In January 2016, Puerto Rico defaulted on roughly $174 million dollars of debt payments.
The island’s total debt stands at roughly $72 billion dollars—an amount Puerto Rico’s
governor calls “not payable”.
Puerto Rico’s future largely depends on whether the US government helps the island.
So, should the US let Puerto Rico go bankrupt?
Well, most of the island’s financial troubles are actually the result of US tax policy.
In 1976, congress allowed American companies to make products in Puerto Rico without paying
federal taxes on their income.
Corporations flocked to the island to build factories and industrial sites, predominantly
pharmaceutical companies.
In fact, during this time more than half of prescription drugs sold in the US were manufactured
in Puerto Rico.
But in 1996, US tax revenue began to suffer, and the tax breaks were phased out.
By the time they completely expired in 2006, much of the existing industry had left the
island for the US, sinking Puerto Rico into a deep recession.
Now, Puerto Rico’s debt has completely outgrown its economy with a debt-to-GDP ratio of roughly
70%.
As further defaults loom in the future, some say that Puerto Rico’s best option is to
declare Chapter 9 municipal bankruptcy.
This would let them work with congress to negotiate a payment plan for their debt.
However, due to Puerto Rico’s unique status as a US territory, it has not legally been
able to initiate Chapter 9 Bankruptcy.
In US law, only municipalities may file for debt relief with the permission of their state.
Municipalities include cities, counties, and certain government agencies.
However, since territories are not states, they do not qualify for Chapter 9.
A 2015 proposal supported by President Obama attempted to give the island the same bankruptcy
rights as the rest of the united states.
But pushback from congress has prevented the measure from moving forward.
Senate Republicans say that allowing Puerto Rico to declare bankruptcy is not an efficient
solution because it wouldn’t address the island’s spending problems.
Republicans are instead pushing for a bill that would cap relief at $3 billion dollars
and give tax breaks to residents.
Democrats on the other hand are urging Congress to let Puerto Rico file for bankruptcy, saying
that if the recession continues it could turn into a humanitarian crisis.
Neither plan has gained bipartisan support thus far, and Puerto Rico faces more defaults
and insolvency.
So far the US government has refused to pay the growing debt, and depending on what Congress
decides, Puerto Ricans may see higher taxes, a suspension of the minimum wage law and other
budget slashing plans.
In an attempt to pay their government’s debts, it is likely the citizens who will
end up suffering the most from inevitable austerity measures.
While Puerto Ricans are automatically granted U.S. citizenship, Puerto Rico is not considered
a U.S. state.
Should it be?
Find out in
our video.
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