A well-known feature of the Puerto Rican economy, both at the government and individual levels, is its heavy reliance on federal funds. Over the years this dependency has increased considerably for both of them. Thus, Puerto Rico ranks fourth among all jurisdictions with the greatest dependence on federal funds for its tax revenue, with the state of Louisiana ranking first 1.
In this brief note we present an examination of this dependence on federal funds for tax revenues and personal income. The analysis has been done until the fiscal year 2019 since subsequent years are highly distorted by the impacts of the pandemic and the large disbursement of federal funds related to it, a very atypical period. Tax revenue corresponds to net periodic income, which includes all the funds received by the state government for various concepts, including federal funds 2. Graph 2 presents the distribution of net periodic income by the main source of income, for fiscal years 2000 and 2019 and the degree of dependency. For the fiscal year 2019, federal funds (for various concepts) represented 43.1%, compared to 29.1% in fiscal 2000. Income tax receipts from individuals and corporations, as a proportion of the total, decreased. Even when non-local income tax revenues, as a proportion of the total, increased from 5.5% to 12.5%, they were not enough to offset the increase in federal funds. Other income taxes were reduced from 43.0% to 18.5%, and the proportion of individuals, the most important, was reduced from 23.4% to 10.3%. Income from the IVU, which did not exist in fiscal 2000, represented 11.0% in 2019, slightly above that of individuals, which reflects that consumption taxes, of which the IVU is the main one, are increasing their relative importance, while the proportion of the individuals’ income tax is reduced.
What contributed to this significant increase in reliance on federal funds? Figure 3 provides an explanation. Between the fiscal year 2000 and 2019, federal contributions to the government of Puerto Rico (excluding public companies and municipalities) increased by 201.0%. The greatest driver of this increase was the contributions to the Department of Health (which includes what was allocated to the public health program), which increased by 342.0%, and represented 41.0% of the increase in total federal contributions. In fiscal 2000, they represented 28.0% of the total; for fiscal 2019 said participation increased to 37.2%.
A similar situation occurred in the case of personal income and the consolidated budget, in the same period, where unilateral federal transfers to individuals represented 31.1% of personal income in fiscal 2019, from 20.0% in 2000, and in the case of the consolidated budget, this dependence on federal funds increased from 20.3% in fiscal 2000 to 39.4% of the budget in fiscal 2019.
In the case of personal income, not all payments from the federal government are unilateral transfers, that is, granted, since net receipts for Social Security and Medicare (which are accrued) represented, in fiscal 2019, 47.3% of total payments of federal transfer payments on personal income 3. But, the most significant of the evolution of personal income in the period under consideration (2000 - 2019), is the extraordinary decrease in the participation of compensation to employees, which are wages and salaries, plus other labor compensation, received by workers. In fiscal 2000, said participation amounted to 61.0%; for fiscal 2019 it was reduced to 40.4%. In other words, income from income related to employment and production is reduced, and those from federal transfer payments have increased.
Undoubtedly, after fiscal 2019, this dependency will have grown larger, given the significant flow of federal funds for the pandemic, which is understandable. Now, a post-COVID-19 normalization scenario brings a possible implication to consider: what would happen if those federal revenues were reduced as a result of changes in the fiscal and budgetary policy of the federal government, given the already termination of a large part of these in 2021. For example, the extension to Puerto Rico of the two federal credits, for dependents and for work, may well eventually be eliminated, which would reduce personal income.
1 Ben Geler (2020). States Most Dependent on the Federal Government - 2020 Edition (Mayo 27, 2020). In: https://smartasset.com/taxes/states-mostdependent-on-the-federal-government-2020. Louisiana outcome may be impacted by post-Hurricane Katrina funding.
2 See Table 27 of the Statistical Appendix of the Economic Report to the Governor by the Planning Board. In: https://jp.pr.gov/index.php/ apéndice-estadístico-del-informe-económico-a-la-gobernador/
3 Planning Board (2021). Statistical Appendix Economic Report to the Governor 2020. Tables 15 and 21. In: https://jp.pr.gov/wp-content/uploads/2021/09/Apendice-Estadistico-2019.pdf
This article was originally published in Spanish by Estudios Técnicos Inc.