valentin, the journalist, says he experienced this when he was trying to buy a house for his young family.

8:47Real estate people here on the island would pick up the phone, and if you don't speak English or if you don't have cash, they will not do business with you, right? Like, they don't want to hear it. Given that the island is 95 % Spanish-speaking, so that really speaks to something there. That's crazy, right? And that's why I think that that album really resonates with Puerto Ricans, because they feel, you know, I get it. Luis Fortunio, the former governor, now lives in Washington, D.C., but he says he visits the island every month. He has little patience for Bad Bunny's critiques of the island's newcomers.

9:28He lives in a mansion in LA. And come on, give me a break. If you're going to get involved in the island, move down there and get involved. To be fair, Bad Bunny will do a 21-show residency in Puerto Rico this summer. But back to whether or not Act 22 is the villain or hero, it's clear that Puerto Rico's economic policies aren't perfect. The island's population declined throughout the 2010s as many young Puerto Ricans decided to take up opportunities elsewhere.

10:09This episode was produced by Angel Carreras with engineering by Jimmy Keely. It was fact-tracked by Sierra Juarez. Kate Kinkanen edits the show and The Indicator is a production of NPR.

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