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The Origins of the Puerto Rican Debt Crisis
The Origins of the Puerto Rican Debt Crisis | Investopedia
Origins
The Puerto Rican debt crisis has many origins. Most notably, investors in Puerto Rican municipal bonds have received favorable tax treatment for years. Bond investors from all 50 states have taken advantage of this benefit by purchasing Puerto Rican bonds. When a government issues bonds, it is effectively lending money, with interest, to bondholders. Prompted in large part by this tax advantage, Puerto Rico issued too much bond debt and began relying on borrowed funds from bond issuance to balance its budget.
Economic decline in Puerto Rico has led to widening budget deficits over the years. The tiny island is ill-equipped for manufacturing and production of goods. Its economy was sustained for decades by the presence of technology and service-oriented companies that located to the island due to its favorable tax treatment. Many of Puerto Rico's tax advantages, however, were ephemeral. The U.S. tax code called for these advantages to expire over time. When that began to happen, companies fled the island, eviscerating its economy.
Compared to other states and territories, spending on social programs is disproportionately high in Puerto Rico. The majority of the island's residents receive Medicare or Medicaid. A high poverty rate in Puerto Rico invariably means a lot of its inhabitants seek welfare and other government benefits. Confounding the issue further is the fact Puerto Rico receives far fewer federal dollars to assist with social spending than states with comparable populations.
Puerto Rico has been shedding residents since 2005. The island's population is also aging. These combined factors have reduced its tax base substantially; not only has the territory taken on increasing debt in the 21st century, but it has less revenue coming in to pay that debt.
The Origins of the Puerto Rican Debt Crisis | Investopedia
Origins
The Puerto Rican debt crisis has many origins. Most notably, investors in Puerto Rican municipal bonds have received favorable tax treatment for years. Bond investors from all 50 states have taken advantage of this benefit by purchasing Puerto Rican bonds. When a government issues bonds, it is effectively lending money, with interest, to bondholders. Prompted in large part by this tax advantage, Puerto Rico issued too much bond debt and began relying on borrowed funds from bond issuance to balance its budget.
Economic decline in Puerto Rico has led to widening budget deficits over the years. The tiny island is ill-equipped for manufacturing and production of goods. Its economy was sustained for decades by the presence of technology and service-oriented companies that located to the island due to its favorable tax treatment. Many of Puerto Rico's tax advantages, however, were ephemeral. The U.S. tax code called for these advantages to expire over time. When that began to happen, companies fled the island, eviscerating its economy.
Compared to other states and territories, spending on social programs is disproportionately high in Puerto Rico. The majority of the island's residents receive Medicare or Medicaid. A high poverty rate in Puerto Rico invariably means a lot of its inhabitants seek welfare and other government benefits. Confounding the issue further is the fact Puerto Rico receives far fewer federal dollars to assist with social spending than states with comparable populations.
Puerto Rico has been shedding residents since 2005. The island's population is also aging. These combined factors have reduced its tax base substantially; not only has the territory taken on increasing debt in the 21st century, but it has less revenue coming in to pay that debt.
