“El Apagón,” Bad Bunny’s award winning anthem, famously launches the listener into scathing critique of Puerto Rico’s woes. From gentrification to persistent blackouts, the catchy beat obscures a deeper truth about the island’s challenges however. As the lyrics suggest, Puerto Rico is in dire straits economically, socially, and politically. The hundred-mile long island is marred in a seven billion dollar debt from an original seventy-two billion. The latest data from October shows a 5.4% unemployment rate and a population decline of 12% between 2010 and 2020. Its power grid is notoriously outdated, and corruption scandals (not least here and here) have further eroded public trust. Against this backdrop, the government’s bid to reinvent Puerto Rico as a tax haven, initiated in 2012 through Acts 20 and 22, remains controversial.
These measures, which offer lucrative tax breaks to individuals and corporations relocating to the island, aimed to stimulate economic growth, attract investment, and create jobs. More specifically, Act 20 1or the Export Services Act’s passage allowed corporations who exported services from the island to pay the 4% Puerto Rico tax rate for the exported services, receive a 60% reduction on municipal taxes, and enjoy a complete exemption on all earnings and profit dividends. The similarly-minded Act 222, the Individual Investors Act, extended this total exemption on earnings and profit dividends to individuals and added all capital gains to the list as well—as long as the person(s) established residency on the island. Consolidated in 2019 as Act 60, the policies have drawn mixed reactions. While they have increased interest in Puerto Rico, particularly from wealthy mainland Americans, critics argued that their benefits have been overstated. Far from catalyzing an economic transformation, the tax incentives have contributed to rising inequality, limited job creation, and speculative investment. Without significant reform, Puerto Rico risks entrenching its roles as a playground for affluent outsiders while failing to address the needs of its people.
Acts 20 and 22 were originally heralded as catalysts for job creation. The logic was simple: wealthy individuals and companies would stimulate demand for local services and hire Puerto Rican workers. To some extent, this proved correct. By 2021, the incentives had reportedly created 33,740 jobs. Yet these numbers tell only part of the story. The island has experienced a year-on-year decrease in nonfarm employment every year in that period except 2018, 2019, and 2021 per data from the Bureau of Labor Statistics. A simple calculation shows a net loss of roughly 49,000 jobs over that time. It is correct that the island’s 6.7% employment rate in December 2021 was an improvement from the 14.3% it was in December 2012, but the boon promised by the laws was not fully delivered.
Even the Puerto Rican Department of Economic Development—original study’s researchers—admitted that these numbers were smaller than expected. A closer look reveals structural flaws: Act 60 requires businesses to employ a minimum of one full-time Puerto Rican worker, incentivizing companies to do the bare minimum. Loopholes allow business to claim benefits while moving only part of a services operation (though only the island-based part will apply for 4% corporate tax), establishing a residence as offices, and working around with stock selling. As a result, much of the anticipated economic transformation has failed to materialize.
The types of jobs created further underscore the policy’s limitations. Employment growth has been concentrated in sectors like leisure, hospitality, and construction, while high-value fields such as finance and information technology have seen little change. A 2021 study by Pennsylvania State University found even less correlation based on 1990-2018 governmental data, finding no significant change in four major sectors analyzed. This lopsided growth perpetuates Puerto Rico’s dependence on low-wage service industries, offering few opportunities for upward mobility. As former gubernatorial candidate Rafael Bernabe observed, investors “will hire a few gardeners, [and] create jobs for a few more waiters” are essentially creating a “drop in the bucket.” While any job creation is laudable, the combination of Act 60 and growing interest in Puerto Rico as a tourist hub has funneled job growth into specific sectors. If the island does not work to expand other opportunities of growth, it risks furthering systematic unemployment and underemployment.
Mediocre results also crop with island investments. Acts 20 and 22 were intended to spur significant investment in Puerto Rico’s economy. Yet private fixed investment has remained sluggish, contributing just 0.53% of the 4.0% GDP growth in 2021. From 2012 to 2017, investment increased by an average of only 3.2% annually—a figure that pales in comparison to the policy’s lofty ambitions. Part of the problem lies in lax enforcement. By 2020, only 30% of the individuals and business granted tax degrees had fulfilled their investment obligations. Real estate speculation has surged meanwhile, with beneficiaries of Act 60 driving up property prices. The Federal Housing Finance Agency has noted a 8.6% increase in all transactions between the first to second quarters of 2023. However, this “investment” often benefits wealthy outsiders more than local communities. Some of this may well be Puerto Ricans selling to Puerto Ricans, or, more probable, beneficiaries of Act 60 as at least 4,500 individuals and businesses had moved by 2021. Investment in Puerto Rico has ultimately proven varied throughout—not least because, as stated in one incendiary quote, “the profile of the Act 22 beneficiary changed from an executive in a tie to that of a tourist in beach wear.”
To be clear, the collective acts are not without merit. Act 60 companies have imbued more than $210 million into the economy between 2015 and 2019. The increased attention on Puerto Rico has helped draw tourists and entrepreneurs alike. The one 2022 study found that for every 1,000 reservations on Airbnb and similar rentals, 17 employment opportunities and $330,000 in salaries and other forms of income were generated. Nonetheless, corruption, poor oversight, and insufficient regulatory mechanisms have undermined their potential. Both the IRS and Puerto Rican authorities have been criticized for failing to enforce compliance, allowing beneficials to exploit loopholes with little accountability. Members of Congress have called for increased oversight as late as July 2023. Policymakers would do well to consider steps to strengthen the act’s effects. From enforcing stricter job creation requirements, enforcing higher taxes on capital gains, and decoupling property investments property purchases from mandatory investments, action is necessary. Strengthened oversight, both locally and federally, is further essential to ensure that these policies serve Puerto Rico’s long-term interests rather than short-term profits of a privileged minority.
Act 60 is not yet without hope. Perhaps the greatest realization is that Bad Bunny’s declaration “que se vayan ellos” in “Apagón” (that they—the privately-owned, American transmissions company Luma, presumably—leave) will likely never occur. Beyond Luma, the American mainlanders are here to stay and so are the Puerto Ricans. The island stands at a crossroads with the opportunity to transform itself into a truly resilient economy. Yet it will be the role of both sides to come together and steer Puerto Rico true into 21st-century waters.
Featured/Headline Image Caption and Citation: Puerto Rico, taken on Dec 30, 2006 | Image sourced from Wikimedia Commons | CC License, no changes made
- Nanavati, Jay R., and Mariana Gusdorf. “Puerto Rico’s Act 60 Tax Incentive Program Attracting Heightened IRS Scrutiny of Sourcing and Transfer Pricing.” Journal of Tax Practice and Procedure, vol. 25, no. 1, spring 2023, pp. 27+. Gale Academic OneFile, link.gale.com/apps/doc/A747409355/AONE?u=29002&sid=summon&xid=0fcc3693. Accessed 1 Nov. 2023. ↩︎
- Ibid. ↩︎