The aggregate amount of EITC earned by these taxpayers would have been about $574 million, thus the aggregate net federal tax liability would have been about $49 million (see table 1). Our estimates indicate that, before taking the federal child and dependent care tax credit (DCTC) into account, about 41 percent of the 651,201 households that filed Puerto Rican income tax returns in 1992 would have had positive federal income tax liabilities, about 53 percent would have received net transfers from the federal government because their EITC would have more than offset their precredit liabilities, and the remaining 6 percent would have had no federal tax liability. The Treasury Department estimated that the tax expenditure would be $2.8 billion in 1996, rising to $3.4 billion by 2000. Specifically, they asked that we provide estimates of (1) the amount of federal income tax that individuals residing in Puerto Rico would pay if they were treated in the same manner as residents of the 50 states, the amount of earned income tax credits (EITC) Puerto Rican residents would receive, the percentage of taxpayers who would have positive federal tax liabilities, and the percentage who would earn EITC; (2) the extent to which the Government of Puerto Rico would have to reduce its own income tax if it were to keep the amount of combined income tax (both federal and Commonwealth) on individuals the same as it was without the full imposition of the federal tax; (3) how the amount of income taxes paid by the average taxpayer in Puerto Rico compares with the amount of combined federal, state, and local income taxes paid by residents in the 50 states and the District of Columbia; and (4) the amount of revenue the U.S. Treasury could obtain by the repeal of the possessions tax credit, which effectively exempts from federal taxation a portion of the income that subsidiaries of U.S. corporations earn in Puerto Rico. Conversion to the U.S. return: EITC was computed using information reported on the Puerto Rican tax return.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the potential effects of extending the Internal Revenue Code (IRC) to residents of Puerto Rico.

What GAO Found

GAO found that if IRC tax rules are applied to residents of Puerto Rico: (1) the residents would owe around $623 million in federal income tax before taking into account the earned income tax credit (EITC); (2) the aggregate amount of EITC would total $574 million; (3) 59 percent of the population filing individual income tax returns would earn some EITC; (4) 41 percent of the households filing income tax returns would have positive federal income tax liabilities, 53 percent would receive net transfers from the federal government, and 6 percent would have no federal tax liability; (5) more Puerto Rican residents and married couples would file federal tax returns if they qualified for EITC; (6) the average EITC earned by eligible taxpayers would be $1,494; (7) the Puerto Rican government would have to reduce its own individual revenue by 5 percent to keep the aggregate amount of income tax levied on its residents constant; (8) the taxes paid by certain classes of Puerto Ricans would change drastically; (9) the per capita combined individual income tax in Puerto Rico would increase by 5.5 percent; and (10) tax expenditures would total $2.8 billion in 1996 and $3.4 billion in 2000.