What Bad Bunny teaches us about Puerto Rican tax law

Summary

Summary of "What Bad Bunny Teaches Us About Puerto Rican Tax Law"
The Indicator from Planet Money
Released on March 10, 2025
Host: Darren Woods, Wayland Wong
Producer: Angel Carreras
Fact-Checker: Sierra Juarez
Editor: Kate Concanan

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Introduction: Bad Bunny's Puerto Rican Anthem

In January, Puerto Rican superstar Bad Bunny released a new album that not only showcases his musical prowess but also serves as a poignant commentary on the island's socio-economic challenges. Darren Woods introduces the episode by highlighting the album's deep-rooted Puerto Rican influences:

"In January, Puerto Rican musician Bad Bunny released a new album and this album was distinctly Puerto Rican. It sampled salsa and old school rhythms from the territory."
— Darren Woods [00:14]

Bad Bunny's work is more than music; it's a reflection of the island's struggles and resilience, particularly in the face of economic pressures and changing demographics.

Historical Context: Puerto Rico's Quest to Become a Tax Haven

To understand the current economic situation, the hosts delve into Puerto Rico's history of attempting to transform itself into a tax haven. Originating from efforts in the 20th century, both U.S. federal initiatives and local laws aimed to attract businesses and wealthy individuals to the island through tax incentives.

"Puerto Rico is a self-governing territory of the United States in the Caribbean, the US gained control after the Spanish American War in 1898 and 100 years ago it was a fairly low income agricultural place."
— Wayland Wong [02:55]

A pivotal moment came in the 1970s with federal laws offering significant tax breaks to corporations relocating to Puerto Rico. This strategy saw a boom in manufacturing jobs, as highlighted by investigative journalist Louise Valentin:

"It created a lot of jobs. I mean, like, even my mom worked for such a manufacturing company."
— Luis Valentin [03:44]

However, by the mid-1990s, the financial strain on the U.S. government led to the phasing out of these incentives by 2006, setting the stage for economic downturns exacerbated by global shifts like Chinese manufacturing and automation.

Introduction of Act 22: Attracting Wealthy Individuals

Facing a dire economic situation, former Governor Luis Fortuno sought innovative solutions to revive Puerto Rico's economy. Among various policies, Act 22 was introduced to attract wealthy individuals by offering tax exemptions on capital gains.

"Act 22 allowed people to move to Puerto Rico and pay no taxes on capital gains. So say you own a bunch of property or shares and want to sell them, there's no tax for their growth in value while you were in Puerto Rico."
— Wayland Wong [05:24]

Conditions for benefiting from Act 22 included residing on the island for over six months, purchasing property, donating to local charities, and annual reporting to the government. Approximately 2,300 individuals, including notable figures like Logan Paul and Brock Pierce, capitalized on this opportunity before the pandemic.

Evaluating Act 22's Impact: Economic Insights

To assess the effectiveness of Act 22, a report was commissioned by the administering department, with contributions from University of Puerto Rico economist Jose Caraballo. The findings were underwhelming:

"I found that Act 22 is creating a very low number of jobs."
— Jose Caraballo [06:25]

While unemployment did decrease to 5.5%, the job creation attributed to Act 22 was minimal—only about 6,000 jobs in a population of 3.2 million. This prompted discussions with former Governor Fortuno, who tempered expectations:

"So it is not a home run. And I never expected it to be a home run. It's just one of many measures that have been taken."
— Luis Fortuno [07:14]

Social Consequences: Housing Market Strain and Displacement

Beyond economic metrics, Act 22 had significant social repercussions, particularly in the housing sector. The combination of favorable tax policies and global tourism trends led to skyrocketing property values, especially in desirable areas like Old San Juan. This surge disproportionately affected long-term residents, leading to displacement and affordability issues.

"Real estate people here on the island would pick up the phone and if you don't speak English or if you don't have cash. They will not do business with you."
— Luis Valentin [08:51]

Although the growth in rental prices in Puerto Rico mirrored trends in the broader U.S., the localized impact was severe, with many locals finding themselves priced out of their communities.

Cultural Reflection: Bad Bunny’s Critique of Newcomers

Bad Bunny's album encapsulates the frustration felt by many Puerto Ricans regarding the influx of wealthy newcomers. His lyrics resonate with the sentiments of displacement and loss of cultural identity, serving as a creative outlet for societal grievances.

"They want my river and my beach too. They want my neighborhood and your kids to leave."
— Wayland Wong [00:28]

Despite these critiques, former Governor Fortuno remains defensive, arguing that newcomers are essential for economic stimulation and that criticisms ignore the contributions of these individuals.

"He lives in a mansion in LA and come on, give me a break. You know, if you're going to get involved in the island, move down there and get involved."
— Luis Fortuno [09:32]

Conclusion: The Complex Legacy of Act 22

Act 22 stands as a controversial component of Puerto Rico's economic strategy. While it achieved some reduction in unemployment, its broader benefits are limited, and its social costs are significant. The experiences from Act 22 offer valuable lessons on the complexities of using tax incentives to drive economic growth, particularly in regions grappling with historical and structural challenges.

"But back to whether or not act 22 is the villain or hero, it's clear that Puerto Rico's economic policies aren't perfect."
— Darren Woods [09:20]

As Puerto Rico continues to navigate its economic future, the balance between attracting investment and preserving local communities remains a central challenge.

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Notable Quotes:

• Darren Woods [00:28]: "They want my river and my beach too. They want my neighborhood and your kids to leave."
• Luis Fortuno [07:14]: "So it is not a home run. And I never expected it to be a home run."
• Luis Valentin [08:51]: "Real estate people here on the island would pick up the phone and if you don't speak English or if you don't have cash. They will not do business with you."

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Credits:
Produced by Angel Carreras
Engineered by Jimmy Keeley
Fact-Checked by Sierra Juarez
Edited by Kate Concanan
The Indicator is a production of NPR.

Transcript

[NPR Host]

NPR.

[Darren Woods]

In January, Puerto Rican musician Bad Bunny released a new album and this album was distinctly Puerto Rican. It sampled salsa and old school rhythms from the territory.

[Wayland Wong]

It was also full of messages ruing what was being lost on the island in large part due to economic forces. They want to take my river and my beach too. They want my neighborhood and your kids to leave.

[Darren Woods]

What Bad Bunny is beating his drum is part of a long history of political leaders trying to turn Puerto Rico into a tax haven. This is the indicator from Planet Money. I'm Darren Woods.

[Wayland Wong]

And I'm Wayland Wong. Many countries try to boost their economies by attracting wealthy people. President Trump recently announced a gold card visa for people willing to pony up $5 million. On today's show, we're looking at how Puerto Rico tried to escape a grinding recession through tax breaks to newcomers and what Puerto Rico's experience can tell us about whether this approach works.

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[Darren Woods]

Our guide through Puerto Rican economic history today is investigative journalist Louise Valentin and it's fair to say Louise's household is a fan of the new Bad Bunny album.

[Luis Valentin]

My baby actually loves the album, which actually make her really calm for some.

[Wayland Wong]

To understand Bad Bunny's sadness around changes to Puerto Rico, Luis says it's good to recap a bit of history. Puerto Rico is a self governing territory of the United States in the Caribbean, the US gained control after the Spanish American War in 1898 and 100 years ago it was a fairly low income agricultural place. So throughout the 20th century there were efforts from both the US federal government and and lawmakers in Puerto Rico to turn the island into a tax haven.

[Darren Woods]

The hope was that this would attract money. In the 1970s, a federal law gave corporations tax incentives to move there, set up shop in Puerto Rico, and your profits there will essentially be tax free. And Luis says that did entice businesses, especially in manufacturing.

[Luis Valentin]

It created a lot of jobs. I mean, like, even my mom worked for such a manufacturing company.

[Wayland Wong]

Luis's mother was an environmental engineer for General Electric, which took advantage of those incentives. But the program was expensive for the U.S. government. A Treasury report in the 1980s estimated the government lost out on at least $1.50 in taxes for every dollar paid to Puerto Ricans in wages. So in the mid-1990s, the federal law was phased out. It ended in 2006. Combined with global forces like the rise of Chinese manufacturing, automation and the great Rece, Puerto Rico slumped into an economic depression.

[Darren Woods]

Then in 2009, Puerto Rico got a new governor, Luis Fortuno. Fortuno says the state of the government's books was dire.

[Luis Fortuno]

We didn't have enough money to meet our first payroll January 15th. We had to rush to the market, take loan money against the sales tax collections to be able to pay the payroll. That was the context, really.

[Wayland Wong]

Unemployment hit 17% because businesses had left Puerto Rico and people were leaving the island by the tens of thousands.

[Luis Fortuno]

So we needed people and money. That was it.

[Darren Woods]

Fortuno asked his team to come up with policies that might bring those people and that capital. And along with a range of other policies, Fortuno's team came up with the idea to try to attract wealthy individuals to the territory.

[Luis Fortuno]

Most of them were going to be type A individuals. They will not sit around just playing golf and watching tv. They're going to engage in the local economy.

[Wayland Wong]

This new tax law was Act 22. Act 22 allowed people to move to Puerto Rico and pay no taxes on capital gains. So say you own a bunch of property or shares and want to sell them, there's no tax for their growth in value while you were in Puerto Rico.

[Darren Woods]

Now, there were certain conditions for people taking advantage of Act 22. They had to live on the island for more than six months of the year. They needed to buy a house, and every year they needed to donate $5,000 to local charities and file a report to the Puerto Rican government.

[Wayland Wong]

Though this wasn't always enforced, roughly 2,300 people took advantage of Act 22 in the years before the pandemic. This included American boxer and influencer Logan Paul, later cryptocurrency entrepreneur Brock Pierce.

[Darren Woods]

Also Jo After Several years, the department that administers the scheme commissioned a report to measure the economic benefits. One of the authors was Jose Caraballo, a professor of economics at the University of Puerto Rico.

[Jose Caraballo]

They didn't like it because I think they were expecting me to defend Act 22 as it is. And I said no. And I found that Act 22 is creating a very low number of jobs.

[Darren Woods]

The unemployment rate did decline significantly during this time. It's now five and a half percent. But according to Jose's report published in 2021, only a small share of those jobs created could be attributed to Act 22. And that's about 6,000 jobs now. 6,000. It compares against an island of 3.2 million people.

[Wayland Wong]

We brought these lackluster findings to the former governor of Puerto Rico, Luis Fortuno.

[Darren Woods]

The paper you sent me concludes, seven years after the enactment of these acts, we still observe modest results. Is that disappointing to read?

[Luis Fortuno]

So it is not a home run. And I never expected it to be a home run. It's just one of many measures that have been taken. I never thought this was going to be a silver bullet. Never sold it that way. Just thought it was one of many measures that was going to help us retain people, bringing people, new people to the island and generate new economic activity.

[Wayland Wong]

So it's worth considering Act 22 as almost a symbolic center of a package of changes that are affecting Puerto Rico. The most contentious effect is the cost of housing. At the same time as Act 22, the Fortuno administration was also encouraging banking and tourism through lower tax rates. There was also a global tourism boom in the 2010s, with backlash from Barcelona to the beaches of Thailand. And the rise of Airbnb meant that properties near attractions like the colorful streets of Old San Juan spiked in value. Longtime renters in those neighborhoods ended up as collateral damage.

[Darren Woods]

That said, there is no robust economic analysis teasing out the specific effect of Act 22 on housing prices in Puerto Rico.

[Luis Fortuno]

Prices have gone up everywhere. Go to Florida, go to Texas, go to New York, everywhere. So that is a result of something else, but not in these neighborhoods. As a result of Act 22, the.

[Wayland Wong]

Growth in rental prices in Puerto Rico is comparable with the US As a whole, which also faces a housing shortage. That said, the anecdotes of displacement on the island are widespread. Luis Valentin, the journalist, says he experienced this when he was trying to buy a house for his young family.

[Luis Valentin]

Real estate people here on the island would pick up the phone and if you don't speak English or if you don't have cash. They will not do business with you. Right? Like they don't, they don't want to hear it.

[Darren Woods]

Given that the the island is 95% Spanish speaking. So that really speaks to something there.

[Luis Valentin]

That's crazy, right? And that's why I think that that album really resonates with Puerto Ricans, because they feel, you know, I get it.

[Darren Woods]

Luis Fortuno, the former governor, now lives in Washington, D.C. but he says he visits the island every month. He has little patience for Bad Bunny's critiques of the island's newcomers.

[Luis Fortuno]

He lives in a mansion in LA and come on, give me a break. You know, if you're going to get involved in the island, move down there and get involved.

[Wayland Wong]

To be fair, Bad Bunny will do a 21 show residency in Puerto Rico this summer.

[Darren Woods]

But back to whether or not act 22 is the villain or hero, it's clear that Puerto Rico's economic policies aren't perfect. The island's population declined throughout the 2010s as many young Puerto Ricans decided to take up opportunities else. This episode was produced by Angel Carreras with engineering by Jimmy Keeley. It was fact checked by Sierra Juarez. Kate Concanan edits the show and the indicator is a production of npr.

[NPR Host]

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