Executive summary

Puerto Ricans are facing immense displacement amidst policies that support America’s elite with extreme income tax incentives. In a case of modern-day gentrification, the housing market is being overtaken and spiked by foreigners. This brief covers an overview of policies which have shaped the course of the Puerto Rican debt crisis and introduces potential solutions to reduce inequality on the island. 

Overview

In cities like San Juan, the median price for a home listing is $905,000, in January 2024^[1], an abysmal price considering the average income in 2023 was $25,621, according to the United States Census Bureau^[2]. This surge in price is primarily caused by Act 60, an incentive for foreign investment and settlement in the area speared by Governor Luis Fortuno in 2012 to support economic revitalization and reduce the country’s floundering debt^[3]. In the midst of increasing rents and housing listings, Puerto Ricans have no choice but to move away from affected cities and leave their roots behind.  

Pointed Summary

• Investors who are moving to Puerto Rico for reduced income tax rate, to avoid U.S. income tax rates are buying waves of buildings and resell or rent them at higher prices 
• The average, and wealthier than average, local Puerto Rican cannot afford exacerbated prices 
• Lack of affordable housing is leading to mass displacement in cities across Puerto Rico
• Puerto Ricans are struggling to find a home in their price range, some are now victims of homelessness
• This form of gentrification causes the Puerto Rican people to lose their historical land to foreigners  
• Most properties and buildings investors or other beneficiaries of Act 60 have taken ownership of are left vacant. 
• Due to an economic crisis, few opportunities for advancement, high income inequality, and rising property prices, Puerto Ricans are leaving the country

Relevance

Due the tax incentive program, there has been an influx of wealthy investors and beneficiaries, 4,286 since 2012 according to the New York Times,^[4] are moving to Puerto Rico for a reduced 0%-4% income tax rate to escape a 37% federal income tax rate, according to Forbes^[5]. Subsequently, they are buying waves of buildings and property across the island, which they later resell or rent at higher prices the average, and wealthier than average^[6], local Puerto Ricans cannot afford, leading to mass displacement and a loss of education for youth and job security for older individuals. This form of gentrification causes the Puerto Rican people to lose their historical land to foreigners which are re-building cities with little to no regard for giving homage or making space for the native people of the land. Many Puerto Ricans are struggling to find a home in their price range, some now homeless. Additionally, most properties and buildings investors or other beneficiaries of Act 60 have taken ownership of are left vacant^[7]. Although it was a policy aimed at resulting in economic revitalization on the island, the positive impact on the economy is negligible compared to the devastating impacts it has had on the locals, to achieve revitalization other methods must be explored. 

History

In 1940, after an economic decline due to WW2 and military occupation, the Puerto Rican government devised a plan to attract investment in Puerto Rico from mainland America through  a proposal of close-ended funds exempt from the Investment Company Act of 1940, which allowed highly leveraged transactions^[8]. In 1976, Section 936 exempted companies operating in Puerto Rico from paying federal income tax, a move which would begin mass movement and investment from overseas industries and in extreme economic independence amidst privatization on the island^[9]. In 1996, President Bill Clinton  phased out Section 936 over a ten-year period. This loss of foreign investment resulted in a significant economic downturn^[9]. In 2006, a recession dramatically resulted in unprecedented decline in the economy^[10]. The Puerto Rican government responded by creating generous investments into providing for the people, through social funding and programs. In the next few decades, Puerto Rico accumulated a debt of 72 billion dollars^[11]. As a territory, the Puerto Rican government lacked the statehood status that could file them for bankruptcy, absolvancy laws could not apply to Puerto Rico’s situation. In 2012, to incentivize economic revitalization to reduce the territory’s massive debt, Governor Luis Fortuno passed Act 20 and Act 22 to give massive tax breaks to private investors^[12], in 2019, this later became Act 60 in which companies would pay 4% corporate income tax^[13]. To qualify, one needs to have not resided in Puerto Rico in the last 10 years, buy a home, reside in Puerto Rico for ½ a year, and donate to a local non-profit organization^[14]. Act 60 has not been successful in creating an integrated sustainable economic plan. In fact, according to Periodismo Investigativo, Act 60 has created only 40,000 employment opportunities^[15], while the Puerto Rican population now surmounts 3.2 million people, according to the United States Census Bureau^[16], and these jobs are poorly paid, the average income being $19,000, under the federal poverty line^[17]. In 2016, the Obama administration passed PROMESA, which created a management board to create austerity measures to reduce deficits through spending tax cuts and tax increases which hurt locals and public services and advancement opportunities, like public school funding^[18]. After Hurricane Maria, in 2017, Puerto Rico faced another massive economic hit which destroyed infrastructure and damaged bond values^[19]. To investors, Puerto Rico seemed like fair game for investment. However, soon incentives resulted in major displacement of local people and gentrification. A scene of privatization and a real estate game where outsiders are reselling and renting at high prices, Act 60 resulted in the development of luxury housing and tourism development pushing out locals^[20]. Since 2022, Puerto has significantly reduced its debt^[21], however proper economic revitalization and a true economic integration plan is necessary to reduce income inequality, provide a bright future for Puerto Rico, and ensure Puerto Rico does not become an island unaffordable for Puerto Ricans.

1. Current Stances

While displacement and economic inequality has persisted since 1976, upon the passage of Section 936, and increased after 2012 and the passage of Act 60, it exacerbated after Hurricane Maria devastated the island in 2017. When investors took advantage of extremely low real estate prices property costs, amidst the destruction. Recently, the IRS has declared 98% of Puerto Rico an “opportunity zone”^[22]. 

2. Tried Policy

 First created in 1993, the CDBG-DR Gap to Low-Income Housing Tax Credits Program has created an incentive for the development of affordable rental housing, as approved by the Puerto Rico Disaster Recovery Action Plan. Thus far, it has increased the inventory of affordable multi-family homes^[23]. An appeal to review Act 60 through the Government Accountability Office has been issued by adversaries of the policy, such as Alexandria Ocasio-Cortez^[24].

Policy Problem

A. Stakeholders

The growth of privatization, income inequality, and a lack of affordable housing has been driving out and thus affecting Puerto Ricans the most. It has also been promoting the loss of culture and tradition in Puerto Rico. Additionally, the IRS has found around 100 people to have been taking advantage of Act 60 without meeting the minimum requirements for consideration^[25]. The fact that billionaires and millionaires have taken advantage of tax incentive programs should be pressing for the United States Government which is losing out on billions of tax dollars which could have gone towards promoting development and into federal programs and resources in the United States^[26]. 

B. Risks of Indifference

The risk of not addressing the detrimental effects of Act 60, is the rising support for Puerto Rican independence amongst increasing distrust and anger towards the federal United States Government for standing at the sidelines while Puerto Rico has faced inequality, disparity, and displacement in the face of Act 60. The trend of Puerto Rican statehood is on the down-low as Puerto Ricans grow tired. However, many argue whether this is truly an issue moving forward^[27]. 

C. Nonpartisan Reasoning

On the issue, wealthy beneficiaries of Act 60 have created coalitions and groups in support of the policy, hoping to ensure it stays in place for their personal benefit. On the other hand, adversaries of the policy see its detrimental effects on the ability for Puerto Ricans to find an affordable home, and see their public places and land being taken away from them, or rather sold off to “colonizers”^[28]. 

Policy Options

In order to address the detrimental effects of Act 60, an amendment to rid the government of Act 60 is possible in order to address the income inequality and address the influx of wealthy people on the island. However, this could possibly result in a detriment for some local restaurants and businesses that rely on these wealthy individuals, however, because the beneficiaries of Act 60, mostly create direct job opportunities, like chauffeur employment opportunities that are low pay the result may be minimal, according to Luis Valentin, of the Centro de Periodismo Investigativo^[29]. However, the influx of detached luxury tourism development may be significantly impacted by the abolition of Act 60.  

Additionally, policy to accordingly address the primary objective of Act 60, which has often been ignored by those who covet Act 60 is to revitalize the Puerto Rican economy. In order to revitalize the Puerto Rican economy and create significant opportunities for the Puerto Ricans without creating a real estate bust, should be to consider investment into tourism that does not exploit Puerto Rican land and culture, or luxuriously build atop it, rather a model of sustainable cultural and responsible tourism. Similar to tourism development in Costa Rica, and other initiatives in forested areas of the United States Rocky Mountains area which takes advantage of the beauty of the island and the surrounding culture, while incentivising business development with a focus on retaining the traditional flavor of Puerto Rican culture. It will bring attention to the infrastructure needs of the local people, as well and could improve the daily life of the people on the island. This influx of sustainable cultural tourism, retains Puerto Rican identity while capitalizing on ensuring that accommodations for tourists are reflective of traditional experiences and do not impose on local living standards. It will reduce the likelihood of economic leakage to foreign tourism hotel and resort chains, and will ensure economic growth is directly creating wealth and cycling money into the local economy for the local people^[30]. 

Additionally, there needs to be a promotion of usage for the slew of abandoned real estate on the island for affordable housing or for community development, like schools and community or educational centers. 

As an added note, agriculture could be a significant investment for the island to take advantage of its fertile land and position in the Caribbean to produce coffee or marijuana for economic revitalization and general profit, this could also create jobs in the industry, though the wages of the average farmer or harvester not be as considerable for lifting locals out of poverty^[31]. 

Conclusions

In conclusion, Act 60 has been considered a detriment to Puerto Ricans, as it has created a scene in which wealthy investors are being allowed to tax advantage to effectively revitalize the economy, however even this data point has been proven false, so moving forward Puerto Rico must seek policy to ensure that there is a proper integrative economic plan that revitalizes the island and bring up the standard of living for all of the people of Puerto Rico, not just the wealthy and few local property owners.

Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Gwen Singer, Mason Carlisle, Lilly Kurtz, Paul Kramer. and other contributors for developing and maintaining the Fellowship Program within the Institute.

Work Cited

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2. “Explore Census Data.” Data.census.gov, data.census.gov/profile/Puerto_Rico?g=040XX00US72..
3. Cabán, Pedro. “Gringo Go Home! Puerto Rico Is Not for Sale!” The American Prospect, 21 Aug. 2023, prospect.org/power/2023-08-21-gringo-go-home-puerto-rico-not-for-sale/.
4. Marcos, Coral Murphy, and Patricia Mazzei. “The Rush for a Slice of Paradise in Puerto Rico.” The New York Times, 31 Jan. 2022, www.nytimes.com/2022/01/31/us/puerto-rico-gentrification.html.
5. Wood, Robert W. “Move to Puerto Rico, Slash Your Taxes to Zero? Not Exactly.” Forbes, 9 Sept. 2019, www.forbes.com/sites/robertwood/2019/09/09/move-to-puerto-rico-slash-your-taxes-to-zero-not-exactly/.
6. Rojas-Lebron, Gabriela. “Gentrification in Puerto Rico: The Impact on Displacement and Local Livelihoods.” ReVista, 2024, revista.drclas.harvard.edu/gentrification-in-puerto-rico-the-impact-on-displacement-and-local-livelihoods/
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15. Pascualy, Damaris SuárezyVíctor Rodríguez VelázquezyOmaya Sosa. “A Nightmare for Puerto Ricans to Find a Home, While Others Accumulate Properties.” Centro de Periodismo Investigativo, periodismoinvestigativo.com/2022/12/a-nightmare-for-puerto-ricans-to-find-a-home-while-others-accumulate-properties/.
16. US Census Bureau. “Population and Housing Unit Estimates.” Census.gov, 30 Nov. 2018, www.census.gov/programs-surveys/popest.html.
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18. CNE, Grupo. “PROMESA: A Failed Colonial Experiment?” CNE – Centro Para Una Nueva Economía – Center for a New Economy, 29 June 2021, grupocne.org/2021/06/29/promesa-a-failed-colonial-experiment/.
19. https://www.spglobal.com/spdji/en/indices/fixed-income/sp-municipal-bond-puerto-rico-index/#overview.
20. Espada, Mariah. “Influencers, Developers, Crypto Currency Tycoons: How Puerto Ricans Are Fighting Back against the Outsiders Using the Island as a Tax Haven.” Time, 16 Apr. 2021, time.com/5955629/puerto-rico-tax-haven-opposition/.
21. Cheatham, Amelia, and Diana Roy. “Puerto Rico: A U.S. Territory in Crisis.” Council on Foreign Relations, 29 Sept. 2022, www.cfr.org/backgrounder/puerto-rico-us-territory-crisis.
22. “Puerto Ricans Are Occupying Land to Resist Displacement.” Progressive International, progressive-international-website, 2017, progressive.international/wire/2023-05-17-puerto-ricans-are-occupying-land-to-resist-displacement/en. Accessed 16 Nov. 2024.
23. “The Low-Income Housing Tax Credit (LIHTC) Program - CDBG-DR/MIT Recovery Funds.” CDBG, 1 Apr. 2021, recuperacion.pr.gov/en/lihtc/.
24. More Perfect Union. “We Went to Puerto Rico: The Inequality We Saw Will Shock You.” Www.youtube.com, www.youtube.com/watch?v=i4ulSk0EqXU. Accessed 12 Nov. 2024. 
25. “Lawmakers Urge IRS to Crack down on Wealthy Americans Allegedly Dodging Taxes in Puerto Rico - CBS News.” Www.cbsnews.com, 22 Nov. 2023, www.cbsnews.com/news/wealthy-americans-tax-dodging-puerto-rico/. 
26. Corujo, Cristina. “Lawmakers Urge IRS to Crack down on Wealthy Americans Allegedly Dodging Taxes in Puerto Rico - CBS News.” Www.cbsnews.com, 22 Nov. 2023, www.cbsnews.com/news/wealthy-americans-tax-dodging-puerto-rico/.
27. Medina, Alberto C. “The Case for Puerto Rican Independence.” Currentaffairs.org, Current Affairs, 5 Apr. 2024, www.currentaffairs.org/news/2024/04/the-case-for-puerto-rican-independence.
28. Cano-Santiago, Yssis. “CANO-SANTIAGO: Abolish Act 60 and Recognize Puerto Rican Sovereignty.” CANO-SANTIAGO: Abolish Act 60 and Recognize Puerto Rican Sovereignty - the Cavalier Daily - University of Virginia’s Student Newspaper, 21 Mar. 2023, www.cavalierdaily.com/article/2023/03/cano-santiago-abolish-act-60-and-recognize-puerto-rican-sovereignty.
29. “Centro de Periodismo Investigativo.” Centro de Periodismo Investigativo, periodismoinvestigativo.com/.
30. “What Is Sustainable Tourism in Puerto Rico?” Caribbean Trading, 16 Nov. 2023, caribbeantrading.com/what-is-sustainable-tourism-in-puerto-rico-and-its-educational-implications/?srsltid=AfmBOorLSOwTQIQZmGbnyGoribws9r3b10eTlpTD3WKyqsNco7y7z1dZ. Accessed 16 Nov. 2024.
31. Ashe, David, and San Juan. Suggestions for the Economic Development of Puerto Rico.
    

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