House Democrats Renew Effort Against Puerto Rico Tax Break (1)

Three US House members are renewing a call to end a decade-old program offering substantial tax breaks to wealthy investors who relocate to Puerto Rico, introducing a congressional resolution to “swiftly address” what they called millions in lost revenue.

Rep. Delia C. Ramirez (D-Ill.) will announce the resolution—co-led by New York Democrats Nydia Velázquez and Alexandria Ocasio-Cortez—in Chicago on Thursday to address the impact of Act 22, a controversial tax incentive that attracts affluent individuals to the island by allowing them to avoid federal income tax.

The law is currently the subject of an report by the Government Accountability Office, Congress’s investigative arm, requested by Velázquez and others last year. The GAO told Bloomberg Tax the report is “underway” and expected to come out next spring.

Once established as residents of Puerto Rico, individuals can pay just 4% in income tax to the US territory and pay no taxes on capital gains, dividends, and interest. In exchange, investors must agree to certain obligations, including a commitment to create jobs—though the law sets no minimum requirement—make charitable donations, and purchase a residential property.

“Many members of Congress may not be aware of the crisis of displacement in Puerto Rico or the direct effect of tax evasion on their districts,” Ramirez told Bloomberg Tax ahead of the announcement. The resolution, she said, “builds awareness and coalition in Congress.”

Groups represented at Ramirez’s press conference, including Power 4 Puerto Rico, a national coalition of Puerto Rican diaspora organizations, criticized the tax incentive for benefiting millionaires, naming crypto investor and 2020 US independent presidential candidate Brock Pierce, as well as social media personalities Jake and Logan Paul.

“They are exploiting a federal tax loophole to avoid paying taxes in both the US and Puerto Rico,” said director Erica González Martínez at the press conference.”

IRS Probing

House members led by Velazquez have been pressing the Internal Revenue Service for updates on a campaign it launched in 2021 to go after US taxpayers who may have improperly claimed Puerto Rico tax benefits without meeting the residency requirements. The Senate Finance Committee said earlier this year it was investigating whether the IRS failed to oversee Act 22.

The IRS has reported “dozens of audits” and investigations involving around 100 individuals but did not have an update when asked by Bloomberg Tax.

Marlyn Goyco-García, campaign coordinator at the Center for Popular Democracy—a group advocating for the end of Act 22—expressed concern over the IRS’s lack of urgency and transparency.

“More than three years after the agency initiated its Act 22 enforcement campaign, and over a year since announcing potential indictments of over 100 individuals, no tangible action has been taken. We urge the IRS to fulfill its oversight responsibilities,” García said.

House members asked the GAO last year to assess the impact of Act 22, including potential lost federal income tax, effects on Puerto Rico’s economy, energy, and housing markets, and IRS compliance monitoring. GAO Senior Media Relations Specialist Jessica Baxter noted that, as it is early in the process, no findings can be shared at this time.

A government official defended the program.

Carlos Fontán, incentives director at the Puerto Rico Department of Economic Development and Commerce called the efforts to end Act 22 “based on a narrative and an agenda, not data.”

The House resolution unveiled Thursday suggests the number of stateside residents moving to Puerto Rico has “grown significantly,” with total beneficiaries reaching 5,010 by early 2023.

That figure includes all approved tax agreements, not active beneficiaries, which stood at 2,670 based on 2022 tax returns, Fontán said in an interview.

Act 22 is Puerto Rico’s “third most profitable incentive program,” according to Fontán.

A report by consulting firm Abexus Analytics said Puerto Rico gained $16.9 million in 2022 in donations investors are required to make, consumption taxes, and reduced income taxes, after accounting for the costs. The program cost $184.4 million in 2022 in uncollected interest, dividends, and capital gains taxes.

Fontán attributed the current housing market conditions to a global real estate trend following the pandemic.

“Arguing that 2,670 people are causing a massive displacement of Puerto Ricans is completely unfounded,” he said. “These individuals own approximately 4,800 residential properties in Puerto Rico out of a total of 1.6 million properties on the island, meaning that attributing increases in property costs to Act 22 is irresponsible.”

Local opponents said they will press on to abolish Act 22.

Goyco-García said the power to push for its end “ultimately lies with the Puerto Rican people.”