Francine J. Lipman (UNLV; Google Scholar) presents Not Taxing Puerto Rico? Whitewashing Impoverishment in United States v. Vaello-Madero at Georgetown today as part of its Tax Law and Public Finance Workshop hosted by Emily Satterthwaite and Dayanand Manoli:
For more than four generations, since 1917, Puerto Ricans have qualified for U.S. citizenship. Yet citizens residing in Puerto Rico do not enjoy the same rights and privileges of citizens residing in the states and Washington D.C., but rather must suffer what Justice Ruth Bader Ginsburg famously coined, albeit in the context of marriage, a “skim milk” version of citizenship. This disparate treatment arises from the Supreme Court’s interpretation of the Territory Clause of the Constitution in the Insular Cases. The Territory Clause provides Congress with plenary power to “dispose of and make all needful Rules and Regulations respecting the Territory.” The Supreme Court through its decisions in the Insular Cases, dated more than one-hundred years ago, and their progeny has generally held that the Constitution only applies to residents of the territories if Congress has specifically ruled that it applies and if the right is “fundamental.”
To be clear, many have criticized the Insular Cases. Most recently Justice Gorsuch, in his concurrence in Vaello-Madero, has described the Insular Cases as a “misguided framework” with a “rotten foundation” arising from the “sordid business of segregating Territories and the people who live in them on the basis of race, ethnicity, or religion” relying on “ugly racial stereotypes, and the theories of social Darwinists.”
Gorsuch further describes that the Insular Cases are derived from the racist view that America could “acquire and exploit ‘an unknown island, peopled with an uncivilized race . . . for commercial and strategic reasons’—a right that ‘could not be practically exercised if the result would be to endow’ full constitutional protections ‘on those absolutely unfit to receive [them].’” Other jurists have similarly described this separate and unequal treatment as “odious and wrong” and “an impermissible second rate citizenship akin to that premised on race.” For a stark example evincing that the disparate treatment of the Territories is grounded in race, U.S. Supreme Court Justice Brown argued that constitutional protections, like uniformity of federal tax laws, should apply only to “contiguous territor[ies] inhabited only by people of the same race, or by scattered bodies of native Indians” and not in regions “inhabited by alien races, differing from us in religion, customs, laws, methods of taxation, and modes of thought.”
In April 2022, the U.S. Supreme Court in U.S. v. Vaello Madero reaffirmed this disparate treatment in an 8 to 1 decision holding that there was a “rational basis” to deny the equal protection guarantee under the Fifth Amendment and the Territory Clause of the Constitution to residents of Puerto Rico. The opinion written by Justice Kavanaugh overturned the decisions of the District Court of the District of Puerto Rico and the U.S. Circuit Court of Appeals for the First Circuit that found no rational basis to deny Supplemental Security Income (SSI) to otherwise qualifying impoverished, aged, and disabled individuals because they resided in Puerto Rico. The Court held that residents do not have equal protection because (1) some Puerto Ricans were not subject to certain income taxes and (2) providing antipoverty benefits like SSI and subjecting certain Puerto Ricans to income taxes “would inflict significant new financial burdens on residents of Puerto Rico, with serious implications for the Puerto Rican people and the Puerto Rican economy.” In sharp contrast to the lower court decisions, the Court’s opinion does not address claims that the disparate treatment is grounded in racial discrimination.
This article will explain that by not taxing residents of Puerto Rico the federal government significantly reduces the cost of additional antipoverty benefits that would be due to the majority of U.S. citizens residing in Puerto Rico who suffer rates of impoverishment in excess of 40 percent. Given the increased use of the federal income tax system as a benefits delivery system, not including Puerto Ricans in the federal income tax system does the opposite of the claims made by the majority in the rational basis test. Moreover, because residents are subject to regressive payroll, self-employment, and unemployment taxes on their earned income, but are denied the targeted offsets of earned income tax benefits, they are further harmed. Rather than reducing the federal tax burden on residents “not taxing Puerto Rico” reduces the benefits delivered to U.S. citizens merely because of their zip code. Thus, most Puerto Rico residents are effectively subject to a higher federal tax burden than their 50 state and Washington D.C. counterparts. A distinction that the lower courts and others have argued is due to the race of the residents, rather than any reasonable fiscal analysis whether scrutinized rationally or strictly.