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April 09, 2024 The Tax Lawyer

Not Taxing Puerto Rico? Whitewashing Impoverishment in United States v. Vaello-Madero

Vol. 77, No. 2 - Winter 2024

Francine J. Lipman

Abstract

Puerto Rico is a lush archipelago located between the Caribbean Sea and the North Atlantic Ocean. More than three million U.S. citizens with diverse racial and ethnic histories and cultures live on the islands. But life for Puerto Ricans has been challenging with high rates of impoverishment, disability, unemployment, and devastating natural disasters. In addition to these challenges, Puerto Rico has a complicated relationship with the United States. Indeed, residents, 99 percent of whom identify as Hispanic, are treated “separately and unequally” in many aspects by the federal government compared to their state counterparts. One significant difference is the federal tax treatment of Puerto Rican residents.

This article details the past and present federal taxation of Puerto Rico residents. The article also presents and exposes detailed economic data to demonstrate explicitly that Puerto Ricans are not reaping federal benefits (including tax benefits) as a “welfare island.” In fact, Puerto Rico suffers federal fiscal shortfalls that have been justified by misguided and racist U.S. Supreme Court Insular Cases and their progeny. This analysis establishes that the failure to include most Puerto Rico residents in the federal income tax system has burdened rather than benefited them and their local economy.

The benefit versus burden tax analysis is framed using the U.S. Supreme Court’s and lower court’s opinions in the matter of United States v. Mr. Jose Luis Vaello Madero. Mr. Vaello Madero is a disabled, elderly Puerto Rican, who is representative of many residents. In its 8-1 majority opinion, the U.S. Supreme Court reaffirms the disparate treatment of Puerto Rican residents by arguing, among other claims, that “not taxing” Puerto Ricans is a benefit. This article demonstrates that this argument is not only incorrect, but it whitewashes the racist history upon which it is justified.

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