Tax Policy: Analysis of Certain Potential Effects of Extending Federal \par
Income Taxation to Puerto Rico (Letter Report, 08/15/96, GAO/GGD-96-127). \par
Pursuant to a congressional request, GAO provided information on the \par
potential effects of extending the Internal Revenue Code (IRC) to \par
residents of Puerto Rico. \par
\par
GAO found that if IRC tax rules are applied to residents of Puerto Rico: \par
(1) the residents would owe around $623 million in federal income tax \par
before taking into account the earned income tax credit (EITC); (2) the \par
aggregate amount of EITC would total $574 million; (3) 59 percent of the \par
population filing individual income tax returns would earn some EITC; \par
(4) 41 percent of the households filing income tax returns would have \par
positive federal income tax liabilities, 53 percent would receive net \par
transfers from the federal government, and 6 percent would have no \par
federal tax liability; (5) more Puerto Rican residents and married \par
couples would file federal tax returns if they qualified for EITC; (6) \par
the average EITC earned by eligible taxpayers would be $1,494; (7) the \par
Puerto Rican government would have to reduce its own individual revenue \par
by 5 percent to keep the aggregate amount of income tax levied on its \par
residents constant; (8) the taxes paid by certain classes of Puerto \par
Ricans would change drastically; (9) the per capita combined individual \par
income tax in Puerto Rico would increase by 5.5 percent; and (10) tax \par
expenditures would total $2.8 billion in 1996 and $3.4 billion in 2000. \par
\par
--------------------------- Indexing Terms ----------------------------- \par
\par
REPORTNUM: GGD-96-127 \par
TITLE: Tax Policy: Analysis of Certain Potential Effects of \par
Extending Federal Income Taxation to Puerto Rico \par
DATE: 08/15/96 \par
SUBJECT: Personal income taxes \par
Tax returns \par
Taxpayers \par
Territories and possessions \par
Tax administration \par
Tax credit \par
Tax expenditures \par
Tax law \par
IDENTIFIER: Puerto Rico \par
\par
****************************************************************** \par
** This file contains an ASCII representation of the text of a ** \par
** GAO report. Delineations within the text indicating chapter ** \par
** titles, headings, and bullets are preserved. Major ** \par
** divisions and subdivisions of the text, such as Chapters, ** \par
** Sections, and Appendixes, are identified by double and ** \par
** single lines. The numbers on the right end of these lines ** \par
** indicate the position of each of the subsections in the ** \par
** document outline. These numbers do NOT correspond with the ** \par
** page numbers of the printed product. ** \par
** ** \par
** No attempt has been made to display graphic images, although ** \par
** figure captions are reproduced. Tables are included, but ** \par
** may not resemble those in the printed version. ** \par
** ** \par
** Please see the PDF (Portable Document Format) file, when ** \par
** available, for a complete electronic file of the printed ** \par
** document's contents. ** \par
** ** \par
** A printed copy of this report may be obtained from the GAO ** \par
** Document Distribution Center. For further details, please ** \par
** send an e-mail message to: ** \par
** ** \par
** <info@www.gao.gov> ** \par
** ** \par
** with the message 'info' in the body. ** \par
****************************************************************** \par
\par
\par
Cover \par
================================================================ COVER \par
\par
\par
Report to Congressional Requesters \par
\par
August 1996 \par
\par
TAX POLICY - ANALYSIS OF CERTAIN \par
POTENTIAL EFFECTS OF EXTENDING \par
FEDERAL INCOME TAXATION TO PUERTO \par
RICO \par
\par
GAO/GGD-96-127 \par
\par
Puerto Rico Taxation \par
\par
(268682) \par
\par
\par
Abbreviations \par
=============================================================== ABBREV \par
\par
ACIR - Advisory Commission on Intergovernmental Relations \par
AGI - Adjusted Gross Income \par
AMT - Alternative Minimum Tax \par
DCTC - Child and Dependent Care Tax Credit \par
EITC - Earned Income Tax Credit \par
IRA - Individual Retirement Account \par
IRC - Internal Revenue Code \par
IRS - Internal Revenue Service \par
OBRA - Omnibus Budget Reconciliation Act \par
SEP - Simplified Employee Pension \par
SOI - Statistics of Income \par
\par
Letter \par
=============================================================== LETTER \par
\par
\par
B-265968 \par
\par
August 15, 1996 \par
\par
The Honorable Don Young \par
Chairman, Committee on Resources \par
House of Representatives \par
\par
The Honorable Elton Gallegly \par
Chairman, Subcommittee on Native \par
American and Insular Affairs \par
Committee on Resources \par
House of Representatives \par
\par
In response to your request, this report presents information on some \par
potential consequences of extending the income tax provisions of the \par
federal Internal Revenue Code (IRC) to residents of the Commonwealth \par
of Puerto Rico. Specifically, you asked us for estimates of \par
\par
(1) the amount of federal income tax that individuals residing in \par
Puerto Rico would pay if they were treated in the same manner as \par
residents of the 50 states, the amount of earned income tax credits \par
(EITC) Puerto Rican residents would receive, the percentage of \par
taxpayers who would have positive federal tax liabilities, and the \par
percentage who would earn EITC; \par
\par
(2) the extent to which the Government of Puerto Rico would have to \par
reduce its own income tax if it were to keep the amount of combined \par
income tax (both federal and Commonwealth) on individuals the same as \par
it was without the full imposition of the federal tax; \par
\par
(3) how the amount of income taxes paid by the average taxpayer in \par
Puerto Rico compares with the amount of combined federal, state, and \par
local income taxes paid by residents in the 50 states and the \par
District of Columbia; and \par
\par
(4) the amount of revenue the U.S. Treasury could obtain by the \par
repeal of the possessions tax credit, which effectively exempts from \par
federal taxation a portion of the income that subsidiaries of U.S. \par
corporations earn in Puerto Rico. \par
\par
As agreed with your offices, our estimates relating to federal tax \par
liabilities and earned income tax credits are based on the income and \par
demographic characteristics of Puerto Rican taxpayers in 1992, the \par
latest year for which detailed data were available. We did not \par
attempt to adjust these estimates to reflect changes in the Puerto \par
Rican economy, changes in the behavior of individual taxpayers, or \par
different compliance rates that might result from the imposition of \par
federal income taxes. The data that we used in making our estimates \par
also had some limitations that are explained in the scope and \par
methodology section of this letter and in appendix I. \par
\par
Estimates of the impact of tax policy changes are inherently \par
imprecise. Data limitations and the necessity to make certain \par
behavioral and economic assumptions limits the precision of the \par
estimates. Despite these limitations, we believe our analysis is \par
adequate to provide general information about the magnitude of the \par
potential revenue effect of extending full federal income taxation to \par
the residents of Puerto Rico. \par
\par
The discussion of the implications of extending federal income taxes \par
to the Commonwealth of Puerto Rico should also be viewed in the \par
context of the broader debate about the status of the Commonwealth \par
under the Constitution. The broader issue of whether the benefits \par
and obligations of statehood or independence should be sought for or \par
granted to Puerto Rico is outside the scope of this analysis. \par
However, any changes to tax policy as it affects Puerto Rico may have \par
an impact on or be affected by this broader debate. \par
\par
\par
BACKGROUND \par
------------------------------------------------------------ Letter :1 \par
\par
Under the Jones Act, Puerto Rico is part of the United States for \par
purposes of acquiring citizenship of the United States by place of \par
birth. Thus, a person born in Puerto Rico is typically considered a \par
U.S. person for U.S. tax purposes and thus is subject to the U.S. \par
Internal Revenue Code (IRC). However, IRC has different tax rules \par
for residents of Puerto Rico than it does for residents of the United \par
States. Section 933 of IRC provides that income derived from sources \par
within Puerto Rico by an individual who is a resident of Puerto Rico \par
generally will be excluded from gross income and exempt from U.S. \par
taxation, even if such resident is a U.S. citizen. Section 933 does \par
not exempt residents of Puerto Rico from paying federal taxes on U.S. \par
source income and foreign source income. Nor does section 933 affect \par
the federal payroll taxes that residents of Puerto Rico pay. Federal \par
employment taxes for social security, medicare, and unemployment \par
insurance apply to residents of Puerto Rico on the same basis and for \par
the same sources of income that they are applied to all other U.S. \par
residents. \par
\par
\par
INCOME TAXES \par
---------------------------------------------------------- Letter :1.1 \par
\par
Puerto Rico has had authority to enact its own income tax system \par
since 1918. The current individual income tax system of Puerto Rico \par
is broadly similar to the U.S. individual income tax system. The \par
Puerto Rican and the U.S. corporate income tax rules have many \par
similarities and some differences. The structure of Puerto Rico's \par
income tax system is discussed in appendixes II and III. \par
\par
The current Puerto Rican income tax system is a significant source of \par
revenue for the Puerto Rican government. In fiscal year 1992,\\1 \par
individual and corporate income taxes totaled about 40 percent of \par
Puerto Rico's total revenues, with transfers from the federal \par
government accounting for about 30 percent of revenue and other \par
taxes, such as excise taxes, generating about 18 percent. The \par
balance of the Commonwealth's revenues came mainly from nontax \par
sources. For fiscal year 1992, the Puerto Rico Treasury collected \par
about $1.1 billion in individual income taxes and about $1.02 billion \par
in corporate income taxes.\\2 About 42 percent of the corporate tax \par
(about $426 million) was paid by U.S. subsidiaries covered by the \par
possessions tax credit.\\3 The remaining 58 percent (about $594 \par
million) was paid by corporations not covered by the credit. In \par
addition, about $10 billion of income earned by corporations in \par
Puerto Rico was exempted from the local corporate income tax as a \par
result of Puerto Rico's industrial tax incentive legislation. \par
\par
Currently IRC has special income tax provisions that extend tax \par
benefits to Puerto Rico that are not available to the states. The \par
United States exempts from income taxation--at the federal, state, \par
and local levels--all bonds issued by the Government of Puerto \par
Rico.\\4 Corporations organized in Puerto Rico are generally treated \par
as foreign corporations for U.S. income tax purposes. Like other \par
foreign corporations, they are taxed on their U.S. source income, \par
but their Puerto Rico source income is not subject to U.S. tax. \par
Foreign corporations pay U.S. tax at two rates--a flat 30-percent \par
tax is withheld on certain forms of income not effectively connected \par
with the conduct of a trade or business within the United States, and \par
tax at progressive rates is imposed on income that is effectively \par
connected with a U.S. trade or business. Much interest income is \par
exempt from the withholding tax. Also, IRC's possessions tax credit \par
effectively exempts from federal taxation a portion of the income \par
qualified subsidiaries of U.S. corporations (corporations organized \par
in any state of the United States) earn in the possessions. Tax \par
rules related to possessions source income are discussed in more \par
detail in appendix III. \par
\par
\par
-------------------- \par
\\1 Puerto Rico's 1992 fiscal year was from July 1991 through June \par
1992. \par
\par
\\2 These amounts do not include $99 million of tollgate tax (tax paid \par
by corporations on income repatriated from Puerto Rico), $32.1 \par
million of alternative tax withheld on interests and dividends, $62.1 \par
million of income tax withheld from nonresidents, or $1.2 million of \par
tax paid on partnership income. \par
\par
\\3 Section 936 of IRC provides a tax credit to those subsidiaries of \par
U.S. companies with possessions source income. This credit is \par
commonly known as the "possessions tax credit." \par
\par
\\4 48 U.S.C. 745. \par
\par
\par
RESULTS IN BRIEF \par
------------------------------------------------------------ Letter :2 \par
\par
Our estimates of the potential revenue effect of extending current \par
federal income tax rules to taxpayers in Puerto Rico were derived \par
from our analysis of individual income tax data for tax year 1992 \par
provided by the Government of Puerto Rico. If the characteristics of \par
the Puerto Rican taxpayer population were the same in 1995 as they \par
were in 1992, we estimated that their net aggregate federal tax \par
liability after subtracting EITC would have been about $49 million \par
under U.S. tax rules that had been adopted as of the end of 1995.\\5 \par
The aggregate tax liability in the absence of EITC would have been \par
about $623 million, but Puerto Rican taxpayers would have qualified \par
for a total of about $574 million of EITC. \par
\par
We estimated that about 59 percent of the taxpayers who filed Puerto \par
Rico individual income tax returns in 1992 would have earned some \par
EITC. The average EITC earned by eligible taxpayers would have been \par
about $1,494; the median amount would have been about $1,623. Over \par
half of the taxpayers would have received net transfers from the \par
federal government because their EITC would have been larger than \par
their precredit federal income tax liabilities. We estimated that \par
about 41 percent of the Puerto Rican taxpayers would have had \par
positive federal income tax liabilities including EITC. \par
\par
Had current federal tax rules been in effect in Puerto Rico at the \par
time, it is probable that some Puerto Rican residents who did not \par
file Puerto Rican tax returns in 1992 would have had an incentive to \par
file federal tax returns because they could have qualified for the \par
refundable EITC. We have no way of knowing with certainty how many \par
of these nonfiler residents would claim EITC. However, we did derive \par
an estimate of the amount of EITC that might have been claimed by \par
residents who were not legally required to file tax returns in 1992. \par
We considered the number of people who had income levels below the \par
income tax threshold and were exempt from withholding as an upper \par
limit on the number of those potential additional filers. If all of \par
those residents claimed EITC, we estimated that they would have \par
qualified for about $64 million.\\6 \par
\par
If the additional EITC that could have been claimed by legal nonfiler \par
residents were about $64 million, our estimate of the aggregate \par
amount of EITC that would have been earned would have increased from \par
about $574 million to about $638 million. This additional EITC would \par
be sufficient to eliminate the $49 million of aggregate net federal \par
income tax liability that we estimated would exist for the population \par
that did file. Again, it is important to note that our estimates do \par
not reflect other potential behavioral responses to the availability \par
of the credit or the imposition of the federal income tax. \par
\par
For tax year 1992, Puerto Rican taxpayers reported about $1.03 \par
billion in individual Puerto Rican income tax. If application of \par
federal income tax resulted in an additional $49 million in tax \par
liability after subtracting EITC as we estimated, and if the \par
Government of Puerto Rico wanted to keep constant the aggregate \par
amount of combined federal and Puerto Rican individual income tax \par
levied on its residents, then it would have had to reduce its own \par
individual income tax revenue by about 5 percent. If, because of \par
additional EITC for residents who did not file returns in 1992, the \par
estimated aggregate federal tax liability were eliminated, then the \par
Government of Puerto Rico would not have had to change its individual \par
income tax revenue to keep the aggregate combined taxes constant. \par
However, even though the aggregate taxes may not have changed \par
significantly, the taxes paid by certain classes of taxpayers could \par
have changed dramatically. \par
\par
The per-capita amount of Puerto Rico's individual income tax was \par
lower than the state and local income tax in most states and the \par
District of Columbia in 1992. However, the Puerto Rican income tax \par
as a percentage of total personal income was higher than the state \par
and local income tax as a percentage of total personal income of any \par
state and the District of Columbia. Nevertheless, since residents of \par
Puerto Rico paid only about $4.4 million\\7 in federal income tax in \par
1992 (see discussion of foreign tax credit in app. II), the combined \par
federal and Puerto Rican income tax was lower, in dollars per capita \par
or as a percentage of personal income, than the combined federal, \par
state, and local tax of any state and the District of Columbia. In \par
Puerto Rico, the per-capita combined tax was about $342, and the tax \par
as a percentage of personal income was about 5.3 percent. In \par
Mississippi, which had the lowest combined income tax of any state, \par
the per-capita tax was about $1,147 and the tax as a percentage of \par
personal income was about 8.2 percent. If the federal income tax had \par
been extended fully to Puerto Rico, and the Government of Puerto Rico \par
did not adjust its own tax, we estimated that the per-capita combined \par
individual income tax in Puerto Rico would have increased slightly to \par
about $355--equivalent to about 5.5 percent as a percentage of \par
personal income. \par
\par
The Joint Committee on Taxation's most recent estimates indicate that \par
the federal tax expenditure for the possessions tax credit would be \par
$3.4 billion in 1996, growing to $4.4 billion by 2000. The U.S. \par
Department of the Treasury's most recent estimates are that the tax \par
expenditure would be $2.8 billion in 1996, growing to $3.4 billion by \par
2000.\\8 Tax expenditure estimates are computed to indicate how much \par
revenue the U.S. Treasury would forgo due to the existence of a tax \par
benefit. The Joint Committee and the Treasury both use a different \par
methodology to estimate tax expenditures than they use to estimate \par
the amounts of revenue that would be saved if specific tax \par
preferences were eliminated. Estimates of revenue savings take into \par
account expected tax avoidance behavior by taxpayers in response to \par
the elimination of preferences; tax expenditure estimates do not \par
reflect these responses. \par
\par
Given the differences in behavioral assumptions, if either the Joint \par
Committee or the Treasury were to make both a tax expenditure \par
estimate for a tax credit and a revenue gain estimate for the \par
elimination of the credit, using the same set of economic forecasts \par
and the same data, the revenue gain estimate could very well be \par
smaller than the tax expenditure estimate. However, imprecisions in \par
other assumptions, or in the economic forecasts that the Joint \par
Committee or the Treasury uses, could cause both the tax expenditure \par
estimate and the revenue gain estimate to either overstate or \par
understate the true amount of revenue that would flow into the \par
Treasury if the credit were eliminated. The last publicly available \par
revenue savings estimates, made by either the Joint Committee or the \par
Treasury, for the immediate elimination of the possessions tax credit \par
do not reflect the significant limitations that were placed on the \par
credit by the Omnibus Budget Reconciliation Act of 1993. \par
\par
\par
-------------------- \par
\\5 EITC is a refundable tax credit made available to certain low- \par
income workers to offset the impact of Social Security taxes and \par
encourage low-income workers to seek employment rather than welfare. \par
Because there have been significant changes to EITC that do not fully \par
phase in until 1996 and because EITC is an important factor in our \par
results, we used the 1996 rules for the EITC in our analysis. \par
\par
\\6 There were some additional taxpayers in 1992 who had tax withheld \par
but did not file Puerto Rican tax returns. The potential amount of \par
additional EITC these taxpayers could have qualified for would likely \par
have been relatively low because their earned incomes probably were \par
very low. \par
\par
\\7 The Government of Puerto Rico does not compile data on the amount \par
of federal income tax paid by individuals residing in Puerto Rico, \par
and although the Internal Revenue Service (IRS) compiles data, the \par
individual income tax is not segregated from other taxes paid by \par
residents of Puerto Rico to the United States. In 1992, individuals \par
claimed a total of $4.4 million in foreign tax credits on their \par
Puerto Rican income tax returns. Officials from the Puerto Rico \par
Treasury told us that a very large percentage of these credits are \par
attributable to income taxes paid to the U.S. federal government. \par
Therefore, for purposes of determining the combined federal and \par
Puerto Rican income tax, we assumed this amount was all for U.S. \par
federal income taxes. \par
\par
\\8 Differences in the estimating methodologies and databases used by \par
each set of estimators account for the differences in the estimates. \par
\par
\par
ESTIMATED TOTAL FEDERAL TAX \par
WOULD HAVE BEEN SUBSTANTIALLY \par
REDUCED BY EITC \par
------------------------------------------------------------ Letter :3 \par
\par
As of July 1995, 651,201 individual income tax returns for tax year \par
1992 had been filed with the Government of Puerto Rico. Some of the \par
individuals filing those returns paid federal income tax because they \par
had income from sources within the United States. However, due to \par
section 933 of IRC, which excludes Puerto Rico source income from \par
federal taxation, the vast majority of Puerto Rican taxpayers were \par
not subject to the federal income tax. \par
\par
If current federal tax rules were applied to residents of Puerto Rico \par
in the same manner as they are applied to residents of the 50 states, \par
and if the income and demographic characteristics of Puerto Rican \par
taxpayers were the same as they reported on their 1992 tax returns, \par
we estimate that the 651,201 filers would have owed about $623 \par
million in federal income tax before taking EITC into account.\\9 The \par
aggregate amount of EITC earned by these taxpayers would have been \par
about $574 million, thus the aggregate net federal tax liability \par
would have been about $49 million (see table 1). We estimate that \par
384,107 filers, or about 59 percent of the total number, would have \par
earned some EITC. The average amount of EITC earned by the 384,107 \par
filers would have been about $1,494. The median EITC would have been \par
about $1,623 (see table 2). \par
\par
\par
\par
Table 1 \par
\par
Estimated Potential U.S. Tax Liabilities \par
and EITC for Residents of Puerto Rico \par
\par
(Dollars in millions) \par
\par
U.S. tax \par
Number of liability U.S. tax \par
U.S. adjusted gross income Puerto Rican before U.S. liability \par
(AGI) classes returns EITC\\a EITC after EITC\\b \par
---------------------------- -------------- ------------ ------ ------------ \par
Less than $0 922 $0 $0 $0 \par
$0 to $2,999 34,906 0 7 -7 \par
$3,000 to $5,999 50,719 0 40 -40 \par
$6,000 to $9,999 133,266 8 200 -192 \par
$10,000 to $14,999 152,916 33 226 -193 \par
$15,000 to $24,999 151,122 118 101 17 \par
$25,000 to $49,999 103,758 261 0 261 \par
$50,000 to $99,999 20,493 128 0 128 \par
$100,000 and over 3,099 75 0 75 \par
================================================================================ \par
Total 651,201 $623 $574 $49 \par
-------------------------------------------------------------------------------- \par
\\a U.S. tax liabilities before EITC are reduced by estimated child \par
and dependent care tax credits totaling about $15 million. \par
\par
\\b Puerto Rican residents and nonresidents claimed as a tax credit on \par
their Puerto Rican tax returns about $4.4 million in U.S. individual \par
taxes in 1992. Estimated U.S. tax liabilities of $49 million under \par
state-like taxation is gross of this amount. \par
\par
Source: GAO simulation of U.S. tax law applied to 1992 Puerto Rican \par
individual income tax returns. \par
\par
\par
\par
Table 2 \par
\par
Estimates of Potential Puerto Rican \par
Total, Average, and Median EITCs \par
\par
Estimate of \par
Number of Percentage total Averag \par
credit of credit credits (in e Median \par
Earned income range filers returns millions) credit credit \par
---------------------- ------------ ------------ ------------ ------ ------ \par
Phase-in 59,721 16% $71 $1,192 $1,026 \par
Maximum 90,759 24 193 2,126 1,920 \par
Phase-out 233,627 61 310 1,326 1,346 \par
================================================================================ \par
Total 384,107 100% $574 $1,494 $1,623 \par
-------------------------------------------------------------------------------- \par
Note: Totals may not add because of rounding. \par
\par
Source: GAO simulation of U.S. tax law applied to 1992 Puerto Rican \par
individual income tax returns. \par
\par
Our estimates indicate that, before taking the federal child and \par
dependent care tax credit (DCTC) into account, about 41 percent of \par
the 651,201 households that filed Puerto Rican income tax returns in \par
1992 would have had positive federal income tax liabilities, about 53 \par
percent would have received net transfers from the federal government \par
because their EITC would have more than offset their precredit \par
liabilities, and the remaining 6 percent would have had no federal \par
tax liability. The lack of adequate information on the child and \par
dependent care expenses of Puerto Rican taxpayers made it impossible \par
for us to estimate the amount of DCTC that each taxpayer in our \par
Puerto Rico database would have earned.\\10 The nonrefundable DCTC \par
could only have reduced the number of households having positive tax \par
liabilities and increased the numbers with zero liabilities or net \par
transfers. However, it seems unlikely that the DCTC would have \par
caused a large number of taxpayers to shift from one status to \par
another because our estimates indicate that the average credit earned \par
by those claiming the credit would likely be less than $500. \par
Taxpayers would only move from having a positive tax liability to \par
having a zero tax liability, or receiving a net transfer, if they \par
claimed the credit and if their precredit tax liability were less \par
than the amount of credit claimed.\\11 \par
\par
If the federal income tax had been fully extended to residents of \par
Puerto Rico in 1992, it seems likely that additional individuals and \par
married couples who had not filed Puerto Rican tax returns would have \par
filed federal tax returns in order to take advantage of EITC. \par
Individuals with AGIs less than or equal to $3,300 and married \par
couples with AGIs less than or equal to $6,000 were not required to \par
file Commonwealth tax returns in 1992. However, some of these \par
individuals filed in order to claim refunds of taxes that had been \par
withheld on their wages, dividends, or interest. Others did not \par
file, for example, because they were not subject to withholding taxes \par
on their wages or salaries, as is the case for domestic workers and \par
farm laborers, or because the amount withheld was small. \par
\par
We have no way of knowing with certainty how many of these residents \par
who currently are not required to file would file in order to claim \par
EITC. However, to derive an estimate of what this number might be, \par
we considered the number of people who had income levels below the \par
income tax threshold and also were exempt from withholding as an \par
upper limit of the number of these potential additional filers.\\12 If \par
all of those residents claimed EITC, we estimated that they would \par
have qualified for about $64 million.\\13 \par
\par
If the additional EITC that could have been claimed by nonfiler \par
residents were about $64 million, our estimate of the aggregate \par
amount of EITC that would have been earned would have increased from \par
about $574 million to about $638 million. This additional EITC would \par
be sufficient to eliminate the $49 million of aggregate net federal \par
income tax liability that we estimated would exist for the population \par
that did file. \par
\par
Our estimates do not reflect other potential behavioral responses to \par
the availability of the credit or the imposition of the federal \par
income tax. For example, we were not able to estimate the number of \par
potential EITC claimants who currently are not filing, even though \par
they are legally obligated to file. \par
\par
\par
-------------------- \par
\\9 By "current" federal tax rules, we mean rules adopted as of the \par
end of 1995. For the most part these are the rules that were \par
effective for tax year 1995. The one exception is that we used the \par
rules for the EITC that did not become fully phased in until tax year \par
1996. \par
\par
\\10 We did use the experience of U.S. taxpayers as a basis for \par
estimating the aggregate amount of the federal DCTC that Puerto Rican \par
taxpayers might earn (see app. I for details.) This aggregate amount \par
of DCTC is factored into our estimate of the aggregate federal tax \par
liability in table 1. However, we were unable to assign DCTC to \par
specific taxpayers and, consequently, were unable to determine how \par
those credits affected the net federal tax liability of each \par
individual taxpayer. \par
\par
\\11 We estimate that between 30,000 and 40,000 Puerto Rican taxpayers \par
would have qualified for DCTC in 1992--roughly 5 to 6 percent of the \par
taxfiling population. (See app. I for the estimating methodology.) \par
The number who would have moved from a positive tax liability to a \par
zero or negative one simply by the addition of this credit probably\ \
would have been small, since the average amount of credit earned by \par
DCTC recipients in the United States in 1992 was about $427. \par
\par
\\12 There were some additional taxpayers in 1992 who had tax withheld \par
but did not file Puerto Rican tax returns. The potential amount of \par
additional EITC these taxpayers could have qualified for would likely \par
have been relatively low because their earned incomes probably were \par
very low. \par
\par
\\13 According to officials from the Puerto Rican Treasury, the number \par
of domestic workers and farm laborers who were exempt from income tax \par
withholding in Puerto Rico in 1992 was approximately 43,000. We \par
estimated the upper bound for the amount of EITC that these \par
individuals would have earned by assuming that (1) none of the 43,000 \par
workers actually filed a return in 1992; (2) none of these workers \par
were from the same family; (3) all of these workers were qualified \par
for EITC; and (4) they each earned the average EITC which we \par
estimated to be about $1,494. \par
\par
\par
PUERTO RICO WOULD HAVE HAD TO \par
REDUCE ITS OWN TAX TO KEEP THE \par
AVERAGE COMBINED INCOME TAX AT \par
ITS CURRENT LEVEL \par
------------------------------------------------------------ Letter :4 \par
\par
For tax year 1992, Puerto Rican taxpayers reported about $1.03 \par
billion in individual income tax. We estimated that, if current \par
federal tax rules had been fully applied to residents of Puerto Rico \par
and, if there were no behavioral responses to this new taxation, then \par
the aggregate federal income tax liability of Puerto Rican taxpayers \par
in 1992 would have been about $49 million. If the Government of \par
Puerto Rico had wanted to keep the amount of combined federal and \par
commonwealth individual income tax the same as it was without the \par
imposition of full federal income tax, then it would have had to \par
reduce the aggregate liability imposed by its own individual income \par
tax by about 5 percent. If we allowed for the potential expansion of \par
the filing population in response to the availability of EITC (to \par
include residents who had no withholding), then the estimated \par
aggregate federal income tax liability would have been essentially \par
eliminated. In that case, the Government of Puerto Rico would not \par
have to change its own income tax to keep the aggregate combined \par
income tax constant. There are, however, other reasons why the \par
Government of Puerto Rico may have adjusted its own income tax under \par
these circumstances. \par
\par
In comments on a draft of this report, the Secretary of the Treasury \par
of Puerto Rico stated that his government would adjust the island's \par
fiscal system to provide relief to taxpayers who would have positive \par
federal income tax liabilities if the federal income tax were fully \par
extended to residents of Puerto Rico. \par
\par
\par
AVERAGE COMBINED INDIVIDUAL \par
INCOME TAX IN PUERTO RICO WAS \par
LOW RELATIVE TO THAT IN THE 50 \par
STATES \par
------------------------------------------------------------ Letter :5 \par
\par
There are several ways to compare individual income tax across \par
jurisdictions. A comparison of per-capita tax shows how much, in \par
dollars, the average resident in each jurisdiction bears. Personal \par
income provides a better indication of a jurisdiction's tax capacity \par
than does population because a person's ability to pay taxes rises as \par
his or her income rises. A comparison of taxes paid as a percentage \par
of total state or commonwealth personal income shows, approximately, \par
the relative extent to which each jurisdiction draws upon its \par
residents' ability to pay. When comparing individual income taxes \par
paid, however, it is important to recognize that some jurisdictions \par
may have relatively low individual income taxes because they rely \par
more heavily on other revenue sources. It is also important to note \par
that comparisons of average taxes paid across jurisdictions do not \par
show the comparative taxes paid by specific classes of taxpayers in \par
each jurisdiction. \par
\par
In per-capita terms, Puerto Rico's individual income tax is \par
relatively low. In 1992, the per-capita tax burden of Puerto Rico's \par
individual income tax was about $341. The state and local income \par
taxes in 33 states, and the District of Columbia, were higher per \par
capita. Moreover, since residents of Puerto Rico currently pay a \par
relatively small amount of federal income tax, the combined federal \par
and Commonwealth per-capita income taxes in Puerto Rico are lower \par
than those in any of the 50 states and the District of Columbia. If \par
residents of Puerto Rico had been fully subject to the federal income \par
tax in the same manner as residents of the 50 states were, we \par
estimate that the per-capita federal income tax in Puerto Rico would \par
have been about $14 in 1992.\\14 In this case, if the Government of \par
Puerto Rico did not adjust its own income tax in response to the \par
imposition of the federal tax, the combined federal and Commonwealth \par
income tax in Puerto Rico would have been about $355 per capita. \par
This amount is about a third of the per-capita combined federal, \par
state, and local income taxes in Mississippi, which has the lowest \par
per-capita income taxes of any state. (See app. IV.) \par
\par
One reason why Puerto Rico's per-capita income tax is relatively low \par
is that per-capita personal income in Puerto Rico is significantly \par
lower than that in any of the 50 states and the District of Columbia. \par
In 1992, Puerto Rico's per-capita personal income was $6,428, \par
compared to $14,083 in Mississippi, the state with the lowest \par
per-capita personal income. \par
\par
Puerto Rico's individual income tax collections amounted to 5.3 \par
percent of the Commonwealth's personal income in 1992. This \par
percentage is higher than that of the state and local income tax \par
collections in any of the states and the District of Columbia. New \par
York state, where state and local income taxes amounted to 4.2 \par
percent of state personal income, ranked closest to Puerto Rico. \par
(See app. IV). \par
\par
One reason why Puerto Rico's income tax as a percentage of personal \par
income is high, relative to those of the 50 states and the District \par
of Columbia, is because Puerto Rico relies more heavily on income \par
taxes as a source of revenue than do most of those other \par
jurisdictions. In 1992, only two states, Maryland and Massachusetts, \par
relied more heavily on their state and local individual income taxes \par
than Puerto Rico did. Puerto Rico's reliance on its corporate income \par
tax was also much higher than that of any state or the District of \par
Columbia. Puerto Rico does not levy a general sales tax and received \par
only 5.8 percent of its general revenues from property taxes. In \par
contrast, in the vast majority of states, general sales taxes and \par
property taxes account for at least 25 percent of general revenues. \par
(See app. IV). \par
\par
Despite Puerto Rico's heavy reliance on its individual income tax, \par
the combined federal, state, and local individual income taxes, as a \par
percentage of personal income, were significantly lower in Puerto \par
Rico than in any of the states or the District of Columbia because \par
residents of Puerto Rico paid little federal income tax. If \par
residents of Puerto Rico had been fully subject to the federal income \par
tax in 1992, and Puerto Rico did not alter its own income tax, we \par
estimate that the combined income taxes would have amounted to about \par
5.5 percent of Commonwealth personal income. Combined income taxes \par
in Mississippi amounted to 8.2 percent of state personal income in \par
1992. In no other state or the District of Columbia did combined \par
income taxes amounted to less than 9 percent of personal income. \par
(See app. IV). \par
\par
Although the combined average income tax rates paid by residents of \par
Puerto Rico would not have changed substantially, unless the \par
Government of Puerto Rico adjusted its own income tax rate schedule, \par
higher income residents of Puerto Rico would face substantial \par
increases in their combined marginal income tax rates if they were \par
fully subject to the federal income tax. These individuals would \par
face much higher combined marginal income tax rates than similar \par
individuals residing in any of the 50 states or the District of \par
Columbia face. Under Puerto Rico's current income tax law, marginal \par
tax rates can reach as high as 38 percent over certain ranges of \par
income. Rates for single taxpayers and married taxpayers filing \par
joint returns in Puerto Rico reach 31 percent when taxable income is \par
as little as $30,001. Rates for married taxpayers filing separately \par
reach 31 percent when taxable income is as little as $15,001.\\15 In \par
contrast, as of 1994, in no state or the District of Columbia did \par
state and local marginal tax rates exceed 12 percent for any \par
taxpayers at any income level. With the full imposition of the \par
federal income tax, some residents of Puerto Rico could face combined \par
marginal income tax rates of over 70 percent, unless the Government \par
of Puerto Rico adjusted its own tax. \par
\par
\par
-------------------- \par
\\14 This estimate of the per-capita burden is based on the estimated \par
aggregate burden of $49 million. \par
\par
\\15 These current rates became effective for tax years beginning \par
after June 30, 1995. For tax year 1992 the comparable rates would \par
have been 41, 36, and 36 percent. See app. II for further details \par
on the changes made to Puerto Rico's income tax since 1992. \par
\par
\par
REVENUE ESTIMATES FOR THE \par
ELIMINATION OR PHASE-OUT OF THE \par
POSSESSIONS TAX CREDIT \par
------------------------------------------------------------ Letter :6 \par
\par
Neither the Joint Committee on Taxation nor the U.S. Department of \par
the Treasury has made public any recent estimates of the amount of \par
revenue that would be saved if the possessions tax credit were \par
eliminated immediately. The last publicly available revenue estimate \par
that the Joint Committee made for an immediate repeal of the \par
possessions tax credit, without any phase out, was in February 1993. \par
At that time, it estimated that the repeal of the credit would \par
increase revenues by $4.1 billion in 1996. That estimate did not \par
reflect the significant limitations that the Omnibus Budget \par
Reconciliation Act (OBRA) of 1993 subsequently placed on the use of \par
the credit. Since the 1993 changes reduced the benefits provided by \par
the credit, the February 1993 estimate was higher than it would have \par
been if the Joint Committee had known about the changes.\\16 The U.S. \par
Department of the Treasury also has not publicly released a revenue \par
estimate for the immediate repeal of the credit since the OBRA 1993 \par
changes. \par
\par
The Seven-Year Balanced Budget Reconciliation Act of 1995 (H.R. \par
2491) would have repealed the possessions tax credit after December \par
31, 1995, had it not been vetoed by the President. The act contained \par
a grandfather rule that would have gradually phased out the credit \par
for existing credit claimants over a period of up to 10 years. The \par
Joint Committee on Taxation estimated that this phasing out of the \par
credit would save the Treasury $255 million in 1996 and a total of \par
$2.5 billion from 1996 through 2000. This revenue estimate is \par
relevant only to the very specific phase-out rules contained in the \par
act. Other phase-out schemes could have much different revenue \par
consequences. \par
\par
The Joint Committee on Taxation and the Treasury Department have made \par
"tax expenditure" estimates for the possessions tax credit as \par
recently as September 1995 and March 1996, respectively. The latest \par
Joint Committee estimates indicated that the tax expenditure would be \par
$3.4 billion in 1996, growing to $4.4 billion by 2000. The Treasury \par
Department estimated that the tax expenditure would be $2.8 billion \par
in 1996, rising to $3.4 billion by 2000. The Joint Committee and \par
Treasury both use a different approach for making tax expenditure \par
estimates for specific tax preferences than they use for estimating \par
the revenue gains that would occur if those preferences were \par
eliminated. A revenue gain estimate reflects expected behavioral \par
changes on the part of taxpayers in response to the elimination of a \par
particular preference; a tax expenditure estimate, which represents \par
the amount of tax benefit that taxpayers would receive if the \par
preference were not repealed, does not reflect any behavioral \par
changes. \par
\par
If a tax credit were eliminated, taxpayers would be likely to seek \par
ways to avoid paying the full amount of tax that the credit had \par
previously offset. For example, if the possessions tax credit were \par
repealed, U.S. corporations might shift some of their investment out \par
of Puerto Rico to operations in foreign countries, where some of the \par
income might not be immediately subject to U.S. taxation. Due to \par
the differences in behavioral assumptions, if either the Joint \par
Committee or Treasury were to make both a tax expenditure estimate \par
for a tax credit and a revenue gain estimate for the elimination of \par
the credit, using the same set of economic forecasts and the same \par
data, the revenue gain estimate could very well be smaller than the \par
tax expenditure estimate. On the other hand, imprecisions in other \par
assumptions and in the economic forecasts that the Joint Committee or \par
Treasury uses could cause both the tax expenditure estimate and the \par
revenue gain estimate to either overstate or understate the true \par
amount of revenue that would flow into the treasury if the credit \par
were eliminated. \par
\par
\par
-------------------- \par
\\16 The economic assumptions that the Joint Committee would use when \par
making an estimate now are also likely to be different from the ones \par
used in 1993. We do not know the effect that the change in \par
assumptions would have on the estimate. \par
\par
\par
SCOPE AND METHODOLOGY \par
------------------------------------------------------------ Letter :7 \par
\par
To calculate an estimate of the amount of personal income taxes the \par
United States would collect from residents of Puerto Rico and to \par
analyze issues related to EITC, we obtained individual income tax \par
data from the Government of Puerto Rico. The data included selected \par
items from each individual income tax return filed with the \par
Department of the Treasury of Puerto Rico in 1992, the last year for \par
which detailed information was available. \par
\par
The data we used were the best available. However, they were taken \par
from an administrative database that had not been cleaned of all \par
errors or inconsistencies. We did our own consistency checks and, \par
with the assistance of the Department of the Treasury of Puerto Rico, \par
corrected the significant errors we detected. Some inconsistencies \par
remain in the data, but we determined that the data is adequate to \par
provide general information about the magnitude of the potential \par
revenue effect of extending full federal income taxation to the \par
residents of Puerto Rico. \par
\par
We documented the structure of the Puerto Rican individual income tax \par
system and compared it to the U.S. tax system. On the basis of the \par
tax law summary table in appendix II and the data provided by the \par
Commonwealth, we prepared a computer program to estimate the federal \par
income tax that would have been paid if each Puerto Rican 1992 \par
individual filer had filed a U.S. individual tax return according to \par
U.S. tax rules that had been adopted as of December 31, 1995. With \par
one exception, we used U.S. tax rules that were effective for tax \par
year 1995. The one exception was that we used the rules governing \par
EITC that became fully phased in for tax year 1996. \par
\par
We did not attempt to predict how taxpayers would respond to the new \par
incentives and disincentives they would face under U.S. tax law. \par
Behavioral responses of corporate taxpayers to the elimination of the \par
possessions tax credit would be of particular importance to the \par
aggregate amount of income earned in Puerto Rico. According to \par
officials from the Department of the Treasury of Puerto Rico, \par
corporations covered by the credit directly employed about 109,000 \par
Puerto Rican residents in 1995. As we concluded in our earlier \par
report on the possessions tax credit, reliable estimates of the \par
impact that the elimination of the credit would have on Puerto Rico's \par
economy cannot be made.\\17 \par
\par
A second important limitation of our estimate of federal individual \par
income tax liabilities results from deficiencies of the data \par
available for our estimate. The Puerto Rican tax returns do not \par
contain all of the information that we would need to accurately \par
simulate certain aspects of the federal tax code. For example, under \par
Puerto Rico tax rules, interest from U.S. federal securities is \par
exempt from taxation. No information about this type of interest is \par
reported on the return, and accordingly, we do not have the data to \par
estimate its effect on a possible U.S. tax liability. \par
\par
To compare the combined income tax burden of the Commonwealth of \par
Puerto Rico to the combined income tax burden of the 50 states and \par
the District of Columbia, we analyzed federal, state, and local \par
individual income taxes in per-capita terms and as a percentage of \par
personal income using published data from the Advisory Commission on \par
Intergovernmental Relations (ACIR), the Commonwealth of Puerto Rico, \par
and IRS statistics of income. Further details on our methodology are \par
contained in appendix I. \par
\par
As agreed with your staff, we did not produce our own estimate of the \par
amount of revenue the U.S. Treasury could obtain by eliminating the \par
possessions tax credit. We have simply presented the Joint Committee \par
on Taxation's and the U.S. Treasury's estimates of the tax \par
expenditure for the credit. \par
\par
The Puerto Rico Treasury was unable to provide us with detailed data \par
relating to corporations operating in Puerto Rico that are not \par
covered by the possessions tax credit. There are differences between \par
Puerto Rico's corporate income tax and the federal corporate income \par
tax. In the absence of detailed data relating to the incomes and \par
deductions reported by corporations not covered by the possessions \par
tax credit, we cannot say whether federal income taxation of these \par
corporations would have yielded significantly more or significantly \par
less revenue than the approximately $594 million of income tax \par
actually collected from these corporations by Puerto Rico in 1992. \par
Marginal tax rates for corporations are generally higher in Puerto \par
Rico than in the United States, but Puerto Rico provides significant \par
tax exemptions for income earned from certain designated activities. \par
Appendix III provides a description of the principal differences in \par
the treatment of corporate and partnership income under the Puerto \par
Rican and federal tax codes. \par
\par
We did our work in Washington, D.C., between August 1995 and June \par
1996 in accordance with generally accepted government auditing \par
standards. \par
\par
\par
-------------------- \par
\\17 Tax Policy: Puerto Rico and the Section 936 Tax Credit, \par
(GAO/GGD-93-109, June 8, 1993). \par
\par
\par
AGENCY COMMENTS \par
------------------------------------------------------------ Letter :8 \par
\par
We requested comments on a draft of this report from the Secretary of \par
the Treasury of the Commonwealth of Puerto Rico, from officials of \par
the U.S. Treasury, and from the Internal Revenue Service. We \par
discussed the draft on June 7, 1996, with responsible officials from \par
the Office of the Assistant Secretary of the Treasury for Tax Policy. \par
We discussed the draft on June 11, 1996, with the Secretary of the \par
Treasury of Puerto Rico and members of his staff. The Secretary also \par
provided us with written comments, the full text of which, excluding \par
an attachment of technical comments, is presented in appendix V. \par
IRS' Office of the Associate Chief Counsel provided us with written \par
comments relating to our descriptions of sections of IRC. Most of \par
the comments that the various officials made brought to our attention \par
corrected and updated information. There were also suggestions that \par
parts of our presentation needed to be clarified. We considered \par
their comments and modified the report where appropriate. \par
\par
The U.S. and Puerto Rican officials made several comments that merit \par
special attention. First, officials from both the U.S. and Puerto \par
Rican Departments of the Treasury pointed out that we did not address \par
the distributional effects that a full imposition of the federal \par
income tax would have in Puerto Rico. An official from the U.S. \par
Treasury noted that the combined marginal income tax rates of higher \par
income individuals in Puerto Rico would be significantly higher than \par
the combined marginal rates on similar individuals in any of the 50 \par
states or the District of Columbia. He suggested that the Government \par
of Puerto Rico would be compelled to modify its own tax system to \par
avoid these extremely high rates. The Secretary of the Treasury of \par
Puerto Rico noted that his government would have to make significant \par
adjustments to the island's fiscal system to provide relief for those \par
who would have positive federal income tax liabilities. IRS' \par
Associate Chief Counsel noted that U.S. persons who currently pay \par
Puerto Rican income tax as well as federal income tax, such as U.S. \par
military personnel stationed on the island, can claim a foreign tax \par
credit against their federal income tax liability. If the Puerto \par
Rican income tax were to be treated as a state income tax, these \par
individuals would only be allowed to claim a deduction for that tax, \par
not a credit. As a result, their U.S. income tax liabilities could \par
increase significantly if Puerto Rico did not adjust its income tax. \par
\par
We agree that the full imposition of the federal income tax could \par
have significant impacts on specific groups of taxpayers in Puerto \par
Rico, even though the impact on aggregate federal revenue might be \par
negligible. However, the data and our estimating methodology did not \par
support a detailed distributional analysis. We did not mention \par
possible policy responses by the Government of Puerto Rico because \par
that was beyond the scope of this study. In the section of our \par
report that compares the combined individual income taxes in Puerto \par
Rico with those in the 50 states and the District of Columbia, we \par
have added a comparison of the marginal tax rates for Puerto Rico's \par
income tax with the marginal income tax rates for other U.S. \par
jurisdictions. The top marginal income tax rate in Puerto Rico is \par
significantly higher than the rates in the other jurisdictions. \par
\par
Officials from both the U.S. and Puerto Rican Treasuries were \par
concerned about our discussion of local corporations operating in \par
Puerto Rico that are not covered by the possessions tax credit. The \par
officials felt that we improperly implied that the amount of income \par
tax revenue that the Government of Puerto Rico currently collects \par
from these corporations indicates roughly the amount of revenue that \par
the federal government might collect if the corporations were subject \par
to the full federal income tax. We tried to make clear in our draft \par
that there are differences between Puerto Rico's corporate income tax \par
and the federal corporate income tax and that potential federal \par
revenues could be greater or less than the amount that the Government \par
of Puerto Rico currently collects. In response to the comments, we \par
moved some of the discussion of differences between the two corporate \par
income taxes forward from an appendix to the body of the letter. \par
\par
Finally, the Secretary of the Treasury of Puerto Rico noted that our \par
report does not address all of the consequences that are likely to \par
follow from a major change in the fiscal relations between Puerto \par
Rico and the federal government. He said that, in particular, we do \par
not address potential changes in federal transfers to Puerto Rico. \par
We agree that there are important considerations relating to \par
potential changes in fiscal relations that are beyond the scope of \par
this report. \par
\par
\par
---------------------------------------------------------- Letter :8.1 \par
\par
Unless you publicly announce its contents earlier, we plan no further \par
distribution of this report until 30 days from the date of this \par
report. At that time, we will send copies of this report to the \par
Ranking Minority Members of the House Committee on Resources, and the \par
Subcommittee on Native Americans and Insular Affairs, and to other \par
appropriate congressional committees. We will also send copies to \par
the Commissioner of the IRS, Secretary of the Treasury, \par
representatives of the government of Puerto Rico, and other \par
interested parties. Copies will also be made available to others \par
upon request. \par
\par
This work was performed under the direction of James Wozny, Assistant \par
Director, Tax Policy and Administration Issues. Major contributors \par
to this report are listed in appendix VI. If you have any questions \par
please contact me on (202) 512-9044. \par
\par
Natwar M. Gandhi \par
Associate Director, Tax Policy \par
and Administration Issues \par
\par
\par
OBJECTIVES, SCOPE, AND METHODOLOGY \par
=========================================================== Appendix I \par
\par
The Chairman, House Committee on Resources, and the Chairman, House \par
Subcommittee on Native American and Insular Affairs, Committee on \par
Resources, requested that we provide certain data regarding the \par
potential effects of extending federal income taxation to Puerto \par
Rico. Specifically, they asked that we provide estimates of \par
\par
(1) the amount of federal income tax that individuals residing in \par
Puerto Rico would pay if they were treated in the same manner as \par
residents of the 50 states, the amount of earned income tax credits \par
(EITC) Puerto Rican residents would receive, the percentage of \par
taxpayers who would have positive federal tax liabilities, and the \par
percentage who would earn EITC; \par
\par
(2) the extent to which the Government of Puerto Rico would have to \par
reduce its own income tax if it were to keep the amount of combined \par
income tax (both federal and Commonwealth) on individuals the same as \par
it was without the full imposition of the federal tax; \par
\par
(3) how the amount of income taxes paid by the average taxpayer in \par
Puerto Rico compares with the amount of combined federal, state, and \par
local income taxes paid by residents in the 50 states and the \par
District of Columbia; and \par
\par
(4) the amount of revenue the U.S. Treasury could obtain by the \par
repeal of the possessions tax credit, which effectively exempts from \par
federal taxation a portion of the income that subsidiaries of U.S. \par
corporations earn in Puerto Rico. \par
\par
To calculate the amount of personal income taxes the United States \par
would collect from residents of Puerto Rico and analyze issues \par
related to EITC, we obtained individual income tax data from the \par
Government of Puerto Rico. These data included selected items from \par
each individual income tax return filed with the Department of the \par
Treasury of Puerto Rico in 1992, the last year for which detailed \par
information was available. \par
\par
The data we used were the best available. However, they were taken \par
from an administrative database that had not been cleaned of all \par
errors or inconsistencies. We did our own consistency checks and, \par
with the assistance of the Department of the Treasury of Puerto Rico, \par
corrected the significant errors we detected. Some inconsistencies \par
remain in the data, but we determined that the data is adequate to \par
provide general information about the magnitude of the potential \par
revenue effect of extending full federal income taxation to the \par
residents of Puerto Rico. \par
\par
To estimate the total U.S. federal income tax related to extending \par
the federal income tax to Puerto Rico, we documented the elements \par
that made up Puerto Rico's taxable income, deductions, exemptions, \par
and credits and compared them to the U.S. federal income tax. To \par
aid that process, we have prepared a summary table tracing each line \par
item from the U.S. 1040 return and schedule of itemized deductions \par
to a comparable item in the 1992 Puerto Rican individual income tax \par
return. On the basis of the tax law summary table in appendix II and \par
the data provided by the Commonwealth, we prepared a computer program \par
to estimate the federal income tax that would have been paid if (1) \par
each Puerto Rican 1992 individual filer had filed a U.S. individual \par
tax return according to U.S. tax rules that had been adopted as of \par
the end of 1995 and (2) his or her filing behavior had not changed as \par
a result of the imposition of U.S. income taxes. U.S. tax law was \par
used to determine U.S. tax treatment of Puerto Rican tax return \par
income, exemption, and deduction items.\\1 We assumed that the \par
taxpayers took advantage of any U.S. credits or deductions that were \par
not available under Puerto Rico law, if we had sufficient data to \par
presume their eligibility for those credits and deductions. \par
\par
The estimate of U.S. federal tax liabilities that we produced in \par
this manner differs in several important ways from an estimate of the \par
amount of revenue that the United States would actually receive if \par
the federal income tax were actually imposed on Puerto Rico residents \par
for tax year 1995. We have not attempted to estimate how the \par
extension of individual and corporate income taxes or any federal aid \par
programs would affect the pretax incomes of Puerto Rican taxpayers. \par
\par
Another important limitation of our estimate results from \par
deficiencies of the data available for our estimate. The Puerto \par
Rican tax returns do not contain all of the information that we would \par
need to accurately simulate certain aspects of the federal tax code. \par
For example, under Puerto Rico's tax rules, interest from federal \par
securities is exempt from taxation. Also, for example, unemployment \par
compensation is not included in Puerto Rico's definition of gross \par
income, whereas it is in U.S. tax law. Information about this \par
interest and unemployment compensation is not reported on the return, \par
and accordingly, we did not have the data to estimate its effect on a \par
possible U.S. tax liability. The analysis in appendix II describes \par
the extent to which we could or could not estimate amounts for each \par
line item on the federal tax return from data on Puerto Rican \par
returns. \par
\par
Finally, a study of compliance with Puerto Rico's income tax prepared \par
for the Puerto Rico Treasury revealed that noncompliance with Puerto \par
Rico income tax laws is significantly more extensive than \par
noncompliance with federal income tax laws. This study indicated \par
that the total income gap (the amount of adjusted gross income (AGI) \par
that went unreported) in 1991 for Puerto Rico was about $3.71 \par
billion, or 26 percent of total income, while for the United States \par
the income gap was about $447.1 billion, or 12 percent. Our \par
estimates reflect the compliance behavior of Puerto Rican taxpayers \par
in 1992. They do not take into account any change in compliance \par
rates in Puerto Rico that have occurred since 1992 or that might \par
occur if full federal income taxation were imposed. Since the \par
completion of that study, the Department of the Treasury of Puerto \par
Rico has implemented new compliance initiatives that, according to \par
Puerto Rico Treasury officials, have increased the number of \par
individual income tax returns filed from 651,201 in 1992 to 720,000 \par
in 1994 and increased their collections of all taxes by about $430 \par
million in fiscal years 1994 and 1995. \par
\par
\par
-------------------- \par
\\1 We followed U.S. tax laws that were in place as of October 1, \par
1995. All relevant dollar amounts that are included in the U.S. tax \par
code, such as the amounts for exemptions, standard deductions, and \par
boundaries for tax rate brackets, were deflated into 1992 dollar \par
equivalents. Also, prospective changes in the calculation of the \par
earned income tax credit scheduled to be in place in tax year 1996 \par
were incorporated in the simulation exercise. \par
\par
\par
EITC ESTIMATE \par
--------------------------------------------------------- Appendix I:1 \par
\par
EITC is a major feature of the U.S. income tax system that would \par
significantly affect estimates of federal tax revenues obtained from \par
Puerto Rico if the federal income tax were extended to Puerto Rico. \par
EITC is a refundable credit that is awarded to tax filers who meet \par
certain earned income requirements and have qualified children \par
residing in their households. A smaller credit is awarded tax filers \par
who have earned incomes but no qualifying children--the so-called \par
"childless" credit. Qualification requirements for the credit are \par
discussed in table II.2. Because the credit is targeted to tax \par
filers with relatively low earned incomes, a tax filing population \par
with a high proportion of low-income earners, such as Puerto Rico's, \par
would be entitled to a substantial amount of EITC in the aggregate. \par
\par
Our EITC simulation methodology relied on available information \par
contained in Puerto Rican tax returns for 1992 to estimate proxies \par
for earned income, unearned income, AGI, and qualifying children, as \par
defined under federal tax law. We restated all dollar values, such \par
as income thresholds and maximum credits, contained in the EITC \par
computation rules as 1992 dollars. We then applied the restated \par
rules to the estimated proxies in order to compute an EITC for each \par
Puerto Rican taxfiler in 1992 that met the necessary conditions. \par
\par
A limitation of the simulation described above, apart from the \par
necessity to approximate the value of certain tax elements, is the \par
risk of significantly undercounting the potential EITC-qualified \par
population of tax filers. The 1992 Puerto Rican tax filing \par
population may omit potential filers either because their incomes \par
fell below the filing threshold for the Puerto Rico income tax or \par
because they evaded their filing obligations in 1992.\\2 Because the \par
number of these potential filers may be substantial at the lower \par
earned income levels, and thus cause our simulated estimate of EITC \par
to be understated, we examined Census data in an attempt to estimate \par
the number of nonfilers that would file if EITC were available. \par
\par
The decennial 1990 Census of Puerto Rico contains information on the \par
incomes and family composition of households during the sample period \par
1989. From the family relationships contained on the Census file we \par
constructed a data file of simulated tax filers, e.g., single, \par
head-of-household, and married joint returns. Information about the \par
age and incomes of nonfiling family members was used to estimate the \par
number of EITC-qualified children. Income elements, although not \par
complete for computing taxable incomes, seemed reasonably adequate \par
for estimating approximations of AGI and earned income. \par
\par
From the simulated tax filing data set, we estimated the number of \par
potential filers who would qualify for EITC by AGI classes. These \par
counts of potential filers were compared to the count of simulated \par
EITC filers obtained from the 1992 Puerto Rican tax return file. As \par
expected, the number of potential filers in the Census data set in \par
low-AGI groups, roughly those AGIs below tax filing thresholds, \par
exceeded the number from the tax file data set. Many of the \par
simulated filers from the Census data set, in these income groups, \par
could be agricultural workers or domestic service workers who are \par
exempt from tax withholding and thus need not file tax returns. \par
However, in the higher AGI classes, the number of simulated EITC tax \par
filers from the Census data set was lower than the number of \par
simulated EITC filers from the 1992 tax return data set. This result \par
is not plausible because the number of potential EITC recipients in \par
the full Puerto Rican population cannot be lower than the number of \par
potential recipients in the tax filing population. \par
\par
We have more confidence in our simulations based on the tax return \par
data than those based on the Census data. The translation of Puerto \par
Rican filing units into federal filing units is relatively \par
straightforward from the tax data, although there is considerable \par
uncertainty as to how households in the Census database should be \par
translated into filing units. In addition, income amounts reported \par
on the Census survey may differ from the amounts that the same \par
individuals would report for tax purposes. For these reasons we \par
concluded that we could not use the Census data to estimate the total \par
number of nonfilers who might claim EITC if it became available to \par
them.\\3 However, as explained in the letter, we did make an \par
upper-bound estimate for the amount of EITC that might be claimed by \par
taxpayers who had legitimate reasons for not filing tax returns in \par
1992. \par
\par
Potential noncompliance with the EITC provisions and behavioral \par
responses to the availability of the credit could result in a larger \par
aggregate amount of EITC being earned than we have estimated. A \par
previous GAO report and studies by IRS have raised concerns regarding \par
the vulnerability of EITC to noncompliance including fraud.\\4 Also, \par
the introduction of the earned income credit could induce some \par
welfare recipients to forego welfare and obtain employment in order \par
to claim the tax credit. We did not adjust our estimate for these \par
factors because there was insufficient information available to \par
quantify their effect on EITC. \par
\par
\par
-------------------- \par
\\2 In Puerto Rico, the requirements for filing a return for tax year \par
1992 were $3,300 in gross income for single persons or married \par
individuals not living together, and $6,000 in gross income for \par
married persons living together. Individuals below these tax \par
thresholds may have filed, however, to claim refunds of taxes \par
withheld by employers. Some taxpayers may not have filed for a \par
refund if the amounts withheld were small. \par
\par
\\3 We examined the possibility that the difference in the years \par
between the two data sets--the Census data were based on information \par
in 1989, whereas the tax return data set were for the year \par
1992--might have caused the inconsistency in counts between AGI \par
groups. We obtained from the Treasury Department of Puerto Rico a \par
table of tax filers by AGI groups for the same year as the Census \par
data--1989. In order to estimate the number of EITC filers in each \par
AGI group in 1989, we used our 1992 data to compute the proportions \par
of all tax filers that qualified for the EITC by AGI class and then \par
applied these proportions to the 1989 tax filer counts for the \par
respective AGI groups. A comparison of the count of Census simulated \par
EITC tax filers to the imputed EITC tax return simulated filers again \par
led to a statistical inconsistency across AGI groups. \par
\par
\\4 Tax Administration: Earned Income Credit--Data on Noncompliance \par
and Illegal Alien Recipients, (GAO/GGD-95-27, Oct. 25, 1994). \par
\par
\par
CHILD AND DEPENDENT CARE TAX \par
CREDIT ESTIMATE \par
--------------------------------------------------------- Appendix I:2 \par
\par
Differences between U.S. and Puerto Rican tax rules relating to \par
child and dependent care expenses made it impossible for us to \par
estimate the amount of federal child and dependent care tax credit \par
(DCTC) that each taxpayer in our Puerto Rico database would earn. \par
The federal credit, which is nonrefundable, is equal to a percentage \par
of the expenses that a taxpayer pays for child or dependent care in \par
order to be able to obtain gainful employment. The maximum credit \par
for taxpayers with AGIs of $10,000 or less is $1,440 for two or more \par
dependents, and $720 for one dependent. The maximum credit for \par
taxpayers with AGIs over $28,000 is $960 for two or more dependents, \par
and $480 for one dependent. Puerto Rico allows an itemized deduction \par
for child-care expenses but not for expenses to care for other \par
dependents. The maximum deduction is $800 for two or more children, \par
and $400 for one child. A large majority of Puerto Rican taxpayers \par
do not itemize, so we were unable to determine whether they had any \par
expenses for child care. \par
\par
In the absence of complete information on the child and dependent \par
care expenses of Puerto Rican taxpayers, we had to rely upon the \par
experience of U.S. taxpayers as a basis for estimating the aggregate \par
amount of federal DCTC that Puerto Rican taxpayers might claim. \par
Using a sample of individual tax returns compiled by IRS for tax year \par
1991, the latest data available, we classified U.S. returns by nine \par
AGI categories and by the number of children claimed as qualifying \par
for the DCTC. We classified Puerto Rican returns according to \par
estimated U.S. AGI and the number of children claimed as dependents. \par
We computed an average credit amount per U.S. return for each class \par
of return. We assumed that the average credit per Puerto Rican \par
return in a given class would be the same as the average credit for \par
the comparable class of U.S. returns\\5 Thus, we multiplied the \par
number of Puerto Rican returns in each class by the appropriate U.S. \par
average credit to obtain the amount of credit earned by each class of \par
Puerto Rican returns. We obtained our overall estimate of about $15 \par
million by summing the estimates for the individual classes. \par
\par
We were unable to allocate the aggregate amount of DCTC across \par
individual taxpayers. Consequently, we do not know precisely how \par
many taxpayers might have had their federal tax liabilities \par
completely offset by this credit. For this reason, we could not \par
estimate precisely the number of Puerto Rican taxpayers who would \par
have had positive federal tax liabilities. \par
\par
\par
-------------------- \par
\\5 Dependent-care expenses are likely to be lower in Puerto Rico than \par
in the rest of the United States because labor costs are \par
significantly lower in Puerto Rico than in the United States. \par
However, the amount of expenses that qualify for the credit is capped \par
at $2,400 per dependent and at $4,800 in total. These caps should \par
reduce differences between the average amounts of credit that would \par
be claimed in Puerto Rico, by income group, and the average amounts \par
claimed in the rest of the United States. \par
\par
\par
COMBINED INDIVIDUAL INCOME \par
TAXES \par
--------------------------------------------------------- Appendix I:3 \par
\par
Determining the magnitude of the income tax reductions the Government \par
of Puerto Rico would have to make in order to maintain the same level \par
of combined income tax paid by individuals resident in Puerto Rico if \par
they were subject to the federal income tax was a two-step process. \par
First, we determined the total amount of 1992 Puerto Rican tax from \par
the income tax return data provided by the Commonwealth. Then, we \par
compared this amount to the total estimated potential U.S. tax \par
liability as calculated in the first objective. \par
\par
To compare the combined federal and Puerto Rican income tax to the \par
combined federal, state, and local income tax of the 50 states and \par
the District of Columbia, we analyzed federal, state, and local \par
individual income taxes in per-capita terms and as a percentage of \par
personal income. In addition, to understand the results of our \par
analysis of Puerto Rico's income tax, we analyzed the general revenue \par
sources of Puerto Rico and the states. We used published data from \par
the Advisory Commission on Intergovernmental Relations (ACIR), IRS' \par
Statistics of Income Bulletin, and Puerto Rico's Informe Econ¢mico al \par
Gobernador, an annual report to the Governor on the economy of the \par
Commonwealth.\\6 Generally, ACIR based its calculations on state and \par
local general revenue data collected by the Bureau of the Census.\\7 \par
We followed the Census Bureau's Classification Manual definitions of \par
government and finance data. \par
\par
\par
-------------------- \par
\\6 ACIR was created by Congress to monitor the operation of the \par
American federal system and to recommend improvements. \par
\par
\\7 General revenue, as defined by the Census, includes all revenue \par
except that classified as liquor store, utility, or insurance trust \par
revenue. For purposes of this analysis, the general revenue data we \par
included for the government of Puerto Rico excludes its public \par
corporations. \par
\par
\par
COMPARISON OF U.S. AND PUERTO \par
RICO INDIVIDUAL INCOME TAX RULES \par
========================================================== Appendix II \par
\par
The following tables summarize our comparison of United States and \par
Puerto Rican individual income tax rules relevant to our simulation \par
for each item on the U.S. individual income tax return. These \par
tables provide comments on issues related to the conversion of the \par
Puerto Rican income tax return items to the U.S. individual income \par
tax return items. Our conversion is based on 1992 Puerto Rican \par
income tax rules because that was the latest year for which return \par
information necessary for our simulation was available on computer \par
tape. Since 1992, the Puerto Rican tax system has been changed. In \par
October 1994, Puerto Rico enacted tax reform legislation that \par
according to the government of Puerto Rico, was intended to achieve \par
several objectives. These objectives include (1) establishing a more \par
equitable tax structure, (2) encouraging equal and consistent \par
application of tax laws, and (3) simplifying the tax structure. \par
Generally, the 1994 tax reform lowered individual tax rates and \par
corporate tax rates. Effective for tax years commencing after June \par
30, 1995, the act lowered all statutory individual income tax rates \par
and increased the level of taxable income subject to the maximum tax \par
rate, from $30,000 to $50,000 for married filing jointly. Tax rates \par
were lowered from 1 to 7 percentage points, depending on the tax \par
bracket and filing status of the taxpayer. We noted some of the \par
significant provisions of the Puerto Rico Tax Reform Act of 1994 in \par
table II.1. \par
\par
\par
\par
Table II.1 \par
\par
Conversion of Puerto Rican 1992 \par
Individual Income Tax Return Items to \par
U.S. 1995 Individual Income Tax Return \par
Items \par
\par
U.S. individual income \par
tax item Issues/comments on conversion to U.S. return \par
------------------------- ----------------------------------------------------- \par
Filing status U.S. reporting: The United States has four filing \par
statuses: single, married filing jointly or surviving \par
spouse, married filing separately, and head-of- \par
household. \par
\par
Puerto Rico reporting: Puerto Rico has five filing \par
statuses: married and living with spouse, head-of- \par
household, married not living with spouse, single, \par
and married filing separately. \par
\par
Conversion to the U.S. return: The United States does \par
not have a married not living with spouse status. For \par
the married not living with spouse status, taxpayers \par
would have to file as married filing jointly or \par
married filing separately status. For the married not \par
living with spouse status, we classified returns \par
filed under this status as head-of-household filing \par
status if the Puerto Rican return reports a dependent \par
child, since that status has more favorable tax \par
rates. If the return did not report a dependent \par
child, then the return was classified as single. \par
\par
Exemptions U.S. reporting: The United States allows a deduction \par
amount based on the number of exemptions claimed. \par
Exemptions can be claimed for the taxpayer, the \par
spouse, and the dependents. \par
\par
Puerto Rico reporting: Puerto Rico allows a deduction \par
amount based on the number of personal exemptions and \par
dependents claimed. However, Puerto Rico allows only \par
one personal exemption for married taxpayers and does \par
not allow a head-of-household taxpayer an exemption \par
for the dependent that qualifies him or her as head- \par
of-household. \par
\par
Conversion to the U.S. return: The number of \par
exemptions was included in the U.S. return as \par
reported on the Puerto Rican return except that \par
married filing jointly taxpayers were considered two \par
exemptions instead of one, and head-of-household \par
taxpayers had an additional dependent added. \par
\par
Wages, salaries, and tips U.S. reporting: This includes all compensation for \par
personal services as an employee unless specifically \par
excluded. \par
\par
Puerto Rico reporting: Incudes all amounts paid to \par
employees that constitute compensation. \par
\par
Conversion to the U.S. return: Wages, salaries, and \par
tips on the Puerto Rican return were used as \par
reported. \par
\par
Taxable interest and tax- U.S. reporting: All interest is taxable, except for \par
exempt interest interest on certain state and local bonds and certain \par
other exceptions. \par
\par
Puerto Rico reporting: Income from federal, state, \par
and local government bonds is exempt in Puerto Rico \par
and is not reported. Also the first $2,000 of \par
interest income from Puerto Rican banking \par
institutions is exempt. However, the exempt amount is \par
reported on the income tax return, but it is excluded \par
from gross income. \par
\par
Conversion to the U.S. return: Only those interest \par
earnings reported on the Puerto Rican income tax \par
return were included in our simulation. Interest \par
earnings included the exempt amount for interest in \par
Puerto Rican banking institutions but not interest \par
from federal, state, and local government bonds \par
because it was not reported on the Puerto Rican \par
return. \par
\par
Dividend income The amount of dividend income was included in the \par
U.S. return as reported on the Puerto Rican return. \par
\par
Taxable refunds, credits U.S. reporting: This item is an accounting entry in \par
or other offsets the federal income tax return used only by taxpayers \par
who, during the tax year, received a refund, credit, \par
or offset of state or local income taxes that they \par
paid and deducted in any prior year. \par
\par
Puerto Rico reporting: There is no equivalent line \par
item on the Puerto Rican tax return. \par
\par
Conversion to the U.S. return: This entry was not \par
necessary for our simulation because no prior year \par
deductions would have been made. \par
\par
Alimony received The amount for alimony received was included in the \par
U.S. return as reported on the Puerto Rican return. \par
\par
Business income or loss U.S. reporting: Sole proprietor income after related \par
expenses is included on the U.S. individual income \par
tax return with certain limits. However, U.S. passive \par
losses generally can only be deducted against passive \par
income. Related expenses include those that are \par
ordinary and necessary such as depreciation. The U.S. \par
tax rules allow straight line and some accelerated \par
depreciation. The United States also allows an \par
immediate write-off of business assets up to $17,500. \par
This amount is reduced if the total cost of the \par
property placed in service during the year exceeds \par
$200,000. \par
\par
Puerto Rico reporting: Sole proprietor income after \par
related expenses is also included on the Puerto Rican \par
return. Puerto Rico also limits the extent to which \par
business losses can offset salary income. Deductions \par
rules, like depreciation, may differ. For example, in \par
1992, Puerto Rico allowed certain taxpayers to use \par
"flexible depreciation." This depreciation method \par
allows a depreciation deduction up to the full cost \par
of the asset in the year it is first used. However, \par
the deduction was not to exceed the net benefit of \par
the business or commercial activity in which the \par
property was used. This flexible depreciation method \par
was repealed in the Tax Reform Act of 1994 for assets \par
acquired after June 30, 1995. \par
\par
Conversion to the U.S. return: The amount reported on \par
the Puerto Rican return was used as reported. \par
\par
Capital gain or loss U.S. reporting: Net capital gains are fully included \par
in income with an alternative 28-percent tax rate for \par
long-term gains net of long-and short-term losses. \par
Capital losses are deductible to the extent of \par
capital gains; up to a $3,000 loss is allowed against \par
other income. Capital losses can be carried forward \par
and deducted in succeeding years. Long-term capital \par
gain or loss means gain or loss from the sale or \par
exchange of a capital asset held for more than 1 \par
year. \par
\par
Puerto Rico reporting: Gains are fully taxable; \par
capital losses are limited to capital gains plus net \par
income or $1,000, whichever is lower, with the excess \par
losses carried forward for 5 years. Also, there is an \par
alternative tax on net long-term capital gains, which \par
is either the regular tax or a "special 20-percent \par
tax on capital gains," whichever is more advantageous \par
to the taxpayer. Long-term capital gain or loss means \par
gain or loss from the sale or exchange of a capital \par
asset held for more than 6 months. \par
\par
Puerto Rico also has sale or exchange of principal \par
residence rules that are somewhat similar to those of \par
the United States. In general, if the Puerto Rican \par
taxpayer buys another residence within 1 year before \par
or 1 year after the sale of the old residence (18 \par
months after sale is allowed if a new residence is \par
constructed), the gain is not recognized to the \par
extent the selling price does not exceed the cost of \par
the new residence. A one-time exclusion of $50,000 is \par
provided for taxpayers 60 years old or older at the \par
time of the sale, if the taxpayer lived in the old \par
residence for at least 3 years of the last 5 years \par
prior to the sale. \par
\par
Conversion to the U.S. return: The amount of capital \par
gains and losses was included in the U.S. return as \par
reported on the Puerto Rican return. \par
\par
Other gains or losses U.S. reporting: This line item is used for gains and \par
losses reported on U.S. Form 4797. Generally, this \par
form is used to report sales or exchanges and \par
involuntary conversions from other than casualty or \par
theft of property used in a trade or business; \par
disposition of noncapital assets other than inventory \par
or property held primarily for sale to customers; and \par
recapture of IRC section 179 expense deductions for \par
partners and S-corporation shareholders. Business \par
real estate and any depreciable property is excluded \par
from the definition of capital asset. However, if the \par
business property qualifies as IRC section 1231 \par
property, capital gain treatment may apply. Under IRC \par
section 1231, if there is a net gain during the tax \par
year from (1) sales of property used in a trade or \par
business, (2) involuntary conversion of property used \par
in a trade or business, or (3) sales of capital \par
assets held for more than one year, the gain is \par
treated as a long-term capital gain. A net loss is \par
treated as an ordinary loss. \par
\par
Puerto Rico reporting: Net gains on the involuntary \par
conversion, or on the sale or disposition of property \par
used in a trade or business, held for more than 6 \par
months, are treated as "long-term capital gain." This \par
long-term capital gain is reported together with \par
other long-term capital gains and is taxed as \par
explained in the capital gains section. Except for \par
(1) the holding period of 6 months; (2) the inclusion \par
of involuntary conversion from casualty or theft; and \par
(3) the replacement period of 1 year for involuntary \par
conversions, Puerto Rico's capital gains treatment of \par
the property described in this paragraph is \par
consistent with the U.S. tax treatment. \par
\par
Net gains or net losses on the involuntary conversion \par
or on the sale or disposition of property used in a \par
trade or business, held for less than 6 months, are \par
not considered capital gains or losses. These gains \par
or losses are reported as "ordinary income or loss." \par
\par
Conversion to the U.S. return: Other gains and losses \par
were included in the U.S. return as reported on the \par
Puerto Rican return. \par
\par
Individual Retirement U.S. reporting: IRA distributions are taxed as \par
Account (IRA) ordinary income in the year received. Distributions \par
distributions are fully taxable unless nondeductible contributions \par
have been made. In the United States, a penalty \par
applies if the taxpayer is not 59 1/2 years or \par
older. \par
\par
Puerto Rico reporting: Similar rules apply; \par
nondeductible contributions are not permitted. In \par
Puerto Rico, the penalty applies if the taxpayer is \par
not 60 years or older, with certain exceptions. \par
Puerto Rico has a penalty provision that is similar \par
to that of the United States for early withdrawals. \par
\par
Conversion to the U.S. return: This line item was \par
used as reported on the Puerto Rican return. \par
\par
Pensions and annuities U.S. reporting: The United States taxes each annuity \par
payment as if composed pro rata of taxable income and \par
recovery of cost, projected over the life expectancy \par
of the annuitant. An alternative method is provided \par
for qualified plans; under this method, the total \par
number of payments is determined based on the \par
annuitant's age at the starting date. \par
\par
Puerto Rico reporting: In the case of government \par
pensions, Puerto Rico excludes either $5,000 or \par
$8,000 based on age. If the taxpayer paid part or the \par
total cost of the pension, he/she can recover that \par
amount tax free. The excess of the amount received \par
over 3 percent of the aggregate premiums paid is \par
excluded from income until the amount excluded equals \par
the aggregate premiums paid for the annuity. \par
Taxpayers with government pensions are not required \par
to submit Schedule H (Income from Annuities or \par
Pensions) if their pension or annuity income is less \par
than the exclusion amount. Since 1992, the $5,000 or \par
$8,000 exclusion has been applied to both government \par
and private sector pensions. \par
\par
Conversion to the U.S. return: This line item was \par
included in the U.S. return as reported on the Puerto \par
Rican return, although the cost recovery rules are \par
different in the United States, and government \par
pensions in the United States are taxed on the same \par
basis as are all other pensions. \par
\par
Rents, royalties, U.S. reporting: The United States has complex passive \par
partnerships, estates, loss rules, limiting the use of losses from passive \par
and trusts activities to shelter income from other types of \par
activities. Although a passive activity is defined as \par
one involving the conduct of a trade or business in \par
which the taxpayer does not materially participate, \par
the passive loss rules treat rental activities as \par
passive. \par
\par
Puerto Rico reporting: Passive activity losses may \par
not be used to offset income from another activity. \par
Also, excess losses may be carried forward \par
indefinitely to offset any future income from the \par
same activity. Partnerships that derive at least 70 \par
percent of their gross income from Puerto Rican \par
sources, and at least 70 percent of such income is \par
produced in a specific enterprise, can elect to be \par
treated as special partnerships. However, distributed \par
losses from Special Partnerships can offset up to 50 \par
percent of net income from any source. Puerto Rico's \par
regular partnerships are treated like corporations in \par
the United States. Special partnerships and \par
corporations of individuals (similar to S \par
corporations) are treated like United States \par
partnerships (pass-through entities). \par
\par
Conversion to the U.S. return: These income items \par
were included in the U.S. return as reported on the \par
Puerto Rican return. \par
\par
Farm income U.S. reporting: Farm income is reported and taxed in \par
the same way as income from any other business. \par
However, there are inventory and expense deduction \par
rules that recognize the unique issues related to \par
operating a farm. For example, there are special \par
rules for the involuntary conversion of livestock or \par
crop disaster payments. \par
\par
Puerto Rico reporting: Ninety percent of net farm \par
income is exempted from reporting. Puerto Rico also \par
includes some income and expense recognition rules \par
that are specific to farmers. \par
\par
Conversion to the U.S. return: Farm income was \par
included as reported on the Puerto Rican return with \par
the 90-percent exclusion added back to income. \par
\par
Unemployment compensation U.S. reporting: Unemployment compensation is included \par
in gross income. \par
\par
Puerto Rico reporting: Unemployment compensation is \par
not included in gross income and, therefore, not \par
reported on the income tax return. According to data \par
provided by the Department of the Treasury of Puerto \par
Rico, unemployment compensation totaled $336.5 \par
million in 1994. \par
\par
Conversion to the U.S. return: We were not able to \par
simulate this income item because we did not know how \par
the total unemployment compensation was distributed \par
among Puerto Rican taxpayers. \par
\par
Social Security benefits U.S. reporting: A portion of a taxpayer's Social \par
Security benefits may be taxable. \par
\par
Puerto Rico reporting: Social Security payments are \par
not included as income and, therefore, not reported \par
on the income tax return. \par
\par
Conversion to the U.S. return: We were not able to \par
simulate this income item. \par
\par
IRA deductions U.S. reporting: A deduction of up to $2,000 per \par
taxpayer is allowed for IRA contributions for \par
employees who cannot participate in certain employer- \par
sponsored pension plans. Taxpayers who are \par
participants in employer-sponsored plans can deduct a \par
limited amount of IRA contributions, depending on \par
their income. Total contributions of up to $2,250 can \par
be made per taxpayer each year to the taxpayer's IRA \par
and a spousal IRA. \par
\par
Puerto Rico reporting: A $2,000 deduction per \par
taxpayer is allowed, or $4,000 for married taxpayers. \par
Limitations apply when the individual participates in \par
cash or deferred accounts. In 1994, the IRA deduction \par
was increased to $2,500 per taxpayer or $5,000 for \par
married taxpayers. \par
\par
Conversion to the U.S. return: The IRA deduction \par
amount was included in the U.S. return as reported on \par
the Puerto Rican return. \par
\par
Moving expenses U.S. reporting: Certain moving expenses are \par
deductible as an adjustment to gross income if the \par
move is related to starting work in a new location. \par
\par
Puerto Rico reporting: Moving expenses are deductible \par
as ordinary and necessary expenses within certain \par
limitations. \par
\par
Conversion to the U.S. return: Because moving \par
expenses are reported with other ordinary and \par
necessary expenses, they were included in our \par
simulation of miscellaneous deductions. \par
\par
One-half self-employment U.S. reporting: One half of self-employment tax is \par
tax deductible as an adjustment to income. Dividends \par
typically are not included as earnings for self- \par
employment income. However, a taxpayer's distributed \par
share of ordinary income from a trade or business \par
carried on by a partnership is included in self- \par
employment income. \par
\par
Puerto Rico reporting: Residents of Puerto Rico are \par
subject to federal self-employment tax under IRC \par
section 1402(b). Self-employed residents of Puerto \par
Rico are to file a U.S. Internal Revenue Form 1040PR \par
to compute self-employment tax. This return follows \par
the same employment tax rules applicable to residents \par
of the United States. \par
\par
Conversion to the U.S. return: The tax was computed \par
by multiplying the self-employment tax rate (15.3 \par
percent) times the amount of self-employment income. \par
The Puerto Rican individual income tax return \par
includes corporation dividends and distributions from \par
regular partnerships on the same line of the return. \par
Accordingly, we could not determine the regular \par
partnership distribution amount that would be \par
included as U.S. self-employment income. So that we \par
would not overstate self-employed income and the \par
related tax, we excluded any items from the Puerto \par
Rican return that would not be entirely included as \par
U.S. self-employment income. \par
\par
Self-employed health U.S. reporting: Up to 30 percent of health insurance \par
insurance deduction premiums for self-employed persons are deductible as \par
an adjustment to gross income. \par
\par
Puerto Rico reporting: There is no similar provision \par
in the Puerto Rican return. Health insurance premiums \par
for self-employed persons are deductible as an \par
itemized deduction. \par
\par
Conversion to the U.S. return: Self-employed health \par
insurance deduction was not simulated because self- \par
employed insurance premiums and other business \par
adjustments are offset against self-employment income \par
in the Puerto Rican return, and our Puerto Rican \par
individual income tax data file showed only the net \par
self-employment income amount. \par
\par
Keogh retirement or U.S. reporting: Keogh retirement or SEP payments are \par
Simplified Employee deductible as an adjustment to gross income. \par
Pension (SEP) plans \par
deduction Puerto Rico reporting: Keogh retirement or SEP \par
payments are deductible as an adjustment to self- \par
employment income. \par
\par
Conversion to the U.S. return: A Keogh retirement or \par
SEP deduction was not simulated because Keogh \par
retirement or SEP payments and other business \par
adjustments are offset against self-employment income \par
in the Puerto Rican return, and our Puerto Rican \par
individual income tax data file showed only the net \par
self-employment income amount. \par
\par
Penalty on early U.S. reporting: Penalties paid on early withdrawal of \par
withdrawal of savings savings are deductible. \par
\par
Puerto Rico reporting: There is no similar line item \par
in the Puerto Rican tax return. \par
\par
Conversion to the U.S. return: We were not able to \par
simulate this income adjustment. \par
\par
Alimony paid U.S. reporting: Alimony paid is deductible as an \par
adjustment to income. \par
\par
Puerto Rico reporting: Alimony paid is deductible as \par
an adjustment to income. \par
\par
Conversion to the U.S. return: Alimony paid was \par
included in the U.S. return as reported on the Puerto \par
Rican tax return. \par
\par
Medical and dental U.S. reporting: Unreimbursed medical and dental \par
expenses expenses are deductible as itemized deductions to the \par
extent they exceed 7.5 percent of AGI. \par
\par
Puerto Rico reporting: Under Puerto Rico's rules, \par
generally, the same kind of medical and dental \par
expenses, except drug expenses, are deductible, but \par
only 50 percent of total medical expenses paid are \par
deductible in the year paid and to the extent they \par
exceed 3 percent of AGI. \par
\par
Conversion to the U.S. return: The gross medical and \par
dental expense amount and any orthopedic equipment \par
expenses (see miscellaneous deductions) were included \par
in the U.S. return as reported on the Puerto Rican \par
tax return and adjusted for U.S. income limitation \par
rules. \par
\par
Taxes U.S. reporting: Under U.S. tax rules, certain state, \par
local, and foreign government taxes--such as real \par
property and income taxes--are deductible as an \par
itemized deduction. Personal property taxes are \par
deductible only if paid or accrued to state or local \par
governments. \par
\par
Puerto Rico reporting: Puerto Rico allows as an \par
itemized deduction property taxes paid on the \par
taxpayer's principal residence. Puerto Rico has no \par
personal property or local individual income taxes \par
(below the Commonwealth level). \par
\par
Conversion to the U.S. return: We used the amount of \par
property taxes as reported on the Puerto Rican tax \par
return. No amount was simulated for personal property \par
or local income taxes because they do not exist. We \par
used the actual Puerto Rican tax liability after \par
credits except for the foreign tax credit, which is \par
largely a credit for U.S. income taxes (see foreign \par
tax credit). \par
\par
Interest U.S. reporting: The U.S. itemized deduction includes \par
home mortgage interest and points, home equity loans, \par
and refinanced mortgages for a qualified residence. \par
The deduction is limited to principal amounts of $1 \par
million for mortgages and $100,000 for home equity \par
loans. These limits apply to mortgage or home equity \par
loans taken out after October 1987. Additional limits \par
apply if the mortgage exceeds the fair market value \par
of the residence. \par
\par
Puerto Rico reporting: The Puerto Rican deduction \par
includes many of the U.S. provisions, except that \par
there are no limitation amounts and no deduction is \par
allowed if the mortgage exceeds the fair market value \par
of the residence at the time the debt was incurred. \par
\par
Conversion to the U.S. return: The Puerto Rican tax \par
return item was used. The Puerto Rican deduction \par
could be limited under U.S. rules. However, we did \par
not know whether the principal amount exceeded the \par
U.S. limits because that information is not reported \par
on the Puerto Rican income tax return. \par
\par
Gifts to charity U.S. reporting: U.S. tax rules generally allow as an \par
itemized deduction total contributions to \par
governmental entities, charitable organizations, \par
cemetery companies, war veterans groups, and certain \par
domestic fraternal societies, which are usually \par
limited to 50 percent of AGI. Certain contributions \par
are also limited to 30 percent or 20 percent of AGI, \par
depending on the type of contribution. A carryover is \par
allowed for any excess up to 5 years. \par
\par
Puerto Rico reporting: The Puerto Rican allowable \par
deduction is the total amount of contributions in \par
excess of 3 percent of AGI. The actual deduction \par
taken must not exceed 15 percent of AGI, except an \par
additional deduction of up to 15 percent of AGI is \par
allowed for contributions to accredited university- \par
level educational institutions established in Puerto \par
Rico. Under certain circumstances an unlimited \par
deduction for charitable contributions is allowed. \par
After 1994, a carryover for excess charitable \par
contributions up to 5 years was allowed. \par
\par
Conversion to the U.S. return: The Puerto Rican tax \par
return line item was used. However, because of the \par
differences stated above, the U.S. deduction may be \par
understated. \par
\par
Casualty and theft losses U.S. reporting: U.S. rules allow an itemized \par
deduction for theft, vandalism, fire, storm, or \par
similar causes; car, boat, and other accidents; and \par
money lost due to insolvency or bankruptcy of \par
financial institutions. Each separate casualty or \par
theft loss must be $100 or more. Only losses that \par
total more than 10 percent of AGI are deductible. \par
\par
Puerto Rico reporting: Puerto Rico limits losses of \par
personal property to $5,000 for the year in which the \par
loss was incurred. The carryover of excess losses is \par
allowed for 2 years. Puerto Rico has no limit for \par
casualty loss on a principal residence. \par
\par
Conversion to the U.S. return: The amount reported on \par
the Puerto Rican return was included in the U.S. \par
return as reported, but the U.S. limits were applied. \par
\par
Miscellaneous deductions U.S. reporting: The United States allows itemized \par
deductions for unreimbursed employee expenses such as \par
job travel, union dues, and job education. Other \par
expenses are also deductible such as for investing, \par
preparing tax returns, and renting a safe deposit \par
box. Only amounts in excess of 2 percent of AGI are \par
deductible. All itemized deductions are reduced by 3 \par
percent of the amount that AGI exceeds a threshold \par
amount. \par
\par
Puerto Rico reporting: Puerto Rican job expenses are \par
deductible from AGI as "ordinary and necessary \par
expenses" instead of as an itemized deduction. \par
Taxpayers can deduct ordinary and necessary expenses \par
whether or not they itemize. Generally, the expenses \par
deductible are the same as in the United States. The \par
amount deductible is limited to $1,500, or 3 percent \par
of gross income from salaries, whichever is less. In \par
1994, the deduction of meals and entertainment \par
expenses was reduced from 80 percent to 50 percent of \par
the amount incurred. \par
\par
Conversion to the U.S. return: The amount reported on \par
the Puerto Rican return was included in the U.S. \par
return as a miscellaneous deduction but limited by \par
the U.S. rules. In 1992, the rules on the deduction \par
of meals and entertainment expenses were more \par
restrictive in the United States. \par
\par
Other miscellaneous U.S. reporting: Several expenses are deductible as \par
deductions miscellaneous itemized deductions. However, they are \par
not subject to the 2-percent limit. Examples of \par
deductible items include the following: \par
\par
Amortizable premium on taxable bonds: Bond premiums \par
are deductible for a bond purchased before October \par
23, 1986. \par
\par
Gambling losses to the extent of gambling winnings: \par
The taxpayer cannot offset the losses against the \par
winnings. He/she must report the full amount of the \par
winnings and claim the losses as an itemized \par
deduction. \par
\par
Impairment-related work expense of persons with \par
disabilities: These are allowable business expenses \par
incurred for the taxpayer to be able to work. \par
\par
Puerto Rico reporting: Bond premium amortization is \par
allowed as an offset against interest income, and the \par
net amount is reported as miscellaneous income; \par
however, no deduction is allowed for interest-exempt \par
bonds. Gambling losses are deducted from gambling \par
winnings, and net gambling winnings are reported as \par
miscellaneous income. Net gambling losses are not \par
deductible. An itemized deduction is allowed for \par
"orthopedic equipment expenses for the handicapped." \par
However, this deduction does not have to be directly \par
related to the employment of the taxpayer. \par
\par
Conversion to the U.S. return: Since bond premium \par
amortization is offset against interest income and \par
gambling losses are offset against gambling winnings, \par
we were not able to simulate a miscellaneous \par
deduction for these items. \par
\par
Also, we were not able to simulate a miscellaneous \par
deduction for orthopedic equipment expenses because \par
under Puerto Rico's tax law the orthopedic equipment \par
expense deduction is not required to be work related \par
to be deductible. However, orthopedic equipment \par
expenses were included as medical and dental expenses \par
(see medical and dental expenses). \par
\par
Child and dependent care U.S. reporting: Under U.S. tax rules, the DCTC allows \par
tax credit (DCTC) a portion of the child and dependent care expenses \par
for the taxpayer to obtain gainful employment, as a \par
nonrefundable tax credit. A child must be under the \par
age of 13 to qualify. The credit is computed on the \par
basis of maximum allowable related expenses of $2,400 \par
for one child, or $4,800 for two or more children. \par
Then, depending on the AGI of the taxpayer, a credit \par
is computed on a sliding scale from 20 percent to 30 \par
percent of the allowable expenses. \par
\par
Puerto Rico reporting: Puerto Rico allows a child- \par
care, but not dependent-care, itemized deduction of \par
$400 for one child and $800 for two children. The \par
expenses must be for work or a profitable activity. \par
The child must not be over 14 years of age to \par
qualify. The Puerto Rican return lists the expenses, \par
but up to the limitation amount. \par
\par
Conversion to the U.S. return: Because Puerto Rican \par
taxpayers that do not itemize cannot claim the child- \par
care deduction and because the expense limits are low \par
in comparison to the United States, simulating the \par
credit on the basis of the information reported on \par
the Puerto Rican return would significantly \par
understate the potential use of the credit. Because \par
the DCTC could be an important feature of the federal \par
income tax system extended to Puerto Rico, we imputed \par
the potential value of the credit on the basis of \par
available 1991 IRS Statistics of Income data (SOI). \par
\par
From the SOI data, we identified the dollar value of \par
the credit claimed by all taxpayers categorized by \par
the number of dependent children reported and by AGI \par
class. We then calculated the average credit claimed \par
for each number of dependents in each AGI class. This \par
average credit was given to each Puerto Rican \par
taxpayer with the same number of dependents in the \par
same AGI group. \par
\par
Credit for the elderly U.S. reporting: U.S. rules allow the credit for \par
taxpayers who are 65 or older or who have a permanent \par
and total disability. The amount of the credit \par
depends on the taxpayer's filing status, age, and \par
level of pension, disability, or annuity income. \par
\par
Puerto Rico reporting: There is no similar credit in \par
Puerto Rico. \par
\par
Conversion to the U.S. return: We were not able to \par
calculate the credit because the necessary data were \par
not available. \par
\par
EITC U.S. reporting: See table II.2. \par
\par
Puerto Rico reporting: Puerto Rico does not have a \par
similar credit. \par
\par
Conversion to the U.S. return: EITC was computed \par
using information reported on the Puerto Rican tax \par
return. \par
\par
Foreign tax credit U.S. reporting: The United States allows a credit or \par
a deduction for any income, war profits, and excess \par
profits taxes paid or accrued during the taxable year \par
to any foreign country or to any possession of the \par
United States. \par
\par
Puerto Rico reporting: Puerto Rico allows a credit \par
for the amount of income, war profits, and excess \par
profits taxes imposed by the United States, \par
possessions of the United States, and foreign \par
countries. \par
\par
Conversion to the U.S. return: Officials from the \par
Department of the Treasury of Puerto Rico told us \par
that almost all of the foreign tax credits claimed by \par
Puerto Rican residents (about $4.4 million) on Puerto \par
Rican individual income tax returns was from income \par
taxes paid to the United States. (Puerto Rican \par
residents with income from sources outside Puerto \par
Rico are subject to federal income taxes.) Because \par
these amounts would be the equivalent of federal tax \par
paid, they would not be deductible on a federal \par
income tax return. \par
\par
Miscellaneous credits U.S. reporting: The United States has several \par
targeted credits such as the general business credit, \par
jobs credit, alcohol fuels credit, etc. \par
\par
Puerto Rico reporting: Data were not available from \par
the Puerto Rican return to calculate any of these \par
credits. \par
\par
Conversion to the U.S. return: These credits were not \par
included in our simulation. \par
\par
Alternative minimum tax U.S. reporting: AMT was developed to ensure that \par
(AMT) high-income taxpayers who make extensive use of \par
certain tax deductions and exemptions pay a minimum \par
amount of tax. AMT is computed by adding back certain \par
tax preference items, such as certain itemized \par
deductions, investment interest, depletion, and \par
certain tax-exempt interest to taxable income. \par
Certain tax preference items may have to be \par
recomputed under special AMT rules before they are \par
added back. After deducting an exemption amount, a \par
tentative AMT amount is computed by multiplying the \par
remaining income by either a 26-percent or 28- \par
percent tax rate. The difference between the \par
tentative AMT and the regular tax is the amount of \par
AMT actually owed. The tentative AMT is then added to \par
the regular income tax if it is greater than the \par
regular tax. \par
\par
Puerto Rico reporting: Puerto Rico has an alternate \par
basic tax that will be assessed if it is greater than \par
the regular tax. The tax is computed by subtracting \par
ordinary and necessary expenses and capital gains \par
from AGI. Then an additional tax of 10 percent to 20 \par
percent is calculated on alternative AGIs of over \par
$75,000. The regular tax or the alternate basic tax \par
is paid, whichever is larger. \par
\par
Conversion to the U.S. return: Since computing the \par
U.S. AMT requires the application of complex rules \par
for several income and deduction items, it requires a \par
substantial amount of data to be accurately applied. \par
Some of the data needed to apply these rules is not \par
available on the Puerto Rican return, such as certain \par
types of tax-exempt interest income. Accordingly, the \par
AMT tax was not computed for our simulation. \par
-------------------------------------------------------------------------------- \par
Source: GAO analysis of U.S. and Puerto Rican income tax laws. \par
\par
\par
EITC RULES \par
-------------------------------------------------------- Appendix II:1 \par
\par
EITC is a refundable tax credit available to low-income working \par
taxpayers. The credit was established in 1975 to achieve two \par
long-term objectives: (1) to offset the impact of Social Security \par
taxes on low-income workers with families and (2) to encourage \par
low-income individuals with families to seek employment rather than \par
welfare. \par
\par
EITC amounts generally are determined according to the amount of the \par
taxpayers' earned income and whether they have qualifying children \par
who meet certain age, relationship, and residency tests, which are \par
described in table II.2. The credit gradually phases in, plateaus at \par
a maximum amount, and then phases out until it reaches zero. If the \par
taxpayers' earned income or AGI exceeds the maximum qualifying income \par
level, they are not eligible for the credit. When the taxpayers' AGI \par
falls in the credit's phase-out range, they receive the lesser amount \par
resulting from using either their earned income or AGI in calculating \par
the credit. \par
\par
When changes made in the 1993 Omnibus Budget Reconciliation Act are \par
fully in effect in tax year 1996, taxpayers with two children and \par
whose earned income ranges from $1 to $8,890 are to receive $0.40 for \par
each dollar earned. Taxpayers with two children and whose incomes \par
range from $8,890 to $11,610 are to receive the maximum credit amount \par
of $3,556. The credit will gradually phase out, declining at a rate \par
of about $0.21 for each additional dollar of income, for taxpayers \par
with two children and incomes ranging from $11,610 to $28,495. \par
Taxpayers with one qualifying child or no children receive EITC at a \par
lower rate, with different plateau amounts and phase-out rates. \par
\par
Beginning in 1996, taxpayers will be disqualified for EITC if their \par
unearned income exceeds $2,350. Unearned income is defined as the \par
combined amount of taxable and tax-exempt interest income, dividends, \par
and the net income from rents and royalties not received from a trade \par
or business. \par
\par
The following table summarizes the principal EITC qualification rules \par
and details the extent to which the Puerto Rican tax return provides \par
data for determining eligibility for the credit. \par
\par
\par
\par
Table II.2 \par
\par
Analysis of the Principal EITC \par
Requirements For Tax Year 1996 \par
\par
EITC requirements Issues/comments on conversion to U.S. return \par
------------------------------ -- -------------------------------------------- \par
Eligible individuals \par
-------------------------------------------------------------------------------- \par
(1) Must have a qualifying See qualifying child definition below. \par
child; must have had earned \par
income; must not be a \par
qualifying child of another \par
person; if married persons, \par
must file jointly or qualify \par
for head-of-household status; \par
or \par
(2) Must have been a resident Puerto Rico reporting: The Puerto Rican tax \par
of the United States for more return reports residency in Puerto Rico at \par
than one-half of the tax the end of the tax year, not residency for \par
year; must have had earned more than one-half of the tax year. Though \par
income; must not be a age information is reported on the Puerto \par
dependent of another person; Rican return, this information was not made \par
must not be a qualifying available for our simulation. The return \par
child of another person; if does not ask whether the taxpayer is taken \par
married persons, must file as a dependent on another taxpayer's \par
jointly or qualify for head- return. \par
of-household status; must be \par
at least 25 but not 65 years EITC estimate: We assumed that the taxpayer \par
of age at the close of the had been a resident for more than one-half \par
tax year; and of the tax year, was not taken as a \par
dependent on another taxpayer's return, and \par
met the age requirements. \par
(3) Must not have disqualified Puerto Rico reporting: Specific income items \par
income of more than $2,350. can be identified on the Puerto Rican tax \par
Disqualified income includes return. However, the Puerto Rican return \par
interest, dividends, and net includes royalties as part of miscellaneous \par
income from rents and income. \par
royalties not received from a \par
trade or business. EITC estimate: Since royalties and net \par
rental income derived from nonbusiness or \par
trade activity can not be specifically \par
identified, they were not included in our \par
simulation of the U.S. tax return. \par
\par
Qualifying child \par
-------------------------------------------------------------------------------- \par
(1) Relationship test: must be Puerto Rico reporting: The Puerto Rican \par
son, daughter, adopted child, return identifies some relationships \par
or descendant of the son, between the taxpayer and a dependent. The \par
daughter, or adopted child; identified relationships include child, \par
stepson or stepdaughter; or parent, in-laws, and "closely related." \par
foster child. Married child However, the return does not identify the \par
is not eligible unless he or specific relationships needed to comply \par
she is a dependent. with the EITC requirements. \par
\par
Qualifying child definition: We only \par
included as qualifying children those \par
dependents identified on the Puerto Rican \par
return as "children." We were unable to \par
include other eligible dependents in our \par
simulation, such as "stepson or \par
stepdaughter," because they are identified \par
on the Puerto Rican return as "closely \par
related," which includes other ineligible \par
dependents. \par
(2) Age Test: must be under Puerto Rico reporting: Age and dependent \par
age 19, a full-time student status information is on the Puerto Rican \par
under age 24, or permanently tax return. Disabled persons also qualify \par
and totally disabled. as dependents. \par
\par
Qualifying child definition: Dependents \par
listed on the Puerto Rican return as a \par
nonuniversity student or university student \par
and who met the age and relationship tests \par
were counted as qualifying children. In the \par
special case of head-of-household filers, \par
when one dependent is selected as \par
qualifying the filer for head-of-household \par
status and included in a special dependent \par
section, we assumed this dependent to have \par
met the qualifying child requirements (age \par
and relationship). \par
(3) Residence test: child's Puerto Rico reporting: Under Puerto Rican \par
principal place of residence tax rules, a child's residence does not \par
is with the taxpayer in the have to be with the taxpayer to qualify as \par
United States for more than a dependent. Also, the Puerto Rican return \par
one-half year (the entire requests information on residency in Puerto \par
year, in the case of an Rico at the end of the tax year. It does \par
eligible foster child). There not request information about whether more \par
are special rules for members than one-half of the year was spent in the \par
of the U.S. armed services. United States or Puerto Rico. \par
\par
Qualifying child definition: We assumed \par
that the child had been a resident for more \par
than one-half of the tax year. \par
\par
Earned income \par
-------------------------------------------------------------------------------- \par
Includes wages, salaries, tips Puerto Rico reporting: Many earned income \par
and self-employment income, items can be identified on the Puerto Rican \par
and certain nontaxable earned tax returns, including wages, salaries, \par
income items such as tips, and self-employment income. These \par
voluntary salary deferrals. self-employment income items may vary from \par
those which would have been reported on \par
U.S. returns because of differences in tax \par
accounting rules, such as those related to \par
depreciation of assets. \par
\par
Earned income definition: We used data \par
elements for wage, salaries, and tips as \par
shown on the Puerto Rican return. Items \par
included in our approximation to U.S. self- \par
employment income were (1) profits or \par
losses from special partnerships, (2) \par
profits or losses from commissions, (3) \par
profits or losses from agriculture, (4) \par
profits or losses from professions, and (5) \par
profits or losses from rental businesses. \par
-------------------------------------------------------------------------------- \par
Source: GAO analysis of EITC's principal tax requirements. \par
\par
\par
COMPARISON OF U.S. AND PUERTO \par
RICO'S TAXATION OF CORPORATE AND \par
PARTNERSHIP INCOME \par
========================================================= Appendix III \par
\par
\par
CORPORATE TAXATION \par
------------------------------------------------------- Appendix III:1 \par
\par
Puerto Rican tax rules for corporations have many similarities to and \par
some differences from U.S. tax rules. Both the United States and \par
Puerto Rico require corporations to report their worldwide income. \par
Also, both Puerto Rico and the United States allow the deduction of \par
"ordinary and necessary" business expenses and have similar rules on \par
accounting for inventories and cost of goods sold. Prior to June 30, \par
1995, Puerto Rico allowed, under certain circumstances, businesses to \par
expense up to 100 percent of the basis of business assets in the year \par
of acquisition and thereafter. This provision was repealed in Puerto \par
Rico's Tax Reform Act of 1994 for assets acquired after June 30, \par
1995. \par
\par
Puerto Rico has generally higher marginal corporate tax rates than \par
does the United States. In 1995, corporate taxes in the United \par
States started at 15 percent for incomes of up to $50,000, with a \par
maximum corporate tax rate of 35 percent.\\1 In 1992, Puerto Rico's \par
regular corporation tax rate started at 22 percent. Also, a sliding \par
scale surtax was added to the regular tax, starting at a marginal \par
rate of 6 percent for incomes up to $75,000 with an allowance of a \par
special credit. The maximum surtax marginal rate was 20 percent for \par
incomes over $275,000. Puerto Rico also has an alternative corporate \par
capital gains tax rate of 25 percent and an alternative dividend rate \par
of 20 percent. The Puerto Rico Tax Reform Act of 1994 lowered the \par
regular corporate tax rate to 20 percent, the maximum surtax rate to \par
19 percent, and the alternative dividend rate to 10 percent. \par
\par
Both the United States and Puerto Rico offer corporations special tax \par
incentives to meet a variety of economic goals. In the United States \par
these incentives can be either additional deductions from income or \par
tax credits. Some examples of these incentives include accelerated \par
depreciation of buildings, credits for low-income housing, expensing \par
of research and experimentation expenditures, or the possessions tax \par
credit. \par
\par
Puerto Rico's tax code also includes various deductions and tax \par
credits as incentives. However, since 1947, Puerto Rico has offered \par
a tax incentive program to encourage the establishment and growth of \par
manufacturing and certain other businesses. Most recently, the \par
Puerto Rico Industrial Incentive Act of 1987 provided several tax \par
reductions to industrial units that, for example, manufacture \par
products that had not previously been made in Puerto Rico, produce \par
products designated for export, develop specific types of real \par
estate, or produce energy from recycling or renewable sources. In \par
general, these businesses are exempted from taxation on 90 percent of \par
the net income derived from these sources; and the same percentage \par
for eligible interest and dividends; currency exchange; and patents, \par
royalties, and other rights. The act also includes a package of \par
municipal, personal property, and real property tax reductions. \par
\par
The rate reductions are not permanent. The duration of the rate \par
reductions depends on the location of the exempt business and varies \par
from 10 to 25 years. However, the exempted businesses are allowed \par
the option of selecting the specific years they will be exempt from \par
taxation under the Industrial Development Act. \par
\par
According to statistics provided by the Commonwealth, in 1993, 1,111 \par
corporations were qualified under the Industrial Tax Exemption laws, \par
with about $10.7 billion of exempted income. \par
\par
\par
-------------------- \par
\\1 A corporation with taxable income in excess of $100,000 is \par
required to increase its tax liability by the lesser of 5 percent of \par
the excess or $11,750. A corporation with taxable income in excess \par
of $15 million must increase its tax liability by the lesser of 3 \par
percent of the excess or $100,000. \par
\par
\par
POSSESSIONS TAX CREDIT \par
------------------------------------------------------- Appendix III:2 \par
\par
One U.S. tax policy significantly affecting Puerto Rico is the \par
possessions tax credit defined in section 936 of the federal Internal \par
Revenue Code (IRC). Under this section of the IRC, a portion of \par
income derived from operations of qualified subsidiaries of U.S. \par
corporations in U.S. possessions is effectively exempted from U.S. \par
income tax. \par
\par
Firms are qualified for the credit if, over the 3-year period \par
preceding the close of a taxable year, 80 percent or more of their \par
income was derived from sources within a possession, and 75 percent \par
or more of their income was derived from the active conduct of a \par
trade or business within a possession. \par
\par
The 1993 Budget Reconciliation Act limited the possessions tax \par
credit.\\2 For tax years beginning after 1993, taxpayers are to \par
calculate the credit as under prior law, but the credit would be \par
capped under one of two alternative options selected by the taxpayer: \par
\par
-- The "percentage limitation" option provides for a decreasing \par
credit equal to a decreasing percentage of the amount computed \par
under prior law. The percentages are set by law at 60 percent \par
for 1994, 55 percent for 1995, 50 percent for 1996, and 45 \par
percent for 1997. The percentage will be 40 percent for 1998 \par
and thereafter. \par
\par
-- The "economic activity limitation" option provides a cap on the \par
credit equal to the sum of three factors: \par
\par
-- The first factor is 60 percent of the firm's wages plus \par
allocable employee fringe benefits paid in the possession, with \par
wages limited for each employee to 85 percent of the maximum \par
wage base under the old age survivor and disability insurance \par
portion of Social Security. \par
\par
-- The second factor is a specific percentage of the firm's \par
depreciation deductions for qualified tangible property for each \par
taxable year. The type of property defines the applicable \par
percentage, with factors ranging from 15 percent for property \par
with a relatively short recovery period to 65 percent for assets \par
with a long recovery period. \par
\par
-- The third factor, which applies only to firms that do not use \par
the 50-percent profit-split method of income allocation\\3 is a \par
portion of the income taxes paid to the possession government. \par
Included taxes, however, cannot exceed a 9-percent effective tax \par
rate. \par
\par
\par
-------------------- \par
\\2 Omnibus Budget Reconciliation Act of 1993, Pub.L. No. 103-66, \par
S13227, 107 Stat. 312, 489 (1993). \par
\par
\\3 This method generally permits allocation to the possession \par
corporation of 50 percent of the affiliated group of U.S. \par
corporations' combined taxable income derived from sales of products \par
that are manufactured in a possession. \par
\par
\par
PARTNERSHIP TAXATION \par
------------------------------------------------------- Appendix III:3 \par
\par
U.S. and Puerto Rico's tax laws for partnerships have several \par
significant differences. With a few exceptions, U.S. partnerships \par
are not taxable entities. Distributions of partnership profits are \par
included on the partner's individual income tax return and are taxed \par
at personal income tax rates. \par
\par
In contrast, Puerto Rico taxes regular partnerships on their net \par
income at corporate tax rates and also requires partners to include \par
distributed partnership profits as taxable income on their individual \par
income tax returns. \par
\par
"Special partnerships" in Puerto Rico are not taxed at the entity \par
level. Instead, as is the case with U.S. partnerships, partners \par
include on their individual income tax returns their distributable \par
shares of partnership net income. To qualify as a special \par
partnership, 70 percent of the partnership's gross income must come \par
from Puerto Rican sources. Further, not less than 70 percent of such \par
income must be generated from one of several activities including \par
construction, land development, or manufacturing when it generates \par
substantial employment. \par
\par
\par
COMBINED INDIVIDUAL INCOME TAXES: \par
PUERTO RICO, THE 50 STATES, AND \par
THE DISTRICT OF COLUMBIA \par
========================================================== Appendix IV \par
\par
The following tables compare the actual federal, state, local, and \par
combined individual income taxes of the 50 states, the District of \par
Columbia, and Puerto Rico. The income tax is measured in per-capita \par
terms (table IV.1) and as percentage of total personal income (table \par
IV.2.) In addition, table IV.3 shows the distribution of general \par
revenue sources for Puerto Rico, the 50 States, and the District of \par
Columbia. \par
\par
\par
\par
Table IV.1 \par
\par
Actual Federal, State, and Local \par
Individual Income Tax Per Capita, 1992 \par
\par
Combined \par
federal, \par
State and state, and \par
Federal local income local income \par
Puerto Rico/fifty states/D.C. income tax tax tax \par
------------------------------------ ------------ ------------ -------------- \par
================================================================================ \par
Puerto Rico $1 $341 $342 \par
Mississippi 979 168 1,147 \par
Louisiana 1,315 203 1,518 \par
West Virginia 1,203 339 1,542 \par
New Mexico 1,264 281 1,545 \par
South Dakota 1,546 N.T. 1,546 \par
Arkansas 1,213 355 1,568 \par
North Dakota 1,480 189 1,669 \par
Tennessee 1,669 19 1,688 \par
South Carolina 1,311 392 1,703 \par
Alabama 1,391 312 1,703 \par
Oklahoma 1,363 380 1,743 \par
Montana 1,368 391 1,759 \par
Texas 1,781 N.T. 1,781 \par
Utah 1,354 431 1,785 \par
Arizona 1,532 324 1,856 \par
Wyoming 1,880 N.T. 1,880 \par
Kentucky 1,358 547 1,905 \par
Maine 1,446 479 1,925 \par
Idaho 1,430 502 1,932 \par
Florida 1,997 N.T. 1,997 \par
Nebraska 1,639 408 2,047 \par
Iowa 1,569 505 2,074 \par
North Carolina 1,558 524 2,082 \par
Missouri 1,692 397 2,089 \par
Vermont 1,623 475 2,098 \par
Kansas 1,778 332 2,110 \par
Georgia 1,680 455 2,135 \par
Indiana 1,735 451 2,186 \par
Michigan 1,856 385 2,241 \par
New Hampshire 2,235 31 2,266 \par
Washington 2,287 N.T. 2,287 \par
Rhode Island 1,846 478 2,324 \par
Ohio 1,753 581 2,334 \par
Wisconsin 1,798 629 2,427 \par
Oregon 1,688 747 2,435 \par
Pennsylvania 1,909 545 2,454 \par
California 1,957 551 2,508 \par
Alaska 2,534 N.T. 2,534 \par
Nevada 2,536 N.T. 2,536 \par
Colorado 2,083 465 2,548 \par
Virginia 2,039 519 2,558 \par
Illinois 2,256 395 2,651 \par
Minnesota 2,019 671 2,690 \par
Delaware 2,129 759 2,888 \par
Hawaii 2,111 785 2,896 \par
Maryland 2,276 873 3,149 \par
Massachusetts 2,404 891 3,295 \par
New Jersey 2,816 525 3,341 \par
New York 2,341 1,005 3,346 \par
District of Columbia 2,587 1,073 3,660 \par
Connecticut 3,288 569 3,857 \par
-------------------------------------------------------------------------------- \par
N.T. = No Tax \par
\par
Note: Puerto Rico's federal income tax per-capita amount is based on \par
the foreign income tax credit (about $4.4 million) claimed on the \par
Puerto Rican tax returns, which is almost all for federal taxes paid \par
to the United States (see app. II, foreign tax credit). However, if \par
residents of Puerto Rico had been subject to the federal income tax \par
in the same manner as residents of the states were, we estimate that \par
the federal individual income tax per-capita in Puerto Rico would \par
have been about $14 in 1992, and the combined federal and Puerto \par
Rican individual income tax per-capita would have been about $355 in \par
1992. \par
\par
Sources: Significant Features to Fiscal Federalism, Vol. 2, \par
Advisory Commission on Intergovernmental Relations, 1994; Statistics \par
of Income Bulletin, IRS, Spring 1994; Informe Econ¢mico al \par
Gobernador, Puerto Rico Planning Board, 1994; and GAO computations \par
using Puerto Rico's taxpayer data provided by the Department of the \par
Treasury of Puerto Rico. \par
\par
\par
\par
Table IV.2 \par
\par
Actual Federal, State, and Local \par
Individual Income Tax as a Percentage of \par
Personal Income, 1992 \par
\par
Combined \par
federal, \par
State and state, and \par
Federal local income local income \par
Puerto Rico/fifty states/D.C. income tax tax tax \par
------------------------------------ ------------ ------------ -------------- \par
================================================================================ \par
Puerto Rico 0.0% 5.3% 5.3% \par
Mississippi 7.0 1.2 8.2 \par
South Dakota 9.0 N.T. 9.0 \par
Tennessee 9.4 0.1 9.5 \par
Louisiana 8.3 1.3 9.6 \par
Texas 9.7 N.T. 9.7 \par
North Dakota 8.7 1.1 9.8 \par
West Virginia 7.7 2.2 9.9 \par
New Mexico 8.2 1.8 10.0 \par
Arkansas 7.8 2.3 10.1 \par
Wyoming 10.1 N.T. 10.1 \par
Florida 10.1 N.T. 10.1 \par
New Hampshire 10.2 0.1 10.3 \par
Alabama 8.4 1.9 10.3 \par
South Carolina 8.1 2.4 10.5 \par
Maine 8.0 2.6 10.6 \par
Oklahoma 8.3 2.3 10.6 \par
Arizona 8.8 1.9 10.7 \par
Washington 10.7 N.T. 10.7 \par
Nebraska 8.6 2.1 10.7 \par
Montana 8.4 2.4 10.8 \par
Kansas 9.2 1.7 10.9 \par
Missouri 8.9 2.1 11.0 \par
Vermont 8.6 2.5 11.1 \par
Iowa 8.6 2.8 11.4 \par
Michigan 9.5 2.0 11.5 \par
Alaska 11.5 N.T. 11.5 \par
Utah 8.7 2.8 11.5 \par
Rhode Island 9.1 2.4 11.5 \par
Kentucky 8.2 3.3 11.5 \par
Georgia 9.1 2.5 11.6 \par
Idaho 8.6 3.0 11.6 \par
North Carolina 8.7 2.9 11.6 \par
California 9.2 2.6 11.8 \par
Nevada 11.7 N.T. 11.7 \par
Pennsylvania 9.2 2.6 11.8 \par
Indiana 9.4 2.5 11.9 \par
Illinois 10.4 1.8 12.2 \par
Virginia 9.8 2.5 12.3 \par
Ohio 9.2 3.1 12.3 \par
Colorado 10.1 2.3 12.4 \par
Wisconsin 9.4 3.3 12.7 \par
New Jersey 10.8 2.0 12.8 \par
Hawaii 9.5 3.5 13.0 \par
District of Columbia 9.3 3.8 13.1 \par
Oregon 9.1 4.0 13.1 \par
Minnesota 9.8 3.3 13.1 \par
Maryland 9.8 3.8 13.6 \par
New York 9.7 4.2 13.9 \par
Massachusetts 10.2 3.8 14.0 \par
Delaware 10.3 3.7 14.0 \par
Connecticut 12.1 2.1 14.2 \par
-------------------------------------------------------------------------------- \par
N.T. = No Tax \par
\par
Note: Puerto Rico's federal income tax as a percentage of personal \par
income is based on the foreign income tax credit (about $4.4 million) \par
claimed on the Puerto Rican tax returns, which is almost all for \par
federal taxes paid to the United States (see app. II, foreign tax \par
credit). However, if residents of Puerto Rico had been subject to \par
the federal income tax in the same manner as residents of the states \par
were, we estimate that the federal individual income tax as a \par
percentage of personal income in Puerto Rico would have been about \par
0.2 percent in 1992, and the combined federal and Puerto Rican \par
individual income tax as a percentage of personal income would have \par
been about 5.5 percent in 1992. \par
\par
Sources: Significant Features to Fiscal Federalism, Vol. 2, \par
Advisory Commission on Intergovernmental Relations, 1994; Statistics \par
of Income Bulletin, IRS, Spring 1994; Informe Econ¢mico al \par
Gobernador, Puerto Rico Planning Board, 1994; and GAO computations \par
using Puerto Rico's taxpayer data provided by the Department of the \par
Treasury of Puerto Rico. \par
\par
\par
\par
Table IV.3 \par
\par
Puerto Rico, State, and District of \par
Columbia General Revenue Sources, \par
Percentage Distribution, Fiscal Year \par
1992 \par
\par
\par
\par
Transfer \par
from Total revenues \par
Puerto Rico/fifty federal Individual Corporatio Nontax from own \par
states/D.C. government income n income Property General sales Other Total taxes revenues sources \par
---------------------- ---------- ---------- ---------- -------------- -------------- ------------ ------------ ------------- -------------- \par
Alabama 22.8% 10.1% 1.3% 5.6% 14.0 % 15.3 % 46.3 % 30.9 % 77.2 % \par
Alaska 12.6 N.T. 3.0 9.4 1.1 20.1 33.6 53.8 87.4 \par
Arizona 16.8 9.7 1.6 20.1 19.8 9.1 60.4 22.8 83.2 \par
Arkansas 25.0 12.3 1.8 9.1 17.8 11.7 52.7 22.3 75.0 \par
California 18.9 13.3 3.5 16.1 14.6 8.7 56.3 24.7 81.1 \par
Colorado 16.3 12.6 1.0 18.3 14.6 8.4 55.0 28.7 83.7 \par
Connecticut 16.4 12.4 3.9 26.1 13.9 10.4 66.7 16.8 83.6 \par
Delaware 14.5 17.4 4.3 7.6 N.T. 24.4 53.6 31.9 85.5 \par
District of Columbia 37.7 13.3 1.9 19.2 9.4 7.3 51.1 11.2 62.3 \par
Florida 13.8 N.T. 1.5 21.6 18.5 14.7 56.4 29.8 86.2 \par
Georgia 19.0 13.8 1.7 16.4 15.9 7.6 55.3 25.8 81.0 \par
Hawaii 16.6 16.0 1.2 9.8 22.8 10.0 59.9 23.6 83.4 \par
Idaho 19.4 15.6 2.0 13.9 12.8 11.0 55.2 25.3 80.6 \par
Illinois 16.5 11.2 2.4 24.2 13.4 11.5 62.7 20.8 83.5 \par
Indiana 18.0 13.8 2.1 17.4 15.1 6.4 54.8 27.1 82.0 \par
Iowa 17.1 14.0 1.9 19.7 10.4 10.2 56.1 26.8 82.9 \par
Kansas 16.7 9.8 2.3 21.6 13.9 10.6 58.2 25.1 83.3 \par
Kentucky 22.8 16.8 2.2 9.1 11.2 14.6 53.9 23.3 77.2 \par
Louisiana 25.8 5.6 1.5 7.6 17.5 13.2 45.4 28.8 74.2 \par
Maine 21.3 12.6 1.5 21.7 12.2 8.7 56.7 22.0 78.7 \par
Maryland 16.3 23.4 1.2 17.5 8.6 11.8 62.5 21.2 83.7 \par
Massachusetts 18.9 20.8 2.9 20.5 7.7 7.7 59.6 21.5 81.1 \par
Michigan 17.8 10.1 4.8 25.0 10.2 7.0 57.1 25.1 82.2 \par
Minnesota 15.9 15.3 2.2 17.7 11.3 10.1 56.5 27.5 84.1 \par
Mississippi 28.2 5.7 1.9 12.1 15.3 9.8 44.7 27.1 71.8 \par
Missouri 20.7 13.3 1.5 13.5 16.9 10.8 56.0 23.3 79.3 \par
Montana 25.1 10.4 1.9 18.9 N.T. 16.1 47.3 27.6 74.9 \par
Nebraska 17.1 11.3 1.8 20.2 13.3 9.4 55.9 27.0 82.9 \par
Nevada 15.1 N.T. N.T. 13.8 19.0 24.5 57.2 27.7 84.9 \par
New Hampshire 19.6 0.9 2.4 37.5 N.T. 17.7 58.4 22.0 80.4 \par
New Jersey 14.8 11.3 2.3 27.2 11.1 10.9 62.8 22.4 85.2 \par
New Mexico 20.6 7.4 1.3 5.7 19.8 12.8 47.0 32.4 79.4 \par
New York 18.6 17.6 4.3 20.7 10.7 8.7 62.0 19.4 81.4 \par
North Carolina 19.0 16.5 3.0 11.8 13.7 12.2 57.3 23.7 81.0 \par
North Dakota 24.6 4.9 1.6 13.8 11.1 14.2 45.6 29.7 75.4 \par
Ohio 19.0 17.2 1.7 16.8 11.7 9.8 57.2 23.8 81.0 \par
Oklahoma 19.1 12.3 1.5 7.9 15.8 15.4 52.9 28.0 80.9 \par
Oregon 20.1 18.5 1.3 21.4 N.T. 10.7 51.9 28.0 79.9 \par
Pennsylvania 19.3 14.3 3.6 16.0 9.9 13.7 57.6 23.2 80.7 \par
===================================================================================================================================================== \par
Puerto Rico 29..3 19.3 18.0 5.8 N.T. 18.0 61.2 9.5 70.7 \par
Rhode Island 25.4 12.0 1.2 23.7 9.8 9.7 56.3 18.3 74.6 \par
South Carolina 22.2 12.4 1.2 14.3 12.9 9.3 50.1 27.7 77.8 \par
South Dakota 26.1 N.T. 1.5 18.9 16.5 11.4 48.2 25.7 73.9 \par
Tennessee 24.3 0.6 1.9 11.5 21.8 12.9 48.7 27.0 75.7 \par
Texas 16.5 N.T. N.T. 22.8 18.5 16.6 57.9 25.6 83.5 \par
Utah 20.0 13.1 1.3 14.0 16.4 6.9 51.8 28.3 80.0 \par
Vermont 22.1 11.6 1.3 23.2 6.7 12.7 55.5 22.4 77.9 \par
Virginia 13.9 15.6 1.3 19.5 9.7 13.5 59.7 26.4 86.1 \par
Washington 16.5 N.T. N.T. 17.3 28.5 13.3 59.1 24.4 83.5 \par
West Virginia 25.9 10.3 3.1 8.9 13.4 14.8 50.5 23.6 74.1 \par
Wisconsin 16.8 16.4 2.3 21.5 11.6 9.0 60.7 22.5 83.2 \par
Wyoming 26.7 N.T. N.T. 18.2 9.3 15.4 42.9 30.4 73.3 \par
----------------------------------------------------------------------------------------------------------------------------------------------------- \par
N.T. = No Tax \par
\par
Note: Totals may not add due to rounding. \par
\par
Sources: Significant Features to Fiscal Federalism, Vol. 2, \par
Advisory Commission on Intergovernmental Relations, 1994; and Informe \par
Econ¢mico al Gobernador, Puerto Rico Planning Board, 1994. \par
\par
\par
\par
\par
(See figure in printed edition.)Appendix V \par
COMMENTS FROM THE SECRETARY OF THE \par
TREASURY OF PUERTO RICO \par
========================================================== Appendix IV \par
\par
\par
\par
(See figure in printed edition.) \par
\par
\par
MAJOR CONTRIBUTORS TO THIS REPORT \par
========================================================== Appendix VI \par
\par
GENERAL GOVERNMENT DIVISION, \par
WASHINGTON, D.C. \par
\par
James Wozny, Assistant Director, Tax Policy and \par
Administration Issues \par
Leon H. Green, Senior Evaluator \par
Nilsa I. P‚rez, Evaluator-in-Charge \par
MacDonald R. Phillips, Economist \par
Charles C. Tuck, Senior Economist \par
\par
OFFICE OF THE GENERAL COUNSEL, \par
WASHINGTON, D.C. \par
\par
Rachel DeMarcus, Assistant General Counsel \par
\par
OFFICE OF CHIEF ECONOMIST, \par
WASHINGTON, D.C. \par
\par
Daniel E. Coates, Senior Economist \par
\par
\par
*** End of document. *** \par \pard\plain\f3\fs22 <\plain\f3\fs22\cf1\b p\plain\f3\fs22 > \par <\plain\f3\fs22\cf1\b HR\plain\f3\fs22 > \par Last modified: July 11, 1997 \par <\plain\f3\fs22\cf1\b ADDRESS\plain\f3\fs22 > \par <\plain\f3\fs22\cf1\b P\plain\f3\fs22 >Send e-mail and suggestions to <\plain\f3\fs22\cf1\b A \plain\f3\fs22 HREF="mailto: \par jboulet@englishfirst.org">jboulet@englishfirst.org<\plain\f3\fs22\cf1\b /A\plain\f3\fs22 > \par <\plain\f3\fs22\cf1\b p\plain\f3\fs22 >English First, 8001 Forbes Place, Suite 102, Springfield, VA 22151 tel: (703) 321-8818 fax: (703) 321-8408 Internet: http://www.englishfirst.org \par <\plain\f3\fs22\cf1\b /ADDRESS\plain\f3\fs22 > \par \par <\plain\f3\fs22\cf1\b center\plain\f3\fs22 ><\plain\f3\fs22\cf1\b A \plain\f3\fs22 HREF="index.html">Home<\plain\f3\fs22\cf1\b /A\plain\f3\fs22 ><\plain\f3\fs22\cf1\b /center\plain\f3\fs22 > \par \pard\plain\f3\fs22 <\plain\f3\fs22\cf1\b /BODY\plain\f3\fs22 ><\plain\f3\fs22\cf1\b /HTML\plain\f3\fs22 >\plain\f2\fs20 \par \par }