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U.S. Tax Imperialism Seattle University School of Law Digital Commons Faculty Scholarship 2015 U.S. Tax Imperialism Diane Lourdes Dick Follow this and additional works at: https://digitalcommons.law.seattleu.edu/faculty Part of the Tax Law Commons Recommended Citation Diane Lourdes Dick, U.S. Tax Imperialism, 65 Am. U. L. Rev. 1 (2015). https://digitalcommons.law.seattleu.edu/faculty/729 This Article is brought to you for free and open access by Seattle University School of Law Digital Commons. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Seattle University School of Law Digital Commons. For more information, please contact [email protected]. ARTICLES U.S. TAX IMPERIALISM IN PUERTO RICO DIANE LOURDES DICK* This Article uses historical and legal analysis to demonstrate how U.S. domination over Puerto Rico's tax and fiscal policies has been the centerpiece of a colonial system and an especially destructive form of economic imperialism. Specifically, this Article develops a novel theory of U.S. tax imperialism in Puerto Rico, chronicling the sundry ways in which the United States has used tax laws to exert economic dominance over its less developed island colony. During the colonial period, U.S. officials wrote and revised Puerto Rican tax laws to serve U.S. economic interests. In more recent years, U.S. tax laws have disadvantagedPuerto Ricans, who still lack voting rights and full democratic representation in Congress. A theory of tax imperialism may also have applicationfar beyond the U.S.-Puerto Rican experience. For instance, it may help us understand the relationships between the United States and its other possessions and territories throughout history, and between the United Kingdom and its British Crown dependencies, overseas territories, and newly-independent colonies. * Associate Professor of Law, Seattle University School of Law. This Article was selected for presentation at the Sixteenth Annual Yale/Stanford/Harvard Junior Faculty Forum, held at Harvard Law School in June 2015. I owe a debt of gratitude to Matt Autio, Steven A. Bank, Steven Bender, Rosa Carrasquillo, Brooke Coleman, Keith Demirjian, Lourdes Dick, Sam Erman, Rafael Gely, Carmen Gonzalez, Lily Kahng, Yair Listokin, Charlene Luke, Pedro Malavet, Omri Marian, Ajay Mehrotra, Elizabeth Porter, Diane Ring, Victor Rodriguez, Darien Shanske, and Joseph Thorndike for their helpful comments on earlier drafts. This Work has also benefited tremendously from faculty workshop presentations at my home institution as well as at the University of Utah S.J. Quinney College of Law, and from comments received at the 2015 Northwest Junior Faculty Forum and the History and Fiscal Policy Panel at the 2015 Annual Meeting of the Law and Society Association. This Article was written in loving memory of my grandparents, Joaquin and Gloria Barros. 1 2 AMERICAN UNIVERSITY LAW REVIEW [Vol. 65:1 TABLE OF CONTENTS Introduction .................................... 22...... I. A Theory of U.S. Tax Imperialism .......................... 12 II. Three Historical Stages of U.S. Tax Imperialism in Puerto Rico... 16 A. Stage One of U.S. Tax Imperialism in Puerto Rico, 1898-1919 .................................... 20 1. U.S. evaluation of Puerto Rico's extant system of taxation ................................... 21 2. U.S. adjustments to Puerto Rico's extant system of taxation ........................ ......... 25 a. U.S. enforcement of tax laws in Puerto Rico.......... 36 3. Further U.S. refinements to Puerto Rican tax laws: Property taxation ...................... ...... 37 4. Further U.S. refinements to Puerto Rican tax laws: Income taxation ................... .......... 42 5. Assessing the U.S. fiscal restructuring of Puerto Rico ..... 50 B. Stage Two of U.S. Tax Imperialism in Puerto Rico, 1920-1974 .......................... .......... 53 C. Stage Three of U.S. Tax Imperialism in Puerto Rico, 1975-Present................................. 68 D. Recent Fiscal Developments in Puerto Rico ...... ..... 78 III. A Broader Theory of Tax Imperialism: Possible Future Applications, Points for Further Study................... 83 Conclusion ............................................... 84 INTRODUCTION Today, Estado Libre Asociado de Puerto Rico (the Commonwealth of Puerto Rico)' is financially and economically distressed; this much 1. See P.R. CONST. art. 1, § 2 (establishing a republican form of government for the U.S. territory); see also Act of July 3, 1952, Pub. L. No. 447, 66 Stat. 327 (approving the island's constitution, thereby giving it effect under federal law). Puerto Rico is composed of three separate inhabited islands; however, it is consistently referred to as "the island." See, e.g., CESARJ. AYALA & RAFAEL BERNABE, PUERTO Rico IN THE AMERICAN CENTURY: A HISTORY SINCE 1898 1 (2007) (using the term "the island" to refer to Puerto Rico in a comprehensive account of the island's relations with the United States); see also 48 U.S.C. § 731 (2012) (applying "[t]he provisions of this chapter ... to the island of Puerto Rico and to the adjacent islands belonging to the United States and waters of those islands" and declaring that "the name Puerto Rico ... shall be held to include not only the island of that name, but 2015] U.S. TAx IMPERIALISM IN PUERTO RICO 3 is painfully clear. The Commonwealth struggles with weak economic growth2 while shouldering a heavy debt load. In recent years, prominent U.S. investment rating firms have repeatedly lowered Puerto Rico's bond ratings to below junk status, signaling that the Commonwealth may be unable to satisfy its obligations.' Defaults' are not just harmful to Puerto Rico itself; Puerto Rican government bonds have been traded widely in U.S. capital markets for years. Meanwhile, a legal fight is brewing regarding the island's right to restructure its obligations. Although a federal court has thrown out a new debt restructuring law' passed by the Legislative Assembly of Puerto Rico in June 2014,' the island continues to push for an out-of- all the adjacent islands"). 2. See D. ANDREw AUSTIN, CONG. RESEARCH SERV., R44095, PUERTO Rico's CuRRENT FISCAL CHALLENGES 1-2 (2015), https://www.fas.org/sgp/cts/row/R44095.pdf. 3. See, e.g., Michelle Kaske, Puerto Rico Lawmakers Pass $2.9 Billion Bonding Measure, BLOOMBERGBUSINESS (Dec. 9,2014, 10:06 AM), http://www.bloomberg.com/ news/articles/2014-12-09/puerto-rico-lawmakers-pass-2-9-billion-debt-plan-with-rate- cap (reporting that Puerto Rico's debt had reached approximately $73 billion in December 2014). 4. See, e.g., Josh Beckerman, Standard & Poor'sDowngrades Puerto Rico: S&P Cuts Puerto Rico's General Obligation Rating to Two Notches Below Investment Grade, WALL STREET J. (July 11, 2014, 6:37 PM), http://www.wsj.com/articles/standard-poors- downgrades-puerto-rico-1405117331 (explaining that Puerto Rico's lower general obligation rating could indicate "mounting economic and fiscal challenges for the commonwealth as a whole"); Irina Baron & Xian Li, Puerto Rico's Credit Risk Measures Reach a Five-Year High, MOODY'sANALYICS (June 30, 2014), https://www.moodys.com/ researchdocumentcontentpage.aspx?docid=PBC_172396 (reporting a one-year measure of Puerto Rico's "credit risk" as higher than that of Argentina, Venezuela, and Ukraine). 5. The island defaulted for the first time in August 2015. Mary Williams Walsh, Puerto Rico Defaults on Bond Paymen4 N.Y. TIMES (Aug. 3,2015), http://www.nytimes.com/ 2015/08/04/business/dealbook/puerto-rico-decides-to-skip-bond-payment.html. 6. 2014 P.R. Leyes 71. 7. See Franklin Cal. Tax-Free Tr. v. Puerto Rico, Nos. 15-1218, 15-1221, 15-1271, 15-1272, 2015 WL 4079422, at *1 (1st Cir. July 6, 2015) (affirming the unconstitutionality of 2014 P.R. Leyes 71 because the U.S. Bankruptcy Code pre- empts Puerto Rico's law, and Puerto Rico lacks authority to authorize its municipalities to pursue bankruptcy relief), petitionfor cert. filed, No. 15-233 (Aug. 24, 2015); see also Michael Corkery, judge Strikes Down Puerto Rico's Debt Restructuring Law, N.Y. TIMES (Feb. 8, 2015, 1:52 PM), http://dealbook.nytimes.com/2015/02/08/ judge-strikes-down-puerto-ricos-debt-restructuring-law (explaining that "[i] nvestors in billions of dollars of Puerto Rico bonds secured a major legal victory" as a result of the decision invalidating Puerto Rico's debt restructuring law). 4 AMERICAN UNIVERSITY LAW REVIEW [Vol. 65:1 court restructuring' or, in the alternative, access to federal bankruptcy protections that are normally granted to municipalities.' Scholars and journalists have compared the situation in Puerto Rico to other emerging market financial shocks, such as the 1980s Latin American debt crisis and the City of Detroit's downward economic spiral.o But the Puerto Rican experience is exceptional in a number of ways. Puerto Rico is not a U.S. state or a political subdivision thereof." However, other nation-states do not recognize Puerto Rico as being independent from the United States." In actuality, Puerto Rico is the largest unincorporated U.S. territory and is, therefore, subject to U.S. federal laws and the plenary power of Congress.' 3 Puerto Rican citizens are U.S. citizens," although they lack 8. See, e.g., Michelle Kaske, Puerto Rico Faces Higher Hurdles in Debt RestructuingPlan, BLOOMBERGBusINEss (Sept 10, 2015,3:00 AM), http://www.bloomberg.com/ news/articles/2015-09-10/puerto-ricoconfronts-higher-hurdles-in-debt-restructuring-plan. 9. See Clayton P. Gillette & David A. Skeel Jr., How Congress Can Help Puerto Rico, N.Y. TIMES (Sept. 14, 2015), http://www.nytimes.com/2015/09/14/opinion/how- congress-can-help-puerto-rico.html (discussing Puerto Rico's recent efforts to obtain access to Chapter 9 bankruptcy protection). 10. See, e.g., FRANcIScO E. GONZALEZ, CREATIVE DESTRUCTION? 1-4 (2012) (discussing the relationship between economic collapse and regime change from observations of various Latin American countries); Errol Louis, Puerto Rico: Detroitofthe Caribbean,N.Y. DAILYNEws (July 17,2014,.4:30 AM), http://www.nydailynews.com/opinion/ puerto-rico-detroit-caribbean-article-1.1869561 (noting that Puerto Rico, "the next Detroit," holds $73 billion in debt, far surpassing its $9.6 billion annual budget).
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