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As I understand it they have no voting ability and while they pay some taxes they are exempt from on of the biggest taxes, income tax. I believe they are other taxes states pay that territories do not?

This means the average citizen of a US Territory is paying less in taxes then the average citizen of a US state (or DC citizen). I'm wondering how this affects the financial support that the US provides to this territories. Do they gain all the same expense and financial support of a state, which would imply they are guaranteed to receive more in federal funding they they pay in in taxes due to their not paying income tax? Or are there some forms of federal funding territories do not gain that a state would?

If the US government does provide the same degree of federal funding does this mean that a territory is always costing more in tax dollars then provided, and if so what is the incentive for The US to take on territories?

If the US government is not providing the same degree of federal funding to territories as states has any study been done comparing the degree of taxes payed in vs federal funds payed to the territories and if so generally is the US receiving more, about equal, or less in taxes as it's providing in services to these territories?

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  • It does not really follow that territory would necessarily receive more federal funding than they contribute. That's not the case of regular states either and there is no reason it would be. This is an important insight as it shows that, for better of for worse, this is simply how taxes and spending work in a federation.
    – Relaxed
    Commented Oct 16, 2017 at 21:49
  • How much anyone gets in federal support largely depends on how effective their lobbyists/politicians are at pork barrel extortion. (while territories may not have congresscritters they still have theoretically at least some lobbying power, e.g. Puerto Rico has US citizens who can vote in US elections, if they live outside PR)
    – user4012
    Commented Oct 16, 2017 at 23:32
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    You might note that the median incomes of major territories such as Puerto Rico and the Virgin Islands are considerably lower than US incomes, so it's likely that they wouldn't be paying all that much income tax anyway.
    – jamesqf
    Commented Oct 17, 2017 at 4:21
  • FWIW, Plenty of states also receive much more in support than they contribute.
    – user1530
    Commented Oct 18, 2017 at 19:50
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    @blip: Though one has to be careful about just what one defines as "support". As for instance running a major interstate highway through a rural western state may result in a lot of Federal money being spent there, but it's mostly for the benefit of states on each side. Likewise with major military bases, national parks & forests...
    – jamesqf
    Commented Oct 20, 2017 at 17:18

1 Answer 1

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Are US territories getting the same degree of Federal support without paying as much in taxes?

Let's look at Puerto Rico:

Here's a chart that better shows US states compared to Puerto Rico in terms of what they get back and what they contribute:

enter image description here

Transfers to Puerto Rico, which is a US territory not a fully incorporated state, exceeded 290%. Where did these transfers come from? New York transferred over $950 billion to the rest of America’s fiscal union from 1990 to 2009. But relative to the size of its economy, Delaware made the biggest contribution, equivalent to more than twice its 2009 GDP.

So does this mean Puerto Rico is contributing nothing? Not quite. As the charts show, during the period of 1990 to 2009, Puerto Rico contributed more in federal taxes to the union, even without the federal income tax, than six other states: Montana, North Dakota, Alaska, South Dakota, Vermont and Wyoming. Now that is just in total numbers, proportionally speaking, the story would be a different one, since Puerto Rico would be 25th in terms of population if it were a state.

What's the federal spending of Puerto Rico compared to US states?

enter image description here

In overall terms, Puerto Rico is indeed getting the best deal out of the fiscal union, merely in terms of GDP versus federal spending. It is needless to say that this would be unsustainable, but this reality has been evident for a while now, and Washington seems content with the status quo.

That said, this information likely only fuels the perception of those who believe Puerto Rico should not receive any help during the fiscal crisis, even in the form of re-extending Chapter 9 bankruptcy protection to municipalities in the territory. In the meantime, states like New York, California and Delaware are subsidizing jurisdictions, including Puerto Rico. The one difference being, that unlike with the other jurisdictions, Congress could make the situation a bit more fair, but fully integrating the territory as a state of the union. You also have to look at the population of Puerto Rico:

  • Less population = less taxes for the territory to contribute.

enter image description here

Puerto Rico's population has been shrinking and continues to shrink as more people are moving to the states.

Median Income of Puerto Rico resident

According to Census.gov, the average income of a resident in Puert Rico is $19,515

Now, compare that to average household income of US reisdents which was $73,298 and the picture becomes much more clear.

Break down of average household income of Puerto Rico residents

enter image description here

In short, there's a lot of factors at play here. Cost of living, average household income, population size and lots of other factors. Just because they don't pay federal tax, does not mean they don't contribute(as shown in the graphs).

It can also be do the the No taxation with representation theory as Puerto Rican's cannot vote in US elections.

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    Average resident vs average household is not an consistent comparison standard.
    – PoloHoleSet
    Commented Oct 20, 2017 at 14:48
  • A great answer thank you. Unfortunately the other US territories besides Purto Rico are missing, which surprises me a little that these studies would include calculations for one territory and not the other. Still a good answer thank you. I wonder now what would happen to the average tax/federal spending if Purto Rico was ever made a state. Their taxes would go up, but with voting power they likely would be able to encourage more financial support from the US. I guess it's hard to say what the net result would be.
    – dsollen
    Commented Oct 20, 2017 at 16:13
  • I chose Puerto Rico as an example. Listing all US territories would be much too long
    – Noah
    Commented Oct 20, 2017 at 16:32

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