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
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