The Puerto Rican Statehood Movement is Mainly About Solving its Debt Crisis

The Puerto Rican government has held a referendum (official poll) 5 times on the issue of statehood. In 1967, 1993, and 1998, they voted “no” and in 2012 and 2017 they voted “yes,” with the most recent referendum returning 97% “yes” votes. The reason for the changes in opinion is basically a dire need for additional support from the federal government.

PR is in a serious amount of debt, compounded by hurricane after hurricane in recent history. In 2015, the PR government entered into a forbearance for many of its debt repayments due to inability to repay them. PR has begun to default on many of its debt obligations which basically means kissing credit goodbye, which means no more growth, which means further default on debt…. and so forth, creating a “death spiral” for its economy.

Is it in the federal government’s best interest to incorporate Puerto Rico as a 51st state? Let’s consider the answer from a financial perspective.

PR has a decent economy, with a GDP sitting somewhere between Mississippi and New Mexico, but the debt levels as a percentage of GDP are just too bad. As a percentage of GDP, Puerto Rico’s debt is 66% of its annual GDP. The total amount of debt obligations amounts to $70 billion. That’s bad! The most indebted state in the US is Kansas, which is approximately 25% of its annual GDP.

Currently, federal taxation of Puerto Rico is limited. Puerto Rico also has a reputation as a tax haven for the wealthy. YouTube videos showing watchers how to avoid paying federal taxes are plentiful and available. Residents do not need to report income taxes if they earned money from Puerto Rico. Businesses do not pay income taxes to the federal government, either. Right now, PR pays about $3.5 billion in taxes per year to the federal government. If PR becomes a US state, this number would increase to about $10 billion. To arrive at that number, I basically found the middle between Mississippi and New Mexico’s.

To bring down Puerto Rico’s debt to be in line with other US states, a bailout of about $40 billion is needed (This would bring down the debt to slightly worse than Kansas levels). Ultimately, the federal government’s question becomes: “Is it worth paying $40 billion in order to increase annual revenue by $6.5 billion per year?” – This question also must account for potential pitfalls along the way, such as more natural disasters, or economic problems down the line.

Other territories of the US have debt problems, too. The Virgin Islands have a debt to GDP ratio of 72%. Guam is walking a fine line with its ratio of 44%. However, it is not all bad news. American Samoa is in good shape with a ratio of 11% and the Northern Mariana Islands are at 16%. Statehood for Puerto Rico could very well set a precedent for other territories, which could be costly for the federal government.

Do not get wrapped up and compare this to national-level debts. While it is true that the USA itself has the highest debt-to-GDP ratio of any other country in the world (104%), it is a completely moot point. The USA does not really have foreign debt — it has domestic debt denominated in its own fiat currency, held in large quantities by foreign governments. This means that the US government can essentially print all the money it needs to pay its foreign creditors off. Kind of like selling Chopsticks to the Chinese, and ice to Eskimos, foreign creditors have sold dollars to Americans.

Unlike the federal government, Puerto Rico does not have the ability to print its own money. It needs an angel investor to save it, and it needs saving now.