New tax incentives draw investors to Puerto Rico as middle class continues flight from island
As middle class flees, Puerto Rico tries luring rich people
The towering 38-year-old native of Arkansas is one of at least 250 people who’ve accepted Puerto Rico’s invitation to well-heeled U.S. citizens to move to the island and enjoy life without taxes on capital gains, an enticing offer for those whose income is derived from investments.
Eiler lives in a gated community on Puerto Rico’s southeastern shore, making a commute of less than 5 minutes from house to office across manicured greens, with an expansive ocean view.
“Driving to work in your flip-flops and golf cart is not bad,” he says with a quick laugh.
This semi-autonomous U.S. territory sets its own tax policy, and its residents pay no federal tax on income derived locally. Mired in a recession for almost a decade and with an unemployment rate stuck above 13 percent, more than double the U.S. rate overall, it decided in 2012 to try to lure wealthy investors who would be likely to buy expensive real estate, establish businesses and create jobs.
Act 22, the legislation that set up the program, exempts people from taxes on any capital gains accrued after they move and it provides an exemption from local taxes on dividends and interests if they take up permanent residence, among other conditions. A government brochure sums it up as “Sun, Sand and Zero Taxes.”
“Frankly, for Americans, it’s sort of an unprecedented thing,” said Alex Daley, a technology investment strategist who moved from Vermont with his wife in December 2013.
Daley said he felt the U.S. mainland had become a more hostile tax environment under President Barack Obama. “They try to hold the people with the most mobility and the most wealth captive,” Daley said of the U.S. government. “People are getting angry about that.”
The law is sparking some controversy in Puerto Rico, however, particularly among economically beleaguered middle-class workers who pay island taxes on non-investment income. Others say the strategy helps erode the U.S. federal government’s tax base by diverting revenue from the mainland.
Economists also say the new residents won’t do enough to rescue the island from its deep economic woes. A smarter strategy would be to focus on broadening the tax base, said Barry Bosworth, an economist with the Brookings Institution in Washington.
“Instead, Puerto Rico spends a lot of time and effort to attract a sub-population that wants special treatment and is seeking to avoid paying taxes on the mainland,” he said. “It gives the appearance of being for sale.”
A recent report from Standard & Poor’s issued another warning: “If Puerto Rico becomes too successful at marketing itself as a tax haven, the U.S. Congress in our view would likely enact restrictions.”
So far, however, at least 500 people have applied and been approved, half of whom have made the move like Eiler. He had only briefly visited Puerto Rico before settling here with his family, but he finds the environment familiar.
“We have a Walmart and Costco and P.F. Chang’s,” he said.
Such familiarity and the ability to move while staying within U.S. jurisdiction is a draw not offered by the Bahamas and other Caribbean destinations that have created tax incentives to lure investors.
Lawyers and tax experts in Puerto Rico say they get calls daily from people seeking to move, including managers of hedge funds or private equity funds who make most of their money from capital gains. In the U.S., long-term capital gains are taxed at 23.8 percent.
The tax refugees must not have lived in Puerto Rico for six years prior to when the law was approved in order to qualify.
Their arrival bucks a trend in the other direction. From 2010 to 2014, Puerto Rico’s population dropped 5 percent to 3.5 million, according to the U.S. Census Bureau. Many of those who left are middle-class professionals, driven out by the lack of economic opportunity and the high cost of living.
While Puerto Ricans do not pay U.S. income taxes, except for Social Security and Medicare, they do pay the equivalent of state income taxes. The highest bracket, for those with incomes above $62,000, is 33 percent.
Act 22 has generated more than $200 million in local real estate sales, said Juan Carlos Suarez at the Department of Economic Development and Commerce, who added that the program is not much different from the incentives offered to other sectors, including manufacturing. “We are thrilled with the growth that Act 22 has had, especially in the past two years,” he said.
But Robb Rill, a Florida hedge fund manager who was among the first to move to Puerto Rico and established The 20/22 Act Society to help others find their feet, cautioned that the free ride could come to an end if the program is abused.
“Right now we’re in the earlier stages, and as long as there are no bad actors and the program does a good job of self-policing, the odds of that are fairly low,” he said.
