PUERTO RICO

Information on How 

Statehood Would 

Potentially Affect 

Selected Federal 

Programs and 

Revenue Sources

Report to Congressional Requesters

March 2014

GAO-14-31

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-31, a report to 

congressional requesters

March 2014

PUERTO RICO

Information on How S tatehood Would P otentially 

Affec t S elec ted Federal Programs and R evenue 

S ources 

What GAO Found

Of the 29 federal programs GAO reviewed (which accounted for about 86 

percent of federal program spending for states or their residents in fiscal year 

2010), statehood would likely affect 11 programs. For 3 other programs, while 

the programs themselves would likely not change under statehood, eligibility 

determinations for these programs could be affected indirectly by changes that 

could occur to benefits in other programs. Statehood would not likely affect the 

15 remaining programs. See figure below.

The extent to which federal spending would change for some of the programs 

affected by Puerto Rico statehood depends on various assumptions: these 

assumptions include the program eligibility options Puerto Rico might select or

the rates at which eligible residents might participate in the programs. For 

example, for the four largest programs for which federal spending likely would 

change under statehood—Medicare, Medicaid, the Supplemental Nutrition 

Assistance Program (SNAP), and Supplemental Security Income (SSI)—GAO 

used various assumptions to estimate the range of potential effects on federal 

program spending. The estimated ranges for the four programs, as described

below, are based on Puerto Rico being treated the same as the states in either 

2010 or 2011, based on the year for which GAO had the most recent data.

Medicare: In fiscal year 2010, actual federal Medicare spending in Puerto Rico 

was $4.5 billion; if Puerto Rico had been a state in calendar year 2010, 

estimated federal spending would have ranged from $4.5 billion to $6.0 billion. 

The Medicare estimates take into account certain changes under the Patient 

Protection and Affordable Care Act occurring after 2010 that would reduce 

spending. Also, the Medicare estimates depend on the estimates for Medicaid, 

as some individuals are eligible for both programs.

Medicaid: In fiscal year 2011, actual federal Medicaid spending in Puerto Rico 

was $685 million; if Puerto Rico had been a state in calendar year 2011, 

estimated federal spending would have ranged from $1.1 billion to $2.1 billion.

The Medicaid estimates do not take into account the cost of nursing home and 

Why GAO Did This Study

Puerto Rico has access to many 

federal programs, and is subject to 

certain federal tax laws; however, for 

some programs and for some aspects 

of tax law, Puerto Rico is treated 

differently than the states. Options for 

Puerto Rico’s political status include 

statehood. 

GAO was asked to review potential 

fiscal implications for federal programs

if Puerto Rico were to become a state. 

This report examines potential 

changes to selected federal programs

and related spending changes, and

changes to selected federal revenue

sources that would be expected should 

Puerto Rico become a state. This 

report also discusses economic and 

fiscal factors under statehood that 

could influence changes in spending 

and revenues. 

To evaluate potential changes to 

selected federal programs and revenue

sources, GAO reviewed federal laws 

and regulations and interviewed 

federal and Puerto Rico agency 

officials. To discuss factors that could 

influence changes in spending and 

revenue, GAO reviewed economic 

data from Puerto Rico’s government 

and interviewed officials from the 

current and past Puerto Rico 

government administrations. 

What GAO Recommends

GAO is not making recommendations. 

Federal agency and Puerto Rico 

government officials reviewed GAO’s 

draft report; their comments were 

incorporated as appropriate. 

To view the Spanish translation of this 

highlights page, please see GAO-14-

301. 

View GAO-14-31. For more information, 

contact Stanley J. Czerwinski at (202) 512-

6520 or czerwinskis@gao.gov. 
Highlights of GAO-14-31 (Continued) 

United States Government Accountability Office

home health services in Puerto Rico due to the lack of available cost data, and because Puerto Rico lacks an 

infrastructure of nursing home facilities, according to Centers for Medicare & Medicaid Services officials. If these services 

became available, Medicaid spending would likely increase.

SNAP: In fiscal year 2011, actual federal spending for a similar program in Puerto Rico was $1.9 billion; if Puerto Rico 

had been a state in calendar year 2011, residents would have been eligible for SNAP, and estimated federal spending 

would have ranged from $1.7 billion to $2.6 billion. One reason why the low end of the estimate range is less than actual 

spending is because participants’ benefits would be reduced because of benefits received from SSI, for which Puerto Rico 

residents would newly qualify.

SSI: In fiscal year 2011, actual federal spending for a similar program in Puerto Rico was $24 million; if Puerto Rico had 

been a state in calendar year 2011, residents would have been eligible for SSI, and estimated federal spending would 

have ranged from $1.5 billion to $1.8 billion.

All the federal revenue sources GAO reviewed—individual and corporate income taxes, employment tax, excise tax, 

estate and gift taxes, and customs duties—could be affected if Puerto Rico became a state. For example, under 

statehood, Puerto Rico residents would be subject to federal tax on all their income: currently, they are subject to federal 

tax only on income from sources outside of Puerto Rico. Also, some sources of income, such as pension income, are 

taxed differently in Puerto Rico than in the states. As a result, for 2010, Puerto Rico filers’ adjusted gross income for 

federal tax purposes would have been higher than that for Puerto Rico tax purposes. For some revenue sources, the 

extent to which federal revenue would change depends on various assumptions. For example, for the two largest revenue 

sources that would be affected substantially by statehood—individual and corporate income taxes—GAO used various 

assumptions to estimate a range of federal revenue. The estimate ranges, as described below, are based on Puerto Rico 

being treated the same as the states in either 2009 or 2010, based on the year for which GAO had the most recent data.

Individual income tax: In 2010, Puerto Rico taxpayers reported paying $20 million to the United States, its possessions, 

or foreign countries. According to officials from Puerto Rico’s Department of Internal Revenue, most of these payments 

would have been to the United States. If Puerto Rico had been a state in 2010, estimated individual income tax revenue 

from Puerto Rico taxpayers would have ranged from $2.2 billion to $2.3 billion (after accounting for estimated payments in 

excess of tax liability from refundable tax credits, such as the earned income tax credit). 

Corporate income tax: In 2009, U.S. corporations paid about an estimated $4.3 billion in tax on income from their 

affiliates in Puerto Rico. Most of this amount was from an unusually large amount of dividends repatriated from Puerto 

Rico (compared to amounts repatriated in earlier years or in 2010). Absent that spike in dividends, the federal taxes these 

corporations would have paid for 2009 would have been about $1.4 billion. If Puerto Rico had been a state in 2009, 

estimated corporate income tax revenue from businesses that filed a Puerto Rico tax return for that year (or their parent 

corporations in the United States) would have ranged from $5.0 to $9.3 billion. The low end of this range assumes that 

U.S. corporations would have used prior-year losses of affiliated Puerto Rico corporations to offset their federal taxable 

income to the maximum extent (leaving only smaller or newly generated losses available to offset income in subsequent 

years), among other assumptions. However, this range does not take into account any behavioral changes of businesses 

with activities in Puerto Rico. For example, according to tax policy experts at the Department of the Treasury and the Joint 

Committee on Taxation, changes in federal income tax requirements under statehood would likely motivate some 

corporations with substantial amounts of income derived from intangible (and therefore mobile) assets to relocate from 

Puerto Rico to lower tax foreign locations. The extent to which such corporations might relocate from Puerto Rico is 

unknown. Consequently, GAO produced an alternative set of revenue estimates to account for some businesses with 

activities in Puerto Rico potentially relocating under statehood: this range was -$0.1 billion to $3.4 billion. The low end of 

this range is negative because U.S. corporations would have used their Puerto Rico affiliates’ prior-year losses to reduce 

their taxes to such an extent that they would have more than offset the positive tax amounts that other corporations 

continuing to operate in Puerto Rico under statehood would have paid. 

Puerto Rico faces various economic and fiscal challenges that could potentially impact changes in federal spending and 

revenue under statehood. For example, its economy largely has been in recession since 2006, and its levels of 

employment and labor force participation are relatively low, compared to those of the states. Persistent deficits have 

resulted in an increase in Puerto Rico’s public debt, which represents a much larger share of personal income than in any 

state (and in February 2014, Puerto Rico’s general obligation bonds were downgraded to speculative—noninvestment—

grade by three ratings agencies). Puerto Rico has taken recent steps to improve its fiscal position, such as reducing its 

government workforce and reforming its largest public employee retirement system. Changes in federal program spending 

and to federal tax law under statehood could lead to economic and fiscal changes of their own in Puerto Rico. That may 

have a cascading effect on federal spending and revenue levels. However, the precise nature of such changes is 

uncertain. Because statehood would cause numerous adjustments important to Puerto Rico’s future, it would require 

careful consideration by Congress and the residents of Puerto Rico. Consequently, statehood's aggregate fiscal impact 

would be influenced greatly by the terms of admission, strategies to promote economic development, and decisions 

regarding Puerto Rico’s government revenue structure.
Page i GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Letter 1 

Background 6

Potential Changes to Selected Federal Programs under Puerto 

Rico Statehood 14

Potential Changes to Selected Federal Revenue Sources under 

Puerto Rico Statehood 24

Factors under Statehood that Could Influence Changes in Federal 

Spending and Revenue 29

Agency and Puerto Rico Government Officials Comments 32

Appendix I Objectives, Scope, and Methodology 36

Potential Changes to Selected Federal Programs and Related 

 Changes in Federal Spending 36

Potential Changes to Selected Sources of Federal Revenue 53

Factors that Could Affect Federal Spending and Revenue 62

Appendix II Details on Potential Changes to Selected Federal Programs 

 under Puerto Rico Statehood 64

Medicare 65

Medicaid 73

Supplemental Nutrition Assistance Program 78

Supplemental Security Income 82

Federal-Aid Highways 85

Children’s Health Insurance Program 88

Temporary Assistance for Needy Families 94

Title I Grants to Local Educational Agencies 96

Post-9/11 GI Bill 98

Appendix III Details on Potential Changes to Selected Federal Revenue 

 Sources under Puerto Rico Statehood 100

Individual Income tax 101

Corporate Income tax 105

Appendix IV Potential Effects of the Patient Protection and Affordable 

 Care Act on Federal Spending for Medicare, Medicaid, the 

 State Children’s Health Insurance Program under Puerto 

 Rico Statehood 110

Contents
Page ii GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Appendix V Comments from the Governor of Puerto Rico 116

Appendix VI Comments from the Resident Commissioner for Puerto Rico 118

Appendix VII GAO Contacts and Staff Acknowledgments 126

 

Figures

Figure 1: Comparison of Per-capita Federal Grants, Payments, 

and Taxes in Puerto Rico and the States, 2010 8

Figure 2: Percentages of the Population with Income below the 

Federal Poverty Threshold and Unemployment and Labor 

Force Participation Rates in Puerto Rico and the States, 

2011 10

Figure 3: Potential Changes under Puerto Rico Statehood to 

Selected Federal Programs, in Descending Order by

Total Amount Obligated by the Federal Government in 

Fiscal Year 2010 15

Figure 4: Actual Federal Spending in Puerto Rico and Estimated 

Range of Federal Spending under Puerto Rico Statehood 

for Selected Programs 23

Figure 5: Potential Changes Under Puerto Rico Statehood to 

Federal Revenue Sources, in Descending Order by 

Amount of Federal Receipts in Fiscal Year 2012 25

Figure 6: Actual Federal Income Tax Revenue from Puerto Rico 

and Estimated Range of Federal Income Tax Revenue 

under Puerto Rico Statehood 27

Tables

Table 1: Actual Federal Medicare Spending in Puerto Rico and 

Estimated Federal Medicare Spending Under Puerto 

 Rico Statehood, 2010 72

Table 2: Actual Federal Medicaid Spending and Medicaid 

 Enrollment in Puerto Rico and Estimated Federal 

 Medicaid Spending and Medicaid Enrollment 

 under Puerto Rico Statehood, 2011 77 
Page iii GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Table 3: Comparison of NAP and SNAP Selected Program 

 Characteristics, Fiscal Year 2011 80

Table 4: Actual Puerto Rico NAP Data and Estimates of SNAP 

 Implementation under Puerto Rico Statehood 81 

Table 5: Actual Puerto Rico AABD Data and Estimates for SSI 

 Implementation under Puerto Rico Statehood, 2011 84 

Table 6: Actual Federal CHIP Spending and CHIP Enrollment 

 in Puerto Rico and Estimated Federal CHIP Spending 

 and CHIP Enrollment under Puerto Rico 

 Statehood, 2011 91 

Table 7: Estimated Aggregate Individual Income Tax Liability, 

 Payments for Refundable Credits, and Net Revenue

 under Puerto Rico Statehood—Puerto Rico Individual 

 Tax Return Fliers, 2010 104 

Table 8: Estimated Aggregate Corporate Income Tax 

 Liability for Puerto Rico Business Tax Return Filers 

 under Statehood—Assuming all Filers Maintained 

 Activities in Puerto Rico, 2009 109 

Table 9: Estimated Aggregate Corporate Income Tax Liability 

 for Puerto Rico Business Tax Return Filers under 

 Statehood—Assuming Pharmaceuticals and 

 Medical Equipment Supplies 

 Businesses Relocated, 2009 109 

Table 10: Selected PPACA Provisions and Their Potential 

 Affect on Federal Medicare Spending in Puerto Rico 

 under Statehood 111

Table 11: Selected PPACA Provisions and Their Potential 

 Affect on Federal Medicaid and CHIP Spending in 

 Puerto Rico under Statehood 114
Page iv GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Abbreviations 

AABD Aid to the Aged, Blind, and Disabled 

AOTC American Opportunity Tax Credit

CHIP Children’s Health Insurance Program 

CHIPRA Children’s Health Insurance Program Reauthorization 

Act of 2009

CLF Central Liquidity Facility 

CMS Centers for Medicare & Medicaid Services

CBO Congressional Budget Office

CRS Congressional Research Service

CTC child tax credit

DSH Disproportionate Share Hospital

ED U. S. Department of Education 

EITC earned income tax credit

FHWA Federal Highway Administration 

FMAP federal medical assistance percentage 

FNS Food and Nutrition Service

FPL federal poverty level

GDP gross domestic product

GNP gross national product

HCERA Health Care and Education Reconciliation Act of 

2010

HPC Health Policy Center 

IPPS Inpatient Prospective Payment System 

IRS Internal Revenue Service 

LEA local educational agency 

MA Medicare Advantage

MAP-21 Moving Ahead for Progress in the 21st Century Act

MCBS Medicare Current Beneficiary Survey 

MCO managed care organization

Medicare FFS Medicare fee-for-service 

MSP Medicare Savings Program 

NAP Nutrition Assistance Program 

OMB Office of Management and Budget 

OPPS Outpatient Prospective Payment System 

PPACA Patient Protection and Affordable Care Act

PRCS Puerto Rico Community Survey

Recovery Act American Recovery and Reinvestment Act of 2009

SNAP Supplemental Nutrition Assistance Program

SNP Special Needs Plan
Page v GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

SSA Social Security Administration 

SSI Supplemental Security Income

TANF Temporary Assistance to Needy Families

TRIM3 Transfer Income Model, version 3

USDA U. S. Department of Agriculture

VA Department of Veterans Affairs 

WIC Special Supplemental Nutrition Program for Women, 

Infants and Children 

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Page 1 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

441 G St. N.W.

Washington, DC 20548

March 4, 2014

The Honorable Doc Hastings

Chairman

Committee on Natural Resources

House of Representatives

The Honorable John Fleming

Chairman

Subcommittee on Fisheries, Wildlife, Oceans, and Insular Affairs

Committee on Natural Resources

House of Representatives

In some ways, Puerto Rico—the largest and most populous territory1 of 

the United States—has a fiscal relationship with the federal government 

similar to that with the states.2

Puerto Rico’s political status has been debated for over a century. The 

policy of the federal executive branch has long been that Puerto Rico’s 

status should be decided by the people of Puerto Rico (although 

Congress has ultimate authority over the admission of states). To that 

end, since the 1960s, Puerto Rico has held four plebiscites intended to 

determine its preferred status relationship with the United States, most

For example, Puerto Rico’s residents have 

access to many federal programs and are subject to certain federal tax 

laws. However, for some federal programs, Puerto Rico or its residents 

are subject to different requirements or funding rules than are the states 

or their residents. Likewise, some federal tax laws apply differently to 

Puerto Rico residents and corporations than to residents of the states and 

corporations in the states.

 

1

The U.S. Department of the Interior, Office of Insular Affairs, currently defines a territory 

as an unincorporated insular area: a jurisdiction that is neither a part of one of the several 

states nor a federal district. The Office of Insular Affairs does not exercise any 

responsibilities in relation to Puerto Rico. 

2

In this report, the term states refers to the 50 states and the District of Columbia, unless 

otherwise noted. 
 

Page 2 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

recently in 2012.3 Statehood has been one of the status options included 

in those plebiscites.4

You asked us to review the potential fiscal implications for federal 

programs if Puerto Rico were to become a state. The objectives of this 

report are to evaluate (1) potential changes to selected federal programs 

and related changes in federal spending, and (2) potential changes to 

selected sources of federal revenue, should Puerto Rico become a state. 

We also describe factors under statehood that could influence changes in 

federal spending and revenue, such as the effect of statehood on Puerto 

Rico’s economy and public finances.

If Puerto Rico were to become a state, fiscal 

relations between it and the federal government would likely change.

To evaluate potential changes to selected federal programs under Puerto 

Rico statehood, we used data from fiscal years 2010 and 20115

 

3

A plebiscite is a binding or non-binding referendum on a proposed law, constitutional 

amendment, or significant public issue. These four plebiscites were non-binding. In 

addition to the four plebiscites, in 1991, Puerto Rico held a referendum on rights that 

would have been incorporated into its constitution, including the right to determine its 

status relationship without being subject to the plenary powers of Congress. The 

referendum was not approved. 

to identify 

programs that generally provide funds directly to states and territories, or 

4

Ballot wording or options in past plebiscites have varied, but have included options—in 

addition to statehood—such as various forms of the status quo, including commonwealth; 

independence; and free association. For an overview of the various definitions and 

debates surrounding Puerto Rico’s status, see Congressional Research Service, Puerto 

Rico’s Political Status and the 2012 Plebiscite: Background and Key Questions

(Washington, D.C.: June 25, 2013). 

5

We used data from 2010 because they were the most recent available when we began 

our work. Once data from 2011 became available, we assessed whether our program 

selection would have differed had we used data from that year. Since we found few 

differences, we did not change our original program selection. The five largest federal 

programs that would change under statehood based on outlay data for 2010 were also the 

five largest that would change based on 2011 data. 
 

Page 3 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

residents and institutions in the states and territories.6

For each selected program, we reviewed relevant laws and regulations 

and interviewed federal (and in some cases Puerto Rico) agency officials 

to determine if and how spending would change under Puerto Rico 

statehood. For some programs, current law applies certain limitations or 

exceptions to Puerto Rico by name. For other programs, the governing 

statutes refer to the 50 states or the 50 states and the District of 

Columbia. For these programs, we assumed that if Puerto Rico became a 

state, it would be treated the same as any existing state, either because 

Congress would amend the statutory limitations and exceptions or 

because they would otherwise not apply.

Among those 

programs, we identified those that had total federal net outlays of at least 

$5 billion and/or programs for which federal spending in Puerto Rico 

differed by at least $100 million from spending in a set of comparable 

states. Based on these criteria, we selected 29 programs to review, which 

accounted for about 86 percent of spending in fiscal year 2010 on 

programs that generally provide funds directly to states and territories, or 

residents and institutions in the states and territories.

7

To evaluate potential changes in federal spending that could result from 

potential changes to federal programs, we developed estimates of federal 

spending under statehood for some programs. The programs for which 

we developed estimates accounted for about 94 percent of fiscal year 

2010 spending on programs that would likely change under statehood. 

For these programs, we developed a range of estimated spending for a 

single year in the past, as if Puerto Rico had been treated like the other 

 

6

Based on this criterion, we excluded certain types of federal spending from our review. 

Specifically, we excluded spending on the military; international aid and affairs; interest on 

the national debt; and administrative, operational, procurement, or capital acquisition 

expenses at federal agencies, including federal employee salaries and retirement 

compensation. One aspect of military spending—the Department of Defense’s TRICARE 

Prime program—would be likely to change under statehood. A 2011 Department of 

Defense Report to Congress found that extending TRICARE into Puerto Rico and the 

other territories would result in a net spending increase of $29.7 million. See Department 

of Defense, Report to Congress on Feasibility of TRICARE Prime in Certain 

Commonwealths and Territories of the United States (Washington, D.C.: May 2011). 

7

Whether or not Congress would have the power to treat Puerto Rico—as a state—

differently from any other state for the purposes of any particular federal program was 

beyond the scope of our work. 
 

Page 4 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

states in that year.8

To evaluate potential changes to selected federal revenue sources under 

Puerto Rico statehood, we reviewed federal laws and regulations related 

to the main sources of federal revenue in fiscal year 2012—individual 

income tax (which accounted for 46.2 percent of federal revenue in fiscal 

year 2012), employment tax (34.5 percent), corporate income tax (9.9 

percent), excise tax (3.2 percent), customs duties (1.2 percent), and 

estate and gift taxes (0.6 percent).

The year of the estimate ranges vary by program, 

based on the data available when we began our work. The estimates are 

based on various assumptions—such as the program eligibility options 

Puerto Rico might select or the rates at which eligible residents might 

participate in the programs—which are described in detail for each 

program in appendix II.

9

To identify factors under statehood that could influence changes in 

federal spending and revenue, we reviewed economic data from Puerto 

Rico’s government. We also reviewed reports on Puerto Rico’s economy, 

such as those from the Federal Reserve Bank of New York and the 

Congressional Budget Office. We also interviewed officials from the 

current and past Puerto Rico government administrations and Puerto 

Rico business associations representing large economic sectors in Puerto 

Rico to obtain their views on the potential impacts of statehood on Puerto 

Rico’s economy and public finances.

We also used tax return data from 

Puerto Rico’s Department of Internal Revenue and data from the Internal 

Revenue Service to estimate potential changes in revenue for some 

federal revenue sources.

We took various steps to assess the reliability of the data we used to 

select programs to evaluate and to estimate changes in spending and 

revenue. For example, we reviewed available documentation, examined 

 

8

For some programs, we contracted with the Urban Institute to conduct portions of the 

work using simulation models. The Urban Institute’s analyses required our input on 

assumptions and about the rules governing federal programs. Therefore, the information 

presented in this report is attributable only to GAO. 

9

Office of Management and Budget, Analytical Perspectives, Budget of the United States 

Government, Fiscal year 2014, (Washington, D.C.: Apr. 10, 2013). We did not evaluate 

potential changes to miscellaneous receipts—which accounted for 4.4 percent of total 

receipts in fiscal year 2012. About 77 percent of miscellaneous receipts in fiscal year 2012 

derived from earnings deposited by the Federal Reserve. Other types of miscellaneous 

receipts included fines, penalties, and forfeitures. 
 

Page 5 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

the data for questionable or inconsistent values, and interviewed federal 

and Puerto Rico agency officials, as appropriate, to understand the data 

that we used. We also assessed the reliability of the Urban Institute’s 

modeling procedures by reviewing documentation on the models and 

input data sources, discussing the program rules and underlying 

assumptions used in the models with staff from the Urban Institute who 

were responsible for the work provided under our contract, and reviewing 

the Urban Institute’s internal quality control procedures. We determined 

that the data used in the report, as well as the Urban Institute’s modeling 

procedures were sufficiently reliable for the purposes of this report.

The estimates involve various sources of uncertainty. Some estimates of 

federal spending are based, in part, on sample survey data, which 

required us to take sampling error into account. Unless otherwise 

indicated, the margin of error for estimates using sampling survey data is 

plus or minus 7 percent, or less, of the estimates themselves.10

We conducted this performance audit from June 2012 to March 2014 in 

accordance with generally accepted government auditing standards. 

There are 

other sources of uncertainty that are not readily quantifiable. These 

include the assumptions we used to develop the estimates, such as those 

for which program eligibility rules Puerto Rico would adopt and the rates 

at which eligible Puerto Rico residents would participate in the programs. 

To some extent, the various scenarios for estimated spending and 

revenue that we include capture the extent to which these assumptions 

would impact spending and revenue. In other instances, there may be 

sources of uncertainty and dynamic changes under statehood that we 

could not incorporate into our modeling. These could include further 

changes in eligibility rules once additional program funding becomes 

available, the reaction of program beneficiaries to changes in the 

programs, or changes in economic activity (and resulting revenue). For 

additional details on our scope and methodology, see appendix I.

 

10Sample survey data are obtained by following a probability procedure based on the 

selection of random samples. Each sample is only one of a large number of samples that 

might have been selected. Since each sample could have provided different estimates, 

sampling error measures the level of confidence in the precision of a particular sample’s 

results, which we express as a margin of error at the 95-percent confidence interval. 

Unless otherwise indicated, all estimates included in this report that used sample survey 

data, plus-or-minus 7 percent, or less, of the estimates themselves would contain the 

actual value for the populations we analyzed for 95 percent of the samples that could have 

been selected. 
 

Page 6 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Puerto Rico, with about 3.6 million residents, is the largest U.S. territory. 

As a territory, Puerto Rico is subject to congressional authority, although 

Congress has granted Puerto Rico authority over matters of internal 

governance.11

Puerto Rico has held 4 plebiscites intended to determine its preferred 

status relationship with the United States. The most recent plebiscite, 

held in November 2012, asked voters in Puerto Rico two questions: (1) 

whether Puerto Rico should continue its present form of territorial status, 

and (2) regardless of how voters answered the first question, which nonterritorial status option is preferred—statehood, independence, or a 

sovereign free associated state.12

 

1148 U.S.C. §§ 731b–731e. Under federal statute, Puerto Rico voters elect a Resident 

Commissioner to represent Puerto Rico in Washington. 48 U.S.C. § 891. The Resident 

Commissioner serves four-year terms. Under the rules established by the House of 

Representatives, the Resident Commissioner functions like a member of the House in 

certain respects: he or she may vote and otherwise act similarly to members in legislative 

committee, and may participate in debate and make most motions in the House. However, 

the Resident Commissioner does not enjoy all the same parliamentary rights as Members 

of the House. For example, the Resident Commissioner may not vote in the House. 

Likewise, a rules change adopted in the 112th Congress (2011-2012) eliminated the ability 

of the Delegates and Resident Commissioner to vote in, or preside over, the Committee of 

the Whole. 

For the first question, about 54 percent 

12According to the Congressional Research Service (CRS), the plebiscite ballot 

instructions suggest that a sovereign free associated state would entail independence with 

ongoing, negotiated ties with the United States. The term sovereign free associated state 

resembles language used to describe freely associated states with which the United 

States has a relationship, such as the Republic of the Marshall Islands, the Federated 

States of Micronesia, and the Republic of Palau. See CRS, Puerto Rico’s Political Status 

and the 2012 Plebiscite: Background and Key Questions, (Washington, D.C.: June 25, 

2013). 

Background

Puerto Rico’s Political 

Status
 

Page 7 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

of voters indicated that Puerto Rico should not continue its present form 

of territorial status. For the second question, about 61 percent of voters 

who chose a non-territorial status option chose statehood.13

The Consolidated Appropriations Act, 2014 includes $2.5 million in 

funding for objective, nonpartisan voter education about, and a plebiscite 

on, options that would resolve Puerto Rico’s future political status.14 The 

funds are to be provided to the State Elections Commission of Puerto 

Rico.

Congress generally determines whether Puerto Rico is eligible for federal 

programs on a case-by-case basis, and defines any different treatment in 

law. For example, federal programs in Puerto Rico may be subject to 

certain funding or eligibility restrictions. For some programs, current law 

applies certain limitations or exceptions to Puerto Rico by name. For 

other programs, the governing statutes refer to the 50 states or the 50 

states and the District of Columbia.

Where differences are not mandated by law, federal agencies generally 

treat Puerto Rico the same as the states.15 Yet, characteristics of federal 

programs in Puerto Rico may differ from the states for other reasons. For 

example, a study by the U.S. President’s Task Force on Puerto Rico’s 

Status found that governments and organizations in Puerto Rico were not 

applying for and seeking all available federal funds. It also found that a 

significant amount of funds available in Puerto Rico are not spent in a 

timely manner.16

 

13According to Puerto Rico’s State Election Commission, 1,878,969 voters participated in 

the plebiscite. For the first question, 67,267 ballots were left blank. For the second 

question, 498,604 ballots were left blank.

Furthermore, Puerto Rico residents generally are 

14Pub. L. No. 113-76, 128 Stat. 5, 61 (2014).

15A Presidential Memorandum to the Heads of Executive Departments and Agencies, 

dated November 30, 1992, directs all Federal departments, agencies and officials, to the 

extent consistent with the Constitution and the laws of the United States, to treat Puerto 

Rico administratively as if it were a state, except insofar as doing so with respect to an 

existing federal program or activity would increase or decrease federal receipts or 

expenditures, or would seriously disrupt the operation of such program or activity. 57 Fed. 

Reg. 57,093. 

16U.S. President’s Task Force on Puerto Rico’s Status, Report by the President’s Task 

Force on Puerto Rico’s Status (Washington, D.C.: March 2011). 

Federal Payments to and 

Revenue from Puerto Rico
 

Page 8 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

exempt from federal taxes on income from Puerto Rico sources.17

Figure 1: Comparison of Per-capita Federal Grants, Payments, and Taxes in Puerto 

Rico and the States, 2010

These

differences contribute to Puerto Rico and its residents receiving fewer 

federal payments, and paying less in federal tax, than residents of the 

states on a per capita basis, as shown in figure 1.

a

Taxes paid include individual income tax, employment tax, estate and trust income tax, and estate 

and gift taxes, net of refunds and including interest.

Historically, trends in Puerto Rico’s economy have tended to follow those 

in the rest of United States. However, Puerto Rico’s latest economic 

downturn has been longer and more extreme than the mainland U.S. 

downturn. Specifically, the U.S. economy entered into a recession in 

December 2007, which ended in June 2009, according to the Business 

 

1726 U.S.C. § 933. 

Puerto Rico’s Economy
 

Page 9 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Cycle Dating Committee of the National Bureau of Economic Research. 

In contrast, Puerto Rico’s recession began in the fourth quarter of 2006, 

and the economy contracted every fiscal year from 2007 to 2011. After 

growth of 0.1 percent in fiscal year 2012, the economy is projected to 

have contracted in fiscal year 2013 by 0.4 percent, according to the 

Government Development Bank for Puerto Rico.18

Likewise, income levels and employment in Puerto Rico have been lower 

than in the states. For example, in 2011 Puerto Rico had 1) a greater 

percentage of its population with income below the federal poverty 

threshold,19

 

18Government Development Bank for Puerto Rico, Commonwealth of Puerto Rico, 

Financial Information and Operating Data Report (Puerto Rico: Oct. 18, 2013). 

2) higher unemployment, and 3) lower labor force 

participation—the proportion of the civilian noninstitutional population

older than 15 that is employed—as shown in figure 2.

19In 2011, 45.6 percent of Puerto Rico’s population was below the federal poverty 

threshold, compared to 22.6 percent in Mississippi, the state with the largest percentage 

of its population below the poverty threshold. The U.S. Census Bureau’s poverty threshold 

for a 2-parent family of 4 for 2011 was $22,811. The Census Bureau poverty thresholds 

are a measurement of poverty used for statistical purposes. Later in our report, we use the 

term federal poverty level to refer to the federal poverty guidelines issued each year by the 

Department of Health and Human Services that are used for administrative purposes, 

such as determining financial eligibility for certain federal programs. 
 

Page 10 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Figure 2: Percentages of the Population with Income below the Federal Poverty 

Threshold and Unemployment and Labor Force Participation Rates in Puerto Rico 

and the States, 2011

In 2011, the percentage of the population living below the federal poverty 

threshold was greater in Puerto Rico than in any state. More broadly, 

household income in Puerto Rico in 2011 was lower than that in the 

states—median household income was $18,660, compared to median 

household income of $50,502 in the states, and was lower than that in 

any state.20 Likewise, for 2011, Puerto Rico had a higher unemployment 

rate and lower labor force participation rate than any single state.21

 

20Mississippi’s median household income of $36,919 was the lowest of the states in 2011. 

21In 2011, Puerto Rico’s unemployment and labor force participation rates were 16.0 

percent and 42.1 percent, respectively. The highest unemployment rate in the states was 

13.2 percent (Nevada), and the lowest labor force participation rate was 54.1 percent 

(West Virginia).
 

Page 11 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Another salient feature of Puerto Rico’s economy is that a substantial 

share of production is carried out by U.S. multinational corporations, in 

part because of federal corporate income tax benefits that have been 

available to firms that located in Puerto Rico. Prior to 1994, certain U.S. 

corporations could claim the possessions tax credit. In general, the credit 

equaled the full amount of federal tax liability related to an eligible 

corporation’s income from its operations in a possession—including 

Puerto Rico—effectively making such income tax-free.22 In 1993, caps 

were placed on the amounts of possessions credits that corporations 

could earn. In 1996, the credit was repealed, although corporations that 

were existing credit claimants were eligible to claim credits through 

2005.23

Following the termination of the possessions tax credit, many U.S. 

corporations operating in Puerto Rico chose to reorganize by establishing 

Puerto Rico subsidiaries. Under U.S. tax law, Puerto Rico corporations 

are considered foreign corporations, which generally are not required to 

pay federal income taxes. U.S. parent corporations with foreign 

subsidiaries can defer tax on foreign income—including income earned in 

Puerto Rico—until they repatriate it to the United States, unless antideferral rules apply. Depending on their ownership, these Puerto Rico 

subsidiaries may be considered controlled foreign corporations (CFCs) 

 

22The Tax Reform Act of 1976 established the possessions tax credit under section 936 of 

the Internal Revenue Code with the purpose of assisting U.S. possessions in obtaining 

employment-producing investments by U.S. corporations. The credit effectively exempted 

two kinds of income from U.S. taxation: 1) income from the active conduct of a trade or 

business in a possession, or from the sale or exchange of substantially all of the assets 

used by the corporation in the active conduct of such trade or business, and 2) certain 

income earned from financial investments in U.S. possessions or certain foreign countries, 

if they were generated from an active business in a possession, and were reinvested in 

the same possession. 

23The possessions tax credit was criticized on the grounds that the associated revenue 

cost was high compared to the employment it generated, and because a large share of 

the benefits of the credit was not reaped by Puerto Rico residents. The Omnibus Budget 

Reconciliation Act of 1993 placed caps on the amounts of possessions credits that 

corporations could earn for tax years beginning in 1994 or later. Pub. L. No. 103-66, 

§ 13227, 107 Stat. 312, 489–494. The Small Business Job Protection Act of 1996 

repealed the possessions tax credit for taxable years beginning after 1995. Pub. L. No. 

104-188, § 1601, 110 Stat. 1755, 1827–1833. 
 

Page 12 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

under U.S. tax law, in which case deferral by the U.S. parent would not be 

available on certain types of income.24

That a large share of production in Puerto Rico is carried out by 

multinational corporations is evident in the data on Puerto Rico’s 

economic activity. For example, in 2010, Puerto Rico’s nominal gross 

domestic product (GDP)—which measures the income earned by both 

residents and nonresidents within a country—was roughly $95 billion. 

Nominal gross national product (GNP)—which measures just the income 

earned by residents of a country—was roughly $65 billion. The relative 

gap between GDP and GNP in Puerto Rico is higher than the gaps in 

similarly sized economies with a high presence of foreign multinational 

corporations, such as those of Ireland, Panama, and Singapore.25

Recently, Puerto Rico’s government has faced various fiscal challenges, 

including an imbalance between its general fund revenues and 

expenditures. In fiscal year 2009, Puerto Rico’s fiscal deficit reached a 

high of $2.9 billion—based on $7.8 billion in revenues and $10.7 billion of 

expenditures.26

Recently, Puerto Rico has taken steps to improve its fiscal position.

Persistent deficits have resulted in an increase in Puerto 

Rico’s public debt, which represents a much larger share of personal 

income than in any of the states. In February 2014, Puerto Rico’s general 

obligation bonds were downgraded to speculative—noninvestment—

grade by three ratings agencies. 

• Beginning in 2007, Puerto Rico began to reduce the size of its 

government workforce. For example, between 2007 and 2009, 

government employment declined almost 10 percent. However, as of 

July 2012, government employment still accounted for a larger share 

of overall employment in Puerto Rico when compared to the states

 

24CFCs are entities incorporated outside of the United States that are majority-owned (by 

vote or value) by one or more U.S. shareholder; to meet the definition of a U.S. 

shareholder, a shareholder must own at least 10 percent of the CFC’s voting stock.

25Federal Reserve Bank of New York, Report on the Competitiveness of Puerto Rico’s 

Economy (New York, NY: June 29, 2012). 

26The total deficit in fiscal year 2009 equates to a per capita deficit of $731, based on 

Census Bureau population estimates for July 2009. 

Puerto Rico’s Fiscal 

Position
 

Page 13 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

(although, government employment as a share of the population older 

than 15 in Puerto Rico was similar to that in the states).27

• In 2009, a fiscal stabilization plan was put into effect that reduced 

government spending and increased tax revenues.

• In April 2013, Puerto Rico enacted comprehensive reform of its 

largest public employee retirement system, which is funded primarily 

with budget appropriations from the government’s general fund. The 

reform was intended to address the retirement system’s deteriorating 

solvency.28

Through measures like these, Puerto Rico has reduced its annual deficits. 

However, the fiscal year 2013 deficit was approximately $1.3 billion, 

based on projected expenditures of approximately $10 billion. As the 

Government Development Bank for Puerto Rico notes in its Financial 

Information and Operating Data Report from October 2013, Puerto Rico’s 

ability to continue to reduce its deficit will depend in part on its ability to 

continue increasing revenues and reducing expenditures, which in turn 

depends on a number of factors, including improvements in economic 

conditions.

 

27Government employment represented 27.3 percent of total nonfarm employment in 

Puerto Rico in July 2012, compared to 16.5 percent in the states, according to Bureau of 

Labor Statistics estimates. Government employment as a share of the population over the 

age of 15 was 8.7 percent in Puerto Rico and 8.9 percent in the states, respectively, 

based on Census Bureau population estimates for July 2012. Government employment 

includes employment at the federal, state, and local government levels. 

28According to the Government Development Bank for Puerto Rico, absent reform, the 

retirement system’s assets would have been depleted by fiscal year 2019, and the 

government and other employers would have been required to provide funds to make up 

for subsequent cash funding shortfalls. With the reform, it is projected that the retirement 

system’s gross assets will no longer be depleted. See, Government Development Bank for 

Puerto Rico, Commonwealth of Puerto Rico, Financial Information and Operating Data 

Report (Puerto Rico: Oct. 18, 2013). 
 

Page 14 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Of the 29 selected federal programs we reviewed, statehood would likely 

affect 11 programs. For 3 other programs, while the programs themselves 

would likely not change under statehood, eligibility determinations for 

these programs could be affected indirectly by changes that could occur 

to benefits in other programs. Statehood would not likely affect the 15 

remaining programs. Ultimately, changes to programs under statehood 

would depend on decisions by Congress and, to some extent, on 

decisions by federal agencies. For example, Congress could enact 

legislation that creates or maintains certain exceptions for Puerto Rico. 

Figure 3 shows whether and how statehood would potentially affect the 

programs we reviewed. Additional details on programs that statehood 

would likely affect appear in appendix II.

Potential Changes to 

Selected Federal 

Programs under 

Puerto Rico 

Statehood
 

Page 15 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Figure 3: Potential Changes under Puerto Rico Statehood to Selecteda Federal Programs, in Descending Order by Total 

Amount Obligated by the Federal Government in Fiscal Year 2010
 

Page 16 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 
 

Page 17 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 
 

Page 18 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 
 

Page 19 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 
 

Page 20 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 
 

Page 21 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

a

We identified budget accounts with at least $5 billion, and then reviewed the programs within each 

account to identify those with outlays of at least $5 billion. We defined a program as an organized set 

of activities with the same objective(s) and funded by the federal government. We focused on 

programs that are expected to have an ongoing impact on the federal budget, meaning we did not 

consider temporary funding, such as that provided under the American Recovery and Reinvestment 

Act of 2009. We also identified programs where spending in Puerto Rico differed by more than $100 

million from average spending in 5 comparable states. The table reports federal obligations for each 

program because net outlays information was not consistently available at the program level.

b

Obligation amounts do not include funding from the American Reinvestment and Recovery Act of 

2009. Pub. L. No. 111-5, 123 Stat.115.

c

One exception to the Social Security program in Puerto Rico is residents’ exclusion from special age72 benefits, which are paid out of general revenues to uninsured individuals who turned 72 before 
 

Page 22 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

1972, and which restricts benefits to residents of the 50 States, the Northern Mariana Islands, and the 

District of Columbia. As most of these beneficiaries are likely deceased, the exception may no longer 

have any impact. 42 U.S.C. § 428.

d

Unemployment Insurance is typically funded with payroll taxes, but recently has been supplemented 

with general revenues.

e

The Federal Deposit Insurance Corporation (FDIC) charges premiums to member institutions to 

ensure adequate fund reserves. Thus, deposit insurance payouts are not typically funded with 

taxpayer dollars. At the end of September 2010, the fund was $81.2 billion less than the level needed 

to reach 1.35 of estimated insured deposits. By statute, that target must be reached by September 

30, 2020.12 U.S.C. § 1817 note.

f

Generally, agencies with loan insurance or guarantee programs must produce annual updates of the 

estimated costs of their programs—referred to as credit subsidy reestimates—on the basis of 

information about actual performance and estimated changes in future loan performance. In fiscal 

year 2010, $8.4 billion of the $10 billion in obligations for the Mutual Mortgage Insurance program 

were for subsidy reestimates.

g

We included this program in our review because spending in Puerto Rico differed from average 

spending in five comparable states by at least $100 million.

h

Although Disaster Relief Public Assistance Grants for Presidentially Declared Disasters obligations 

were less than $5 billion, total net outlays for the program were $5.2 billion in fiscal year 2010.

i

The $3.5 billion in Federal Direct Student Loan Program obligations reflects the costs to the federal 

government associated with loans obligated for the program, estimated on a present value basis. 

While fiscal year 2010 obligations did not exceed $5 billion, this program met our selection criteria 

because net outlays in fiscal year 2010 were -$9.1 billion, due in part to lower borrowing costs paid by 

the federal government. There were $142.6 billion in fiscal year 2010 obligations reflected in the 

program’s financing account, a non-budgetary account that records all cash flows to and from the 

federal government.

j

Member credit unions own the Central Liquidity Facility (CLF), which exists within the National Credit 

Union Administration. CLF obtains its funding through credit union capital investments and 

borrowings from the Federal Financing Bank, which provides reduced-cost financing to federal 

agencies that issue government-backed obligations. At the end of fiscal year 2010, CLF borrowing 

from the Federal Financing Bank totaled $10.1 billion. Fiscal year 2010 was not a typical year for the 

CLF, in terms of outlays, because of factors stemming from the 2007 to 2009 financial crisis. In fiscal 

year 2012, net outlays were $155 million.

k

Although obligations for the CLF were less than $5 billion, net outlays were -$8.4 billion.

The extent to which federal spending would change for some of the 

programs that would be affected by Puerto Rico statehood depends on 

various assumptions, such as which program eligibility options Puerto 

Rico might select, and the rates at which eligible residents might 

participate in the programs. For example, for the four largest programs for 

which federal spending would be likely to change under statehood—

Medicare, Medicaid, SNAP, and SSI—and for the ninth largest program 

for which federal spending would be likely to change—CHIP—GAO used 

various assumptions to estimate a range of federal spending. Figure 4 

below shows the range of estimated federal spending for these programs 

based on these assumptions, which are described in detail for each 

program in appendix II. Figure 4 also shows a Federal Highway 

Administration estimate for federal spending for Federal-Aid Highways, 

the fifth largest program for which federal spending would be likely to 

change under statehood. The estimates were developed for a single year 
 

Page 23 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

in the past, as if Puerto Rico were treated the same as the states in the 

year specified for each program. For programs other than Federal-Aid 

Highways, the estimates are in calendar-year terms because the eligibility 

and other data used to develop the estimates were in calendar-year 

terms. The estimate for Federal-Aid Highways is in fiscal-year terms. 

Actual spending in Puerto Rico, to which we compare the estimates, is in 

fiscal-year terms because the spending data were reported in fiscal-year 

terms.

Figure 4: Actual Federal Spending in Puerto Rico and Estimated Range of Federal Spending under Puerto Rico Statehood for 

Selected Programsa

a

Actual spending is in fiscal-year terms. Estimated spending is in calendar-year terms, except for 

Federal-Aid Highways, which is in fiscal-year terms. The margins of error for the estimates are plus or 

minus 7 percent, or less, of the estimates themselves, except for the margin of error for the high end 

of the CHIP estimate range (which has a margin of error of plus or minus 27 percent of estimate 

amount).

b

The Medicare estimates take into account certain changes under the Patient Protection and 

Affordable Care Act occurring after 2010 that would reduce spending. Also, the Medicare estimates 

depend on the estimates for Medicaid, as some individuals are eligible for both programs.

c

The Medicaid estimates do not take into account the cost of nursing home and home health services 

in Puerto Rico due to the lack of available cost data, and because Puerto Rico lacks an infrastructure 

of nursing home facilities, according to Centers for Medicare & Medicaid Services officials. If these 

services became available, Medicaid spending would likely increase.
 

Page 24 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

d

Actual spending is for Puerto Rico’s Nutrition Assistance Program. One reason why the low end of 

the estimate range is less than actual spending is because participants’ benefits would be reduced 

because of benefits received from SSI, for which Puerto Rico residents would newly qualify.

e

Actual spending is for Puerto Rico’s Aid to the Aged, Blind, and Disabled program.

f

Actual spending for Federal-Aid Highways is for Puerto Rico’s authorization through the Puerto Rico 

Highway Program. The sole estimate for federal spending on Federal-Aid Highways represents the 

net deficit of what highway users in Puerto Rico would have contributed to the Highway Trust Fund 

(about $232 million) minus its estimated apportionment (about $265 million).

g

The lower estimate assumes Puerto Rico would have discontinued its CHIP program, as individuals 

enrolled in CHIP instead would have received benefits through Medicaid. The higher estimate 

assumes Puerto Rico would have extended CHIP coverage to previously unenrolled individuals.

All the federal revenue sources we reviewed could be affected if Puerto 

Rico became a state. As with our review of programs, we assumed that if 

Puerto Rico becomes a state, it would be treated as such for purposes of 

revenue collection. For example, under statehood, Puerto Rico residents 

would be subject to federal tax on all their income: currently they are 

subject to federal tax only on income from sources outside of Puerto 

Rico.

29 However, for two revenue sources through which Puerto Rico 

receives revenue not provided to other states—excise taxes and customs 

duties—whether or how statehood would result in changes would depend 

on decisions by Congress. Figure 5 shows how the revenue sources we 

reviewed potentially would change under statehood. Additional details on 

the two largest revenue sources that would be affected substantially by 

statehood—individual and corporate income taxes—appear after figure 5 

and in appendix III.30

 

29Puerto Rico residents also are required to file Puerto Rico tax returns if their gross 

income exceeds the applicable filing thresholds. Some sources of income are taxed 

differently in Puerto Rico than in the states. For example, Puerto Rico taxpayers can 

exclude certain amounts of pension income from their taxable income. Because of 

differences such as this, for 2010, Puerto Rico filers’ adjusted gross income for federal tax 

purposes (about $32.1 billion, based on our estimates) would have been higher than that 

for Puerto Rico tax purposes (about $28.2 billion, according to Puerto Rico Department of 

the Treasury data).

30Although certain of the various statutory exceptions from the definition of wages for 

employment taxes do not apply to Puerto Rico, federal employment taxes generally apply 

to residents of Puerto Rico on the same basis, and for the same sources of income, as to 

residents of the states. 26 U.S.C. §§ 3121(e), 3306(j). 

Potential Changes to 

Selected Federal 

Revenue Sources 

under Puerto Rico 

Statehood
 

Page 25 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Figure 5: Potential Changes Under Puerto Rico Statehood to Federal Revenue Sources, in Descending Order by Amount of 

Federal Receipts in Fiscal Year 2012
 

Page 26 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

a

The amount of tax covered over to Puerto Rico and the U.S. Virgin Islands is limited to $10.50 per 

proof gallon. Between June 30, 1999, and January 1, 2014, the limit on the amount of this tax 

covered over to Puerto Rico and the U.S. Virgin Islands was $13.25 per proof gallon of imported rum. 

26 U.S.C. § 7652(f). The formula for dividing the cover over of excise tax on rum imported from other 

countries is based roughly on the relative market share of rum that Puerto Rico and the U.S. Virgin 

Islands produce. According to the Government Development Bank for Puerto Rico, Puerto Rico 

received about $401 million in covered-over excise tax on rum in fiscal year 2012. See, Government 

Development Bank for Puerto Rico, Commonwealth of Puerto Rico: Financial Information and 

Operating Data Report, May 17, 2013.)

b

In fiscal year 2012, U.S. Customs and Border Protection covered over $4.8 million to Puerto Rico. 

See, Department of Homeland Security, U.S. Customs and Border Protection Puerto Rico Trust 

Fund, Fiscal Year 2014 Congressional Justification.

The extent to which statehood would affect federal revenue depends on 

various assumptions. For example, for the two largest revenue sources 

that would be affected substantially by statehood—individual and 

corporate income taxes—we used various assumptions to estimate a 

range of federal revenue. The estimate ranges are based on Puerto Rico 

being treated the same as the states in either 2009 or 2010, based on the 
 

Page 27 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

year for which the most recent data were available. An example of how 

assumptions affect the estimates is illustrated by the estimate range for 

corporate income tax. That estimate is influenced by assumptions on 

applicable tax rates for business with activities in Puerto Rico, the extent 

of ownership of Puerto Rico businesses by U.S. corporations, and the 

extent to which U.S. corporations use prior-year losses from their 

affiliated Puerto Rico businesses to offset their federal taxable income. 

For example, the low end of the estimate range shown in figure 6 below is 

based on lower-bound assumptions for applicable corporate income tax 

rates, upper-bound assumptions for the extent of U.S. ownership of 

Puerto Rico businesses, and the assumption that U.S. corporations would 

have used prior-year losses of affiliated Puerto Rico corporations to offset 

their federal taxable income to the maximum extent. The high end of the 

estimate range shown in figure 6 is based on the upper-bound 

assumptions for applicable tax rates, lower-bound assumptions for the 

extent of U.S. ownership of Puerto Rico businesses, and the assumption 

that U.S. corporations would not have used any prior-year losses of 

affiliated Puerto Rico corporations to offset their federal taxable income.

Figure 6: Actual Federal Income Tax Revenue from Puerto Rico and Estimated 

Range of Federal Income Tax Revenue under Puerto Rico Statehood

a

Actual individual income tax revenue represents the amount Puerto Rico taxpayers reported paying 

to the United States, its possessions, or foreign countries. According to officials from Puerto Rico’s 

Department of Internal Revenue, most of these payments would have been to the United States. 

Actual corporate income tax revenue is our estimate—based on Internal Revenue Service (IRS)

data—of taxes paid by U.S. corporations on income from branches or subsidiaries in Puerto Rico. 
 

Page 28 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Most of the estimated $4.3 billion in tax U.S. corporations paid is attributable to an unusually large 

amount of dividends that were repatriated from Puerto Rico in 2009 (compared to amounts 

repatriated in earlier years or in 2010). In the absence of that spike in dividends, the federal taxes 

these corporations would have paid for 2009 would have been about $1.4 billion. For various 

reasons, we could not determine the precise amount of corporate income tax paid directly by 

businesses in Puerto Rico in addition to the $4.3 billion (although based on IRS data, the amount 

would have been no more than about $145 million).

b

Individual income tax estimates are net of estimated payments for refundable tax credits, such as the 

earned income tax credit.

The estimates for corporate income tax in figure 6 do not take into 

account any changes in behavior of businesses with activities in Puerto 

Rico. For example, according to tax policy experts at the Department of 

the Treasury and the Joint Committee on Taxation, changes in federal 

income tax requirements under Puerto Rico statehood are likely to 

motivate some corporations with substantial amounts of income derived 

from intangible (and therefore mobile) assets to relocate from Puerto Rico 

to a lower tax foreign location. The extent to which such corporations 

might relocate from Puerto Rico is unknown. Consequently, we produced 

an alternative set of corporate income tax revenue estimates to account 

for some businesses with activities in Puerto Rico potentially relocating 

under statehood.31 Accounting for this assumption, in conjunction with the 

other assumptions described previously, resulted in an estimated range of 

corporate income tax revenue of -$0.1 billion to $3.4 billion.32

 

 

31We assumed that all filing businesses in the pharmaceuticals and the medical equipment 

and supplies industries—which derive much of their income from mobile assets—would 

have relocated from Puerto Rico. Taxes are only one of various factors corporations 

generally take into account when determining where to locate their operations.

32For the low end of the estimate range for this set of scenarios, the accumulated losses 

from the Puerto Rico affiliates included in the consolidated federal corporate income tax 

return of U.S. corporations reduced taxes paid by the consolidated groups to such an 

extent that those reductions more than offset the positive amounts of taxes paid by other 

corporations operating in Puerto Rico, and resulted in a net revenue effect that was 

slightly less than zero.
 

Page 29 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Statehood could result in dynamic economic and fiscal changes for 

Puerto Rico, changes that could ultimately impact the level of federal 

spending in Puerto Rico, and the revenue collected from residents of, and 

corporations in, Puerto Rico. However, the precise nature of how such 

changes would affect federal spending and revenue is uncertain. 

Because statehood would cause numerous adjustments important to 

Puerto Rico’s future, it would require careful consideration by Congress 

and the residents of Puerto Rico. Consequently, statehood’s aggregate 

fiscal impact would be influenced greatly by the terms of admission, 

strategies to promote economic development, and decisions regarding 

Puerto Rico’s revenue structure. As we have reported in the past, the 

history of statehood admissions is one of both tradition and flexibility. 

While Congress has emphasized the traditional principles of democracy, 

economic capability, and the desire for statehood among the electorate, it 

has also considered potential states’ unique characteristics, including 

population size and composition, geographic location, economic 

development, and historical circumstances when making these decisions. 

Any decision to transition Puerto Rico to statehood in the future will also 

involve assessing a complex array of similar factors, in addition to 

economic and fiscal ones. Some factors that could influence changes in 

federal spending and in revenue for specific programs or types of tax are 

discussed in appendix II and appendix III of this report. In this section, we 

discuss general factors that could influence how Puerto Rico statehood 

could affect future federal spending and revenue. 

As previously discussed, Puerto Rico’s economy has largely been in 

recession since 2006. Likewise, Puerto Rico’s unemployment rate has 

been relatively high, and its labor force participation rate has been 

relatively low, compared to those of the states. Statehood—and the 

resultant changes to spending programs in Puerto Rico, and in tax 

requirements for Puerto Rico residents and corporations—could have 

wide-reaching effects on Puerto Rico’s economy and employment.

Under statehood, Puerto Rico residents would be eligible for the federal 

earned income tax credit (EITC)—including refundable payments—which 

Factors under 

Statehood that Could 

Influence Changes in 

Federal Spending 

and Revenue

Effect of Statehood on 

Puerto Rico’s Economy 

and Employment
 

Page 30 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

is designed to encourage work.33 Also, in the short-term, increased 

federal transfers—such as through SSI benefits, which Puerto Rico 

residents would become eligible for under statehood—could stimulate 

Puerto Rico’s economy. However, some Puerto Rico industry group 

representatives we interviewed worried that the relatively high rate of 

government transfer payments in Puerto Rico could discourage work. 

According to the Federal Reserve Bank of New York, such transfer 

payments equate to roughly 40 percent of personal income, more than 

double the share in the states.34

Likewise, the effect of statehood on Puerto Rico migration—and the 

corresponding effect of that migration on Puerto Rico’s economy and 

employment—is uncertain. From 2002 to 2012, Puerto Rico’s population 

decreased by about 5 percent based on U.S. Census Bureau estimates.

 

35

Migration has been cited as a possible explanation for Puerto Rico’s 

relatively low labor force participation rate, particularly if those Puerto 

Rico residents most interested in participating in the labor force are 

migrating to the states in search of higher wage employment, leaving 

behind residents that have relatively less attachment to the labor force.36

In terms of business activity, one possibility is that statehood could raise 

Puerto Rico’s visibility as a place for U.S. producers to locate. Likewise, 

statehood could eliminate any risk associated with Puerto Rico’s 

uncertain political status and any related deterrent to business 

investment. However, the extension of federal corporate income taxes 

could result in U.S. or foreign corporations that currently operate in Puerto 

Rico relocating to lower-tax locations (although taxes are only one of 

 

33Although Puerto Rico has a similar tax credit for Puerto Rico income taxes (the 

employment credit), its maximum credit amount is relatively small compared to the 

maximum federal EITC amount. For example, the maximum federal credit for tax year 

2012 was $5,891 (for taxpayers with 3 or more qualifying children), compared to a 

maximum Puerto Rico employment credit of $400. 

34Federal Reserve Bank of New York, Report on the Competitiveness of Puerto Rico’s 

Economy (New York, NY: June 29, 2012). 

35From 2002 to 2012, population in the states increased by 9.1 percent, and decreased in 

only 2 states—Rhode Island and Michigan (by 1.5 percent in both states)—based on U.S. 

Census Bureau estimates. 

36GAO, Fiscal Relations with the Federal Government and Economic Trends during the 

Phaseout of the Possessions Tax Credit, GAO-06-541 (Washington, D.C.: May 19, 2006). 

Individuals born in Puerto Rico are U.S. citizens with unrestricted access to the states. 
 

Page 31 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

various factors corporations generally take into account when determining 

where to locate their operations). Also, local businesses could incur 

higher costs because of additional tax liabilities.

As previously discussed, Puerto Rico has run persistent fiscal deficits in 

recent years, which has increased Puerto Rico’s public debt. As a result, 

Puerto Rico government-issued debt represents a much larger share of 

personal income than in any of the states. Recently, Puerto Rico has 

taken steps to improve its fiscal position, including reducing the size of its 

government workforce and reforming its primary public employee 

retirement system. However, in February 2014, Puerto Rico’s general 

obligation bonds were downgraded to speculative—noninvestment— 

grade by three ratings agencies, in part because of concerns about 

Puerto Rico’s fiscal position.

One factor that may have facilitated Puerto Rico’s ability to issue debt is 

that the interest on most bonds issued by Puerto Rico’s government, its 

political subdivisions, and its public corporations generally is not subject 

to income tax at the federal, state, or local levels.37

As a result of statehood, changes to Puerto Rico government spending 

and revenue could ultimately affect the government’s efforts to maintain a 

balanced budget. On the spending side, an increase in federal spending 

could allow Puerto Rico to reduce its own spending. For example, we 

estimated that if Puerto Rico had been a state in 2011, increased federal 

Medicaid spending of about $415 million to about $1.4 billion would have 

been accompanied by decreased Puerto Rico Medicaid spending of $152 

million to $358 million.

Under statehood, if 

Puerto Rico was treated like the states, its government-issued debt would 

no longer enjoy this so called triple-exemption, as income accruing to 

residents of other states would become taxable at the state and/or local 

levels. The loss of triple-exempt bond status could result in reduced 

demand for Puerto Rico’s debt.

38

 

3748 U.S.C. § 745. 

However, statehood could result in reduced 

Puerto Rico tax revenue. For example, Puerto Rico’s individual and 

corporate income tax rates are relatively high in comparison to those in 

the states. If Puerto Rico’s government wished to maintain pre-statehood 

38The $152 million estimate is subject to a high level of statistical imprecision, with a 

margin of error of plus or minus 14.5 percent of the estimate itself. 

Effect of Statehood on 

Puerto Rico’s Public 

Finances
 

Page 32 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

tax burdens for individuals and corporations, it would need to lower its tax 

rates, which could reduce tax revenue. 

Under statehood, certain federal programs in Puerto Rico could change 

substantially if Puerto Rico were treated the same as the states. Likewise, 

Puerto Rico residents and corporations operating in Puerto Rico would 

become subject to significant changes in their tax requirements under 

statehood. Prior bills on Puerto Rico’s status that Congress has 

considered have included provisions providing for a transition period or 

plan.39 Under one approach, if Puerto Rico were to become a state, 

federal funding would increase incrementally until parity with other states 

was reached, and federal income tax requirements would be phased in.40

We provided draft sections of this report to the relevant federal program 

agencies, the Department of the Treasury, and IRS. We also shared a 

draft of the report with officials from the Government of Puerto Rico and 

the Resident Commissioner from Puerto Rico (Puerto Rico’s 

Congressionally-authorized representative in Washington, D.C.). 

If Congress granted statehood to Puerto Rico, it could decide to establish 

a similar transition period. In turn, the characteristics and length of time of 

such a transition period could affect federal spending and revenue 

during—and beyond—that period.

In total, we sent draft report sections to 16 federal agencies.41

 

39For example, from 1989 to 1998, several bills included provisions providing for a 

transition period or plan: H.R. 3536, 101st Cong. (1989); H.R. 4765, 101st Cong. (1990); S. 

712, 101st Cong. (1990); H.R. 3024 104th Cong. (1996); H.R. 856 105th Cong. (1998). 

Six 

agencies had no comments on their draft report sections. Ten agencies 

provided technical comments, which we incorporated as appropriate. We 

also received technical and written comments from the Governor of 

Puerto Rico and the Resident Commissioner from Puerto Rico. Technical 

comments were incorporated as appropriate; the written comments are 

40S. 712, 101th Cong. (1990). Additionally, in the current Congress, bills on Puerto Rico’s 

status introduced in the Senate and the House include language for a ballot on statehood 

that describes a period of transition to statehood, during which equal treatment of Puerto 

Rico in program and tax laws would be phased in. S. 2020, 113th Cong. (2013) and H.R. 

2000, 113th Cong. (2013).

41Three agencies—the Centers for Medicare & Medicaid Services, the Administration for 

Children and Families, and the National Institutes of Health, are part of the Department of 

Health and Human Services.

Effect of a Statehood 

Transition Period

Agency and Puerto 

Rico Government 

Officials Comments
 

Page 33 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

reproduced as appendix V (Governor) and appendix VI (Resident 

Commissioner) to this report.

In his written comments, the Governor of Puerto Rico noted that if we had 

considered two factors omitted from our estimate of individual income tax 

revenue under statehood, estimated revenue would have been higher. 

First, the Governor noted that different federal filing thresholds and tax 

rates, compared to those for Puerto Rico, would have resulted in more 

individuals subject to tax and an increased amount of federal taxes paid 

by individuals. Our individual income tax revenue estimates take these 

differences into account, as they are based on the federal filing thresholds 

and federal tax rates. That is to say, we were able to determine which 

Puerto Rico residents who filed a Puerto Rico tax return for 2010 would 

have met federal filing thresholds and what tax rates would have applied 

to their taxable income, if at all. The Governor also noted that Puerto Rico 

does not tax Social Security benefits, which may be taxable at the federal 

level. In the individual income tax section of appendix III to this report, we 

note that because Social Security benefits are not included on Puerto 

Rico tax returns, our estimates do not take taxable Social Security 

benefits into account, and as a result our estimates could understate 

individual income tax revenue.

In response to our estimate for corporate income tax revenue, the 

Governor noted that to counter the effect of increased taxes on Puerto 

Rico businesses upon the imposition of federal taxes, our draft report 

suggested that Puerto Rico would reduce its corporate tax rate to 3.8 

percent to be on par with the average corporate tax rate in the states 

(state taxes are deductable against corporate income for federal tax 

purposes). He noted that this assumption is unrealistic given Puerto 

Rico’s current level of corporate tax rates and Puerto Rico’s current fiscal 

situation. We based our modeling of corporate income tax revenue under 

statehood on the assumption that Puerto Rico would lower its corporate 

tax rates to be more in line with those in the states. However, we used the 

average effective rate in the states, which is different than a simple 

marginal rate.42

 

42The effective tax rate, which shows how much tax a corporation pays as a percentage of 

its taxable income, incorporates more aspects of the tax code than just the statutory tax 

rate. It also reflects, among other things, the impacts of tax credits, exemptions, deferrals, 

and other provisions that can reduce tax liability.

Based on this comment, we conducted a sensitivity 

analysis to determine how our estimates would change if we assumed
 

Page 34 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

that the effective rate of Puerto Rico’s corporate income tax under 

statehood would have been twice as high as the average effective state 

rate (an effective rate of 7.6 percent). We found that the estimate ranges 

would not have changed substantially using this alternative assumption.43

Finally, the Governor noted that the characterization in the draft report of 

the percent of votes received by statehood in the 2012 plebiscite is 

inaccurate, and that the report should explain further the structure and 

outcomes of the plebiscite. In response to this comment, we provided 

additional detail on the number of voters and blank votes for both 

questions from the plebiscite. Assessing the structure of the plebiscite is 

outside the scope of this report.

In his written comments, the Resident Commissioner for Puerto Rico 

summarized the central findings of the draft report. He also pointed out 

some of the uncertainties and limitations inherent in developing estimates 

for how federal spending and revenue would change if Puerto Rico 

became a state, which we recognize in the report.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the heads of the relevant 

agencies for the programs and revenue sources in this report, Puerto 

Rico’s governor, the Resident Commissioner for Puerto Rico, appropriate 

congressional committees, and other interested parties. In addition, the 

report will be available at no charge on the GAO website at 

http://www.gao.gov. 

 

43Using this higher effective rate, we found that the estimate range changed from a range 

of $5.0 billion to $9.3 billion to a range of $4.6 billion to $9.0 billion. Incorporating the 

assumption that some corporations would relocate from Puerto Rico under statehood, the 

estimate range changed from a range of -$0.1 billion to $3.4 billion to a range of -$0.2 

billion to $3.2 billion.
 

Page 35 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-6520 or at czerwinskis@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff who made key 

contributions to this report are listed in appendix VII. 

Stanley J. Czerwinski

Director, Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

The objectives of this report are to evaluate (1) potential changes to 

selected federal programs and related changes in federal spending, and 

(2) potential changes in selected sources of federal revenue, should 

Puerto Rico become a state. We also describe factors under statehood 

that could influence changes in federal spending and revenue.

To evaluate potential changes in selected federal programs under Puerto 

Rico statehood, we selected programs to review based on three criteria. 

• Programs that generally provide funds directly to states and 

territories, or residents and institutions in the states and 

territories. Based on this criterion, we excluded certain types of 

federal spending from our review. Specifically, we excluded spending 

on the military;1 international aid and affairs; interest on the national 

debt; and administrative, operational, procurement, or capital 

acquisition expenses at federal agencies, including federal employee 

salaries and retirement compensation.

• Programs with net outlays of at least $5 billion. We used the 

Office of Management and Budget (OMB) public budget database 

from fiscal years 2010 and 2011 to select programs to review.2 We 

identified budget accounts with at least $5 billion, and then reviewed 

the programs within each account to identify those with outlays of at 

least $5 billion. We defined a program as an organized set of 

activities with the same objective(s) and funded by the federal 

government. We focused on programs that are expected to have an 

ongoing impact on the federal budget, meaning we did not consider 

temporary funding, such as that provided under the American 

Recovery and Reinvestment Act of 2009.3

 

1

One aspect of military spending—the Department of Defense’s TRICARE Prime 

program—would likely change under statehood. A 2011 Department of Defense Report to 

Congress found that extending TRICARE into Puerto Rico and the other territories would 

result in a net cost increase of $29.7 million. See Department of Defense, Report to 

Congress on Feasibility of TRICARE Prime in Certain Commonwealths and Territories of 

the United States (Washington, D.C.: May 2011).

To further support whether

2

We used data from 2010 because they were the most recent available when we began 

our work. Once data from 2011 became available, we assessed whether our program 

selection would have differed had we used data from that year. Since we found few 

differences, we did not change our original program selection. The five largest federal 

programs that would change under statehood based on outlay data for 2010 were also the 

five largest that would change based on 2011 data.

3

Pub. L. No. 111-5, 123 Stat. 115. 

Appendix I: Objectives, Scope, and 

Methodology

Potential Changes to 

Selected Federal 

Programs and Related 

Changes in Federal 

Spending
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

the programs met our selection criteria, we compared programs with 

total federal outlays of at least $5 billion (from the OMB database) to 

those described in the Catalog of Federal Domestic Assistance and 

the Appendix to the Budget of the U.S. Government.

4 Through this 

process, we identified 27 programs to review.

• Programs for which federal spending in Puerto Rico differed 

significantly from spending in a set of comparable states. To 

identify programs with less than $5 billion in net outlays that may be 

subject to relatively large spending changes under statehood—such 

as those providing little or no funding to Puerto Rico—we reviewed 

federal program spending by state from the Census Bureau’s 

Consolidated Federal Funds Report for fiscal year 2010. We selected 

five states5 most similar to Puerto Rico in terms of population and 

median household income, and identified programs for which the 

difference in average federal spending between these states and 

Puerto Rico was at least $100 million.6 Through this process, we 

identified two additional programs to review: the Public Housing 

Operating Fund and the Public Housing Capital Fund.

The 29 programs we selected to review accounted for about 86 percent of 

spending in fiscal year 2010 on federal programs that generally provide 

funds directly to states and territories, or to residents and institutions in 

the states and territories. 

We asked the 12 federal agencies that administer the 29 programs we 

selected to review our selection methodology and confirm that inclusion of 

each program was appropriate based on our criteria. The agencies 

provided additional information and documentation, when necessary. In 

one instance, a selected program comprised a subset of a larger budget 

account, and the agency overseeing the program was unable to provide a 

 

4

General Services Administration and Office of Management and Budget, 2011 Catalog of 

Federal Domestic Assistance (Washington, D.C.: Nov. 2011) and Office of Management 

and Budget, Appendix, Budget of the U.S. Government, Fiscal Year 2012 (Washington, 

D.C.: Feb. 14, 2011). 

5

The five selected states were Alabama, Arkansas, Kentucky, Mississippi, and Oklahoma.

6

We did not conduct a comprehensive assessment of the reliability of spending data from 

this data source. However, we assessed whether the spending amounts by state and 

program were reasonable based on the overall size of the program.
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

net outlay figure.7 To consistently report federal spending across 

programs, we report obligation amounts for the 29 programs we selected 

for our review, as obligation amounts were available for all selected 

programs (see figure 3 earlier in this report).

For each selected program, we reviewed federal laws and regulations to 

determine whether and how statehood might affect funding or other 

requirements for Puerto Rico. We based our analyses on the assumption 

that, if it is granted statehood, eventually Puerto Rico would be treated 

the same as the states. For some programs, current law applies certain 

limitations or exceptions to Puerto Rico by name. For other programs, the 

governing statutes refer to the 50 states or the 50 states and the District 

of Columbia. For these programs, we assumed that, if Puerto Rico 

became a state, it would be treated the same as any existing state, either 

because Congress would amend the statutory limitations and exceptions 

or they would otherwise not apply. We did not evaluate whether Puerto 

Rico would be required to be treated the same as the states in the context 

of any specific program.8 We confirmed with the relevant agencies 

whether and how statehood would affect funding or other requirements 

for Puerto Rico.

To evaluate potential changes in federal spending related to changes to 

federal programs, we evaluated the five largest programs that would be 

likely to change under statehood. We developed estimate ranges of the 

potential changes in federal spending for the four largest programs that 

would be likely to change under statehood: Medicare, Medicaid, the 

Supplemental Nutrition Assistance Program (SNAP), and Supplemental 

Security Income (SSI). The Federal Highway Administration developed an 

estimate on our behalf of potential changes in federal spending for the 

fifth largest program that would be likely to change under statehood—

Federal-Aid Highways. We also developed an estimate of potential 

changes in spending for the ninth largest federal program that would be 

likely to change under statehood—the Children’s Health Insurance 

Program (CHIP)—because Puerto Rico receives federal CHIP funding as 

part of its Medicaid program. The programs for which we developed 

estimates accounted for about 94 percent of fiscal year 2010 spending on 

 

7

In this instance, the agency confirmed that net outlays were greater than $5 billion.

8

Whether or not Congress would have the power to treat Puerto Rico—as a state—

differently from any other state for the purposes of any particular federal program was 

beyond the scope of our work.
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

programs that would likely change under statehood. We developed 

estimate ranges for a single year in the past, as if Puerto Rico had been 

treated the same as the states in that year. The years of the estimate 

ranges vary by program and are based on the most recent relevant data 

when we began our work. For programs other than Federal-Aid 

Highways, the estimate ranges are in calendar-year terms because the 

eligibility and other data used to develop the estimates were in calendaryear terms. The estimate for Federal-Aid Highways is in fiscal-year terms. 

Actual spending in Puerto Rico, to which we compare the estimates, is in 

fiscal-year terms because the spending data were reported in fiscal-year 

terms.

To estimate potential changes in federal spending for Medicaid, SNAP, 

SSI, and CHIP, we contracted with the Urban Institute to conduct portions 

of the work using two simulation models. We also used aspects of the 

Urban Institute’s simulations in estimating spending for Medicare. 

The estimates of potential spending changes involve various sources of 

uncertainty. Except for Federal-Aid Highways, the estimates are based, in 

part, on sample survey data, which include sampling error. Sample 

survey data are obtained by following a probability procedure based on 

the selection of random samples, and each sample is only one of a large 

number of samples that might have been selected. Since each sample 

could have provided different estimates, sampling error measures the 

level of confidence in the precision of a particular sample’s results, which 

we express as a margin of error at the 95-percent confidence interval. 

Unless otherwise indicated, the estimates included in this report that used 

sample survey data—plus or minus 7 percent, or less, of the estimates 

themselves—would contain the actual value for the populations we 

analyzed for 95 percent of the samples that could have been selected.

There are other sources of uncertainty that are not readily quantifiable. 

These include the assumptions we used to develop the estimates, such 

as those for which program eligibility rules Puerto Rico would adopt, and 

the rates at which eligible Puerto Rico residents would participate in the 

programs. To some extent, the various scenarios for estimated spending 

included in this report capture how these assumptions would impact 

spending. In other instances, there may be sources of uncertainty and 

dynamic changes to the programs that we could not incorporate into our 

modeling. These could include further changes in eligibility rules once 

additional program funding becomes available, the reaction of program 

beneficiaries to changes in the programs, or congressional action 

resulting from statehood. 
Appendix I: Objectives, Scope, and 

Methodology

Page 40 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

To estimate potential changes in federal spending for Medicare for 2010, 

we estimated spending for the two options through which Medicare 

beneficiaries can obtain insurance coverage for hospital and medical 

services—Medicare fee-for-service (Medicare FFS) and Medicare 

Advantage (MA), the private plan alternative to Medicare FFS—as well as 

the optional prescription drug benefit.

For Medicare FFS, we first calculated average spending for various 

demographic groups of Medicare beneficiaries in the states, using the 

Centers for Medicare & Medicaid Services’s (CMS) Medicare Current 

Beneficiary Survey (MCBS) Cost and Use file for 2010, the most recent 

available at the time we began our work.9 The file contains demographic 

information on Medicare beneficiaries, matched to administrative data on 

actual spending. Using these data, we developed estimates for average 

Medicare FFS spending by categories of age, gender, disability status, 

and dual-eligible status—that is, beneficiaries eligible for both Medicare 

and Medicaid. For some groups of Medicare beneficiaries, the MCBS 

sample size allowed for finer age and gender group breakdowns; for 

others, we combined age and gender groups.

To identify corresponding groups of Puerto Rico residents by age and 

gender, we used data from the Census Bureau’s Puerto Rico Community 

Survey (PRCS) three-year sample for 2009-2011: the years closest to the 

year of the MCBS data we used.10 We also used estimates of dualeligible beneficiaries that the Urban Institute developed.11

 

9

The MCBS is a survey of a nationally representative sample of the Medicare population, 

including both aged and disabled beneficiaries. The survey data are released annually 

and the results are contained in two data files, Access to Care and Cost and Use. 

We calculated 

the number of disabled but non-dual-eligible enrollees by subtracting the 

number of dual-eligible enrollees and the number of enrollees over age 

65 from the total number of enrollees. We multiplied the average 

Medicare spending amounts from MCBS respondents in the states for 

10The PRCS is part of the Census Bureau’s American Community Survey and collects 

demographic, income, and other data. Using a multiyear estimate increases the statistical 

reliability and precision of the data for less populated areas or smaller subgroups. We 

used this larger sample size for Puerto Rico Medicare beneficiaries to increase the 

reliability of our estimate.

11The Urban Institute estimated two scenarios for Medicaid based on two different 

assumptions for eligibility, as discussed in the Medicaid section below. These two 

scenarios resulted in two different estimates of dual-eligible beneficiaries, both of which 

we incorporated into our estimates for Medicare. 

Medicare Estimate
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

each group or category to the corresponding Puerto Rico beneficiary 

count.

To account for different health care costs in Puerto Rico relative to the 

states, we adjusted the wage indices used to calculate spending for 

Medicare FFS Part A and the Geographic Practice Cost Indices used to 

calculate spending for Medicare FFS Part B. We also made adjustments 

to account for the lower Medicare FFS Part B take-up rate and lower 

utilization rates in Puerto Rico relative to the states. 

For MA, we used data from the MCBS file to estimate the average cost 

for Puerto Rico MA enrollees. Because the benchmark underlying 

payments to MA plans in Puerto Rico is changing (regardless of whether 

Puerto Rico becomes a state) because of provisions in the Patient 

Protection and Affordable Care Act (PPACA),12

 

we modeled spending 

based on two benchmark scenarios: (1) the benchmark generally 

applicable for Puerto Rico for fiscal year 2014 (147.5 percent), and (2) the 

benchmark that generally will apply in 2017, when PPACA is fully phasedin (115 percent). Given that these changes in benchmarks could result in 

Puerto Rico MA enrollees switching to Medicare FFS, we developed 

estimates based on two MA enrollment scenarios: (1) the percentage of 

Puerto Rico Medicare beneficiaries enrolled in MA in 2010 (about 64 

percent), and (2) the highest MA enrollment percentage in the states 

(about 42 percent). These changes are the only potential impacts of 

PPACA we incorporated into our estimates for Medicare. For a 

description of how PPACA could affect Medicare spending in Puerto Rico, 

see appendix IV.

For the Medicare prescription drug benefit, we estimated the number of 

enrolled beneficiaries by applying the percentage of Puerto Rico 

beneficiaries who enroll in a benefit plan (77 percent) to our estimates of 

Puerto Rico Medicare beneficiaries. Our estimates of Puerto Rico 

Medicare beneficiaries include the estimates of dual-eligible beneficiaries 

that the Urban Institute developed. We assumed that there would be 

different costs per person depending on whether an enrolled beneficiary 

was a dual-eligible beneficiary, a disabled but non-dual eligible 

beneficiary, or any other beneficiary (essentially, all other enrolled 

beneficiaries age 65 or older). Using MCBS data, we estimated average 

 

12Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and 

Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (2010).
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

prescription drug benefit costs for each of the three categories of 

beneficiaries and applied those costs to the number of beneficiaries in 

each category. We also assumed that the percentage of eligible Puerto 

Rico Medicare beneficiaries who would have enrolled in the low-income 

subsidy—which covers all, or a portion of, a beneficiary’s prescription 

drug benefit plan premiums, deductibles, copayments, and other out-ofpocket costs—would have been the same as that for all Medicare 

beneficiaries (about 77 percent).

We assessed the reliability of the PRCS and MCBS data by performing 

appropriate electronic data checks, comparing MCBS data to 

administrative data, and by interviewing CMS officials who were 

knowledgeable about the data. We found the data were sufficiently 

reliable for the purposes of this report. 

To estimate potential changes in federal spending for Medicaid, SNAP, 

SSI, and CHIP, we contracted with the Urban Institute to conduct portions 

of the work using two simulation models: (1) the Health Policy Center’s 

American Community Survey Medicaid/CHIP Eligibility Simulation Model 

(HPC Medicaid/CHIP model), and (2) the Transfer Income Model, Version 

3 (TRIM3), which simulates major federal tax and transfer programs, 

including SNAP, SSI, and Temporary Assistance for Needy Families 

(TANF). For this work, these models used 2011 PRCS data and other 

data sources to estimate the effect of program eligibility changes on the 

number of eligible and enrolled individuals for a select program and, in 

certain instances, they estimate the associated costs. We chose PRCS 

as a data source because of its large sample size and detailed 

information on the respondents’ demographics and participation in public 

assistance programs.13

 

13The Urban Institute captured sampling errors by using the 80 different sets of replicate 

weights the Census Bureau provides for households and individuals in the PRCS sample. 

The Urban Institute treated the program estimates its models produced as if they were 

numbers tabulated directly from the survey data. The Urban Institute tabulated the various 

model-created variables 80 times, once with each set of weights, and used the formula 

that converts that information into a standard error for each estimate. We then used the 

standard error to calculate the margin of error at the 95 percent confidence interval.

2011 was the most recent available year of PRCS 

data. We assessed the reliability of these data by reviewing available 

documentation and conducting reliability tests on the data that we used. 

We determined that the data were sufficiently reliable for the purposes of 

this report.

Medicaid, SNAP, SSI, and 

CHIP Estimates
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

We assessed the reliability of the Urban Institute’s modeling procedures 

by reviewing documentation on TRIM3 and the HPC Medicaid/CHIP 

model and input data sources, reviewing the Urban Institute's internal 

quality control procedures, and discussing the program rules and 

underlying assumptions used in the models with staff from the Urban 

Institute who were responsible for the work provided under our contract. 

Further, we evaluated the estimates on the basis of substantive 

significance (rather than statistical significance) by considering their size 

and the direction of the effect of changes to the programs under 

statehood. We determined that none of the modeling assumptions 

compromised the analysis for this report and that the data were 

sufficiently reliable for our purposes. 

Using the HPC Medicaid/CHIP model and TRIM3 to estimate spending 

changes for these programs required our input on assumptions, and 

about the rules governing federal programs. Therefore, the information 

presented in this report is attributable only to GAO. Specific steps taken 

to estimate spending for these programs appears below.

To estimate federal Medicaid spending for 2011, the Urban Institute used 

the HPC Medicaid/CHIP model to estimate (1) the number of individuals 

who would have been eligible for Medicaid, and (2) the number of eligible 

individuals who would have enrolled in Medicaid. We then estimated (1) 

total (federal and Puerto Rico) Medicaid spending, and (2) the federal 

share of total Medicaid spending. We also estimated the extent to which 

Puerto Rico’s spending on Medicaid would change.

The Urban Institute estimated eligibility based on our input for income 

eligibility assumptions. To determine the most appropriate income 

eligibility assumptions, we identified federal Medicaid mandatory 

categories of individuals for states and Puerto Rico’s 2011 Medicaid 

eligibility standards. We asked Puerto Rico officials for input on what 

optional Medicaid income eligibility standards might be selected under 

statehood. They told us that it would be difficult to determine what 

optional coverage groups would be selected, given the significant 

economic and budgetary restraints Puerto Rico currently faces, and 

uncertainty around the cost to Puerto Rico of expanding coverage. 

Ultimately, we chose to model two eligibility scenarios:

• Assuming Puerto Rico would have covered only mandatory categories 

of individuals. Under this scenario, Medicaid eligibility would have 

increased for some categories (such as pregnant women and as well 

as children). Optional categories (such as childless, non-elderly, nondisabled adults) would no longer be covered. This scenario represents 

Medicaid
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

the lower bound of potential federal Medicaid spending under 

statehood.

• Assuming Puerto Rico would have covered mandatory categories of 

individuals and expanded coverage levels for the optional categories it 

actually covered in 2011.14

 

For certain populations, such as pregnant women, infants, and children, 

Medicaid eligibility is based on a family’s income level as a proportion of a 

defined poverty level. Although Puerto Rico currently uses its own local 

poverty level (see the section on Medicaid in appendix II), we assumed 

that as a state, Puerto Rico would be required to adhere to the same 

federal poverty guidelines as the 48 contiguous states and the District of 

Columbia.15 We based this assumption, in part, on our general 

assumption that Puerto Rico would be treated in the same manner as the 

states, and on input from officials with the Department of Health and 

Human Services’ Office of the Assistant Secretary for Planning and 

Evaluation (ASPE). This office updates and publishes the annual federal 

poverty guidelines.16 For other populations, eligibility is based on 

participation in federal programs, such as SSI, for which Puerto Rico 

residents would become eligible under statehood.

To estimate enrollments, we assumed that all actual Medicaid 

beneficiaries and individuals estimated to have received SSI and TANF 

benefits in 2011 would have enrolled.17

 

14For this scenario we assumed that, where permitted by law, Puerto Rico would have 

adopted optional rules to expand coverage to individuals that were eligible for Puerto 

Rico’s Medicaid or local health insurance program in 2011. We also assumed that if 

Puerto Rico had been a state at the beginning of 2011, it would have exercised its early 

expansion option by the beginning of the year to begin covering childless, non-disabled, 

non-elderly adults with incomes up to the federal poverty level equivalent of 200 percent of 

the local poverty level—as permitted under PPACA. This population of beneficiaries would 

otherwise have been covered through Puerto Rico’s local health insurance program 

(although as of July 1, 2011, Puerto Rico began covering the part of this population with 

incomes at or below 100 percent of the local poverty level through Medicaid).

For all other eligible individuals, 

15The federal poverty guidelines differ for Alaska and Hawaii.

16ASPE officials told us that their office would not generate separate poverty guidelines for 

Puerto Rico unless directed by Congress or the Office of Management and Budget.

17Estimated Medicaid enrollment of individuals receiving SSI benefits is based on a 

scenario under which SSI participation is based on national participation rates (see the 

SSI section of this appendix). 
Appendix I: Objectives, Scope, and 

Methodology

Page 45 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

we decided to apply participation rates observed for actual Puerto Rico 

Medicaid and CHIP enrollees in the top decile of the distribution of 

income-to-poverty ratio by subgroup (i.e., a matrix of age group, 

insurance coverage, and disability status), based on the assumption that 

newly eligible individuals would be more similar to higher-income eligible 

individuals than to lower-income eligible individuals.18 The enrollment 

estimates are by geographic region in Puerto Rico. The Urban Institute 

also estimated the number of beneficiaries dually eligible for Medicare 

and Medicaid.

To estimate total (federal and Puerto Rico) Medicaid spending, we 

applied annualized per member per month rates paid for different 

categories of enrolled individuals to estimated enrollments. The 

annualized per member per month rates we used were those paid by 

Puerto Rico to its managed care organization for Medicaid enrollees 

between October 2010 and June 2011 for physical and mental health 

services.19 These rates generally varied by geographical area and ranged 

from about $1,180 to $1,852.20 For dual-eligible beneficiaries enrolled in 

Puerto Rico’s Platino program—for whom the majority of health care 

costs are covered by Medicare—the rate was $120. According to CMS 

officials, the vast majority of beneficiaries enrolled in the Platino program 

are dual-eligible beneficiaries. Thus, we used the Urban Institute’s 

estimates for dual-eligible beneficiaries as a proxy for the number of 

Platino enrollees when applying per person costs. 

To estimate the federal share of total Medicaid spending, we applied a 

predicted Federal Medical Assistance Percentage (FMAP)—the statutory 

formula that determines the federal share of Medicaid funding provided to 

 

18The Urban Institute conducted sensitivity testing on this aspect of its modeling and found 

that the enrollee estimates did not change substantially when alternative participation rate 

assumptions were applied.

19These rates do not include Medicaid coverage of nursing home and home health 

services, which are mandatory services not covered by Puerto Rico, in accordance with its 

federally-approved state plan. Puerto Rico would have been required to cover these 

services as a state. If the additional costs of covering these services had led to additional 

costs incurred by Puerto Rico, it might have changed the extent to which it had covered 

optional eligibility groups.

20According to CMS data, per-capita Medicaid expenditures averaged $5,495 annually for 

the 50 states and D.C. and ranged from $2,754 in California to $9,128 in New York, based 

on enrollment estimates measured in terms of persons ever enrolled in Medicaid during 

fiscal year 2010. Puerto Rico’s relatively low per-capita expenditure is a function, in part, 

of the statutory limit on federal Medicaid funding for Puerto Rico. 
Appendix I: Objectives, Scope, and 

Methodology

Page 46 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

states and territories—to total Medicaid spending. For Puerto Rico, the 

predicted FMAP was 83 percent.21 We assumed that the statutory limit on 

federal Medicaid funding to Puerto Rico would have been removed. We 

also estimated Puerto Rico’s share of total Medicaid spending to show 

how it would change under statehood.

We did not incorporate all aspects of the Medicaid program into our 

spending model, including the cost of the Medicaid Disproportionate 

Share Hospital (DSH) program or potential savings resulting from Puerto 

Rico’s participation in the Medicaid drug rebate program.22 We did not 

incorporate Puerto Rico’s Enhanced Allotment23 into our model, as it 

would be likely eliminated under statehood and replaced with the 

Medicare low-income subsidy for prescription drugs. 

To estimate federal SNAP spending for 2011, the Urban Institute used 

TRIM3 to estimate (1) the number of household units that would have 

been eligible for SNAP benefits, (2) the number of eligible household 

units that would have participated in SNAP, and (3) aggregate SNAP 

benefits for participating household units.24

The Urban Institute based its eligibility estimates on program eligibility 

rules in the states (SNAP is currently unavailable to Puerto Rico 

residents), including income and resource limits, and rules related to 

participation in other means-tested programs, such as SSI and TANF. 

The Urban Institute calculated net income by subtracting various 

deductions from a household unit’s gross income—such as those for 

earned income, dependent care expenses, medical care expenses, 

excess shelter costs, and a standard deduction. Where the rules for 

allowable deductions differ between (1) the 48 contiguous states and the 

 

21CMS calculated that Puerto Rico’s FMAP would have been 91 percent based on its per

capita income; however, the federal FMAP limit is 83 percent. 42 U.S.C. 1395d(b).

22This program provides savings to state Medicaid programs through rebates for 

outpatient prescription drugs.

23The enhanced allotment provides financial assistance for certain beneficiaries’ 

prescription drug costs. 

24For SNAP, a household is generally a group of people who live together and buy food 

and prepare meals together. However, there are specific exceptions. For example, 

parents, and most children under age 22 who live together are included in the same 

household regardless of whether they purchase and prepare meals together. 7 U.S.C. 

§2012(n). 

SNAP
Appendix I: Objectives, Scope, and 

Methodology

Page 47 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

District of Columbia and (2) other states and territories, the estimates use 

the rules applicable to the 48 contiguous states and the District of 

Columbia. The Urban Institute imputed household units’ resources by 

applying assumed annual rates of return on reported interest, dividends, 

and rent. 

To estimate the number of eligible household units that would have 

participated in SNAP, we directed the Urban Institute to model four 

different scenarios, based on the following assumptions on household 

unit definitions and participation rates.

 

• Everyone in a household would have filed for SNAP as a single unit, 

unless the household contained at least one person who received 

TANF. If the household contained a TANF recipient, it was divided 

into as many filing units as possible, subject to the requirements 

involving married couples and children. This household unit definition 

was modeled using (1) a national probabilities estimate of SNAP 

participation, resulting in a household participation rate of 75 percent, 

and (2) full participation, which occurs in some states.25

• Assuming full participation, all related persons in a household would 

have filed for SNAP as a single unit. Unrelated individuals and 

subfamilies would have filed as separate units.

• Assuming full participation, with households that had more than one 

potential SNAP unit split into as many filing units as permitted. 

For all scenarios, household units that reported receiving benefits under 

Puerto Rico’s current federally-funded nutrition assistance program were 

assumed to have chosen to participate in SNAP if they had qualified.

To estimate aggregate SNAP benefits for participating household units, 

each participating household unit’s benefit amount was determined by 

subtracting 30 percent of the household unit’s net income from the 

maximum SNAP allotment for household unit size, using the maximum 

 

25We used estimated participation rates because the actual rates for the current federallyfunded nutrition assistance program in Puerto Rico was not estimated. A prior study on 

implementing SNAP in Puerto Rico used a participation rate of 89 percent. See U.S. 

Department of Agriculture, Food and Nutrition Service, Implementing Supplemental 

Nutrition Assistance Program in Puerto Rico: A Feasibility Study (Alexandria, VA: June 

2010).
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

SNAP allotments for the 48 contiguous states and the District of 

Columbia.26 This reduction from the maximum SNAP allotments is made 

because households are expected to spend 30 percent of their resources 

on food. We also determined the impact on SNAP benefits of replacing 

the Aid to the Aged, Blind, and Disabled (AABD) program with the higherbenefit SSI program, since an increase in cash aid could lower a person’s 

SNAP benefits. 

To estimate federal SSI spending for 2011, the Urban Institute used 

TRIM3 to estimate (1) the number of individuals who would have been 

eligible for SSI benefits, (2) the number of eligible individuals who would 

have participated in SSI, and (3) aggregate SSI benefits for participating 

individuals.

The Urban Institute based its eligibility estimates on program eligibility 

rules for individuals’ age, blindness, or disability status, and income and 

resource limits. To qualify for benefits based on age, an individual must 

be at least 65 years old. Adults younger than 65 can qualify for benefits 

based on blindness or a permanent disability that prevents work; children 

can qualify based on a disability with conditions that severely limit their 

activities. To determine disability status, doctors examine prospective 

adult and child beneficiaries. Because the PRCS data do not precisely 

capture the same criteria that are assessed by doctors, assumptions were 

required to estimate potential SSI eligibility among the non-elderly. TRIM3

designated an adult as blind or disabled where the survey responses 

showed (1) that the adult did not work in the prior year or earned income 

less than the substantial gainful activity limit, and (2) at least one of the 

following was true:

• The adult indicated having a physical, remembering, or vision 

limitation.

• The adult was between 22 and 61 years old, not a widow, and 

reported Social Security income.

TRIM3 treated children ages 15 and older as adults for the disability 

eligibility determination since children are asked the same survey 

questions asked of adults. TRIM3 identified children younger than 15 as 

potentially disabled if they reported a remembering or vision disability. 

 

26Eligible one and two-person households are guaranteed a minimum benefit.

SSI
Appendix I: Objectives, Scope, and 

Methodology

Page 49 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

The model was not used to estimate the number of children younger than 

age 5 who were potentially disabled, because the remembering limitation 

question is not asked of them. Instead a sufficient number of children 

under age 5 were included so that the portion of the total children’s 

caseload that is under age 5 is the same as in the states.

Regardless of age or disability status, individuals must have limited 

assets and income to be eligible for SSI benefits. TRIM3 imposed the 

eligibility asset test of $2,000 for a unit with one eligible person and 

$3,000 for an eligible couple. Asset values were inferred from the level of 

reported asset-based income (interest, dividend, and rental income). 

Adults may qualify either individually or as couples. The simulation model 

found that 81 percent of eligible adults were either unmarried or married 

to an ineligible individual.

To estimate the number of eligible individuals who would have

participated in SSI, we present two scenarios—with participation rates 

that varied by age group and disability status—assuming that eligible 

individuals would participate based on (1) national average participation 

rates, and (2) the average of participation rates for the five states with the 

highest three-year average poverty rate for 2009 to 2011.27

 

For children 

younger than 5, the data were not sufficient to estimate a participation 

rate; instead, a sufficient number of children younger than 5 were 

included so that their share of all eligible children was the same as in the 

states. Individuals in the simulation determined to be participating in 

AABD, which SSI would replace, were included as participating in SSI. 

To estimate aggregate benefits, we used participant benefits following the 

SSI program rules. To determine the actual benefit, the maximum SSI 

benefits (in 2011, $674 for individuals and $1,011 for couples) were 

reduced, based on countable income. In determining countable income, 

SSI program rules disregard the first $20 of most income per month, plus 

the first $65 of earned income and 50 percent of any additional earned 

income. One-third of child support is also disregarded. For an individual 

with a spouse who is not potentially eligible for SSI, the amount of the 

spouse’s income to be deemed available is determined. For children, 

some income is deemed from their parents. 

 

27These states were Mississippi, New Mexico, Louisiana, Arizona, and the District of 

Columbia.
Appendix I: Objectives, Scope, and 

Methodology

Page 50 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

To estimate federal CHIP spending for 2011, the Urban Institute used the 

HPC Medicaid/CHIP model to estimate (1) the number of individuals who 

would have been eligible for CHIP, and (2) the number of eligible 

individuals who would have enrolled in CHIP. We then estimated total 

(federal and Puerto Rico) CHIP spending. 

The Urban Institute estimated eligibility based on our input on eligibility 

rule assumptions. To qualify for federal CHIP funding, states’ CHIP 

cannot cover children who are eligible for Medicaid. In 2011, states were 

required to provide Medicaid coverage to children with family incomes up 

to 100 percent and 133 percent of the federal poverty level (FPL), 

depending on a child’s age. States have discretion in setting CHIP 

eligibility standards. Forty-five states and the District of Columbia covered 

children between 200 percent and 300 percent of the FPL in 2011.

Given required increases to Medicaid income eligibility limits under 

statehood, Puerto Rico residents enrolled in CHIP in 2011 would have 

qualified for Medicaid, but not for CHIP. To draw down federal CHIP 

funding, Puerto Rico would have needed to raise its CHIP income 

eligibility standards. When asked what income eligibility rules might be 

adopted under statehood, officials from Puerto Rico’s Department of 

Health responded that it would be difficult for Puerto Rico to determine 

what income eligibility rules would be adopted. Ultimately, we chose to 

model three eligibility scenarios.

• Assuming Puerto Rico had opted to cover children up to 300 percent 

of the FPL. 

• Assuming Puerto Rico had opted to cover children up to 200 percent 

of the FPL.

• Assuming Puerto Rico had opted to discontinue its version of CHIP.

To estimate enrollments, we followed a process similar to that for 

Medicaid. We assumed that all actual CHIP beneficiaries and individuals 

estimated to have received SSI and TANF benefits in 2011 would have 

enrolled.28

 

28Estimated CHIP enrollment of individuals receiving SSI benefits is based on a scenario 

under which SSI participation is based on national participation rates (see the SSI section 

of this appendix). 

As previously described for Medicaid, for all other eligible 

CHIP
Appendix I: Objectives, Scope, and 

Methodology

Page 51 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

individuals, we decided to apply participation rates observed for actual 

Puerto Rico Medicaid and CHIP enrollees in the top decile of the 

distribution of income-to-poverty ratio by subgroup (i.e., a matrix of age 

group, insurance coverage, and disability status), based on the 

assumption that newly eligible individuals would be more similar to 

higher-income eligible individuals than to lower-income eligible 

individuals.29 The enrollment estimates are by geographic region in 

Puerto Rico. 

To estimate total (federal and Puerto Rico) CHIP spending, we applied 

annualized per member per month rates paid for different categories of 

enrolled individuals to estimated enrollments. The annualized per 

member per month rates are the same as for Medicaid.

To estimate the federal share of total CHIP spending, we applied a 

predicted enhanced federal medical assistance percentage (enhanced 

FMAP) to total CHIP spending. The enhanced FMAP is the statutory 

formula that determines the federal share of CHIP funding provided to 

states and territories. For Puerto Rico, the predicted enhanced FMAP 

was 85 percent. We also estimated Puerto Rico’s share of total CHIP 

spending to show how it would change under statehood. 

To estimate federal spending on Federal-Aid Highways for fiscal year 

2013, we obtained estimates from the Federal Highway Administration 

(FHWA) on (1) Puerto Rico highway users’ expected contribution to the 

Highway Account of the Highway Trust Fund (the Fund), and (2) Puerto 

Rico’s expected apportionment—a division of authorized highway funding 

according to statutory formulas. Using these estimates, we determined 

Puerto Rico’s net deficit for Federal-Aid Highways.

To estimate Puerto Rico highway user’s expected contribution to the 

Fund for fiscal year 2013, FWHA multiplied Puerto Rico’s reported 

number of gallons of motor fuel consumed on highways for fiscal year 

201130 by the applicable federal tax rate.31

 

29The Urban Institute conducted sensitivity testing on this aspect of its modeling. It found 

that estimated enrollments did not change substantially when it applied alternative 

participation rate assumptions.

We confirmed that FHWA 

30Fiscal year 2011 data would have been used in the fiscal year 2013 apportionment 

calculations because fuel consumption data lags by 2 years. 

Federal-Aid Highways 

Estimate
Appendix I: Objectives, Scope, and 

Methodology

Page 52 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

calculated Puerto Rico highway user’s expected contribution to the Fund 

with the same process it used for highway users in the states. We did not 

independently review FHWA’s process for estimating state users’ 

contributions into the Fund. However, we reviewed the process in the 

past, and FHWA made changes to the process as a result of that 

review.32 Regarding the motor fuel data collected by Puerto Rico, FHWA 

officials were unaware of any specific limitations to the data.33

 

To estimate Puerto Rico’s apportionment, FHWA officials ran Puerto Rico 

data through a series of formulas on our behalf. Under legislation passed 

in July 2012, apportionments for the states in fiscal year 2013 are virtually 

the same as apportionments for fiscal year 2012,34 which, in turn, were 

based on apportionments for fiscal years 2009 and 2011.35 Each state’s 

apportionment for fiscal year 2009 was calculated using a series of 13 

statutory formulas linked to sub-programs. The formulas rely on data 

elements—referred to as factors—such as total lane miles eligible for 

Federal-Aid Highways, and vehicle miles traveled on open Interstates. 

Some factors were unavailable for Puerto Rico and were entered as zero 

in the calculations.36 According to FHWA officials, the unavailable data 

had no effect on the estimated apportionment because of Equity Bonus 

computations. The Equity Bonus, in effect for fiscal year 2009, 

guaranteed that each state received at least a share of combined 

apportionments and High Priority Projects37

 

31The rates for taxes going into the highway account of the Fund are 0.1544 cents for 

gasoline, and 0.2144 for special fuels, which include combined highway diesel and 

highway liquefied petroleum gas and alternative fuels.

equal to 92 percent of 

32GAO, Highway Funding: Problems with Highway Trust Fund Information Can Affect 

State Highway Funds, GAO-RCED/AIMD-00-148 (Washington, D.C.: June 2000).

33Although FHWA assesses whether incoming motor fuel data are significantly out of line 

with past reporting, Puerto Rico has not been included in these reviews because its data 

are not used to calculate a Fund contribution, according to FHWA officials.

34See Moving Ahead for Progress in the 21st Century Act, Pub. L. No. 112-141, 126 Stat. 

405 (2012). This law is the current authorization act for surface transportation programs. It 

will expire at the end of fiscal year 2014.

35Pub. L. No. 109-59, § 1101, 119 Stat. 1144, 1153 (2005).

36Factor data for the Recreational Trails Program (non-highway fuel use), the RailwayHighway Grade Crossings Program (public highway-rail grade crossings), and the Safe 

Routes to Schools Program (total school enrollment in primary and middle schools) were 

unavailable. 

37High Priority Projects were funded by the High Priority Projects Program. Eligible 

projects were identified in prior legislation, in effect for fiscal year 2009. 
Appendix I: Objectives, Scope, and 

Methodology

Page 53 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

contributions from highway users from that state to the Highway Account 

of the Fund. Similarly, as stated in prior work, the underlying data and 

factors are ultimately not meaningful for determining apportionments 

because they are overridden by other provisions that yield a 

predetermined outcome—in particular, the Equity Bonus under prior 

legislation.38 The estimated Puerto Rico apportionment for fiscal year 

2009 was adjusted to meet the 92 percent Equity Bonus minimum relative 

rate of return. 

Given the overriding effect of Equity Bonus on the estimated Puerto Rico 

fiscal year 2009 apportionment—and, consequently, the fiscal year 2013 

estimated apportionment—we did not verify the reliability of the Puerto 

Rico data that fed into the apportionment calculations. Additionally, we did 

not verify that the formulas FHWA used were consistent with the relevant 

statutes. However, we confirmed that FHWA used the same formulas and 

process for calculating state apportionments as were used for fiscal year 

2009, which, by law, is the basis for fiscal year 2013 apportionments.

To evaluate potential changes to selected sources of federal revenue 

under Puerto Rico statehood, we reviewed federal laws and regulations 

related to the main sources of federal revenue in 2012—individual income 

tax (which accounted for 46.2 percent of federal revenue in 2012), 

employment tax (34.5 percent), corporate income tax (9.9 percent), 

excise tax (3.2 percent), customs duties (1.2 percent), and estate and gift 

taxes (0.6 percent).39 We also estimated potential changes in revenue for 

individual and corporate income taxes—the two largest revenue sources 

that would be affected substantially by statehood.40

 

38GAO, Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future 

Program Design, 

As with our estimates 

of potential changes in federal spending, our estimates of potential 

changes in federal revenue involve uncertainty. To some extent, the 

GAO-04-802 (Washington, D.C.: Aug. 31, 2004).

39Office of Management and Budget, Analytical Perspectives, Budget of the United States 

Government, Fiscal year 2014 (Washington, D.C.: Apr. 10, 2013). We did not evaluate 

potential changes to miscellaneous receipts—which accounted for 4.4 percent of total 

receipts in fiscal year 2012. About 77 percent of miscellaneous receipts in fiscal year 2012 

derived from earnings deposited by the Federal Reserve; other types of miscellaneous 

receipts included fines, penalties, and forfeitures.

40Although certain of the various statutory exceptions from the definition of wages for 

employment taxes do not apply to Puerto Rico, federal employment taxes generally apply 

to residents of Puerto Rico on the same basis and for the same sources of income as to

residents of the states. 26 U.S.C. §§ 3121(e), 3306(j). 

Potential Changes to 

Selected Sources of 

Federal Revenue
Appendix I: Objectives, Scope, and 

Methodology

Page 54 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

various scenarios for estimates revenue capture how these assumptions 

would impact revenue. However, there may be sources of uncertainty and 

dynamic changes in economic activity that would affect revenue that we 

could not incorporate into our modeling.

To estimate potential changes to individual income tax, we obtained data 

for all individuals who filed a Puerto Rico individual income tax return for 

tax year 2010, the most recent complete year of tax return data available 

when we began our work. We obtained these data from Puerto Rico’s 

Department of Internal Revenue. The 2010 Puerto Rico individual income 

tax return generally includes information comparable to the federal 

individual income tax return. However, it does not include some items that 

are included on the federal return, and Puerto Rico law defines certain 

items differently. According to Puerto Rico officials, variations between the 

two returns include the following:

• Puerto Rico does not tax income from Social Security benefits or 

unemployment compensation. Thus, these items are not included on 

the Puerto Rico return. Under statehood, these forms of income would 

be subject to federal income tax.41 Because we excluded these items, 

our estimates of aggregate individual income tax revenue under 

statehood could be understated.42

• Winnings from the Lottery of Puerto Rico and racetracks are exempt 

from Puerto Rico income tax. Under statehood, this income would be 

subject to federal income tax. Excluding these items could have 

resulted in understated estimates.

• Some federal income tax deductions—such as for taxpayers and their 

spouses who are blind—and some tax credits (such as for qualified 

expenses paid to adopt an eligible child) have no equivalent under 

Puerto Rico income tax law and therefore are not reported on Puerto 

 

41Social Security benefits, including retirement, survivor, and disability benefits, as well as 

the Social Security-equivalent benefit portion of tier 1 railroad retirement benefits are 

reported on the federal individual tax return. Whether a taxpayer’s Social Security benefits 

are taxable depends on the circumstances for that taxpayer, such as the amount of the 

taxpayer’s income from other sources, if any. 

42According to the Social Security Administration, around 800,000 Puerto Rico 

beneficiaries received an average of $8,600 in social security benefits in 2010. For that 

same year, the Department of Labor reported that nearly 119,000 Puerto Rico residents 

received an average of nearly $2,500 in unemployment benefits. 

Individual Income Tax
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Rico returns. Excluding these items could have result in overstated 

estimates.

• Puerto Rico defines short-term capital gains as those from the sale or 

exchange of capital assets held for 6 months or less. In comparison, 

federal tax law defines short-term capital gains as those from capital 

assets held for one year or less. Under the federal income tax, shortterm gains are taxed as ordinary income, at rates that may be higher 

than those at which long-term gains are taxed for some taxpayers. 

Because we used capital gain information as reported on the Puerto 

Rico returns, our estimates may be understated.43

• The Puerto Rico tax return does not distinguish between qualified and 

ordinary dividends. Qualified dividends generally are subject to a 

lower federal income tax rate than are ordinary dividends. For our 

estimate, we assumed that Puerto Rico qualified dividends would 

have comprised the same percentage of total dividends (74 percent) 

as for dividends reported on federal income tax returns in 2010.

• The federal tax system generally allows taxpayers to carry back and 

carry forward net operating losses for 2 and 20 years, respectively; in 

contrast, Puerto Rico only allows net operating losses to be carried 

forward for 10 years. Consequently Puerto Rico filers might have 

been able to reduce their federal tax liabilities to a greater extent than 

observed on the Puerto Rico tax returns we used.

 

We used the National Bureau of Economic Research’s TAXSIM 

program—which models U.S. federal and state income tax systems—to 

estimate the aggregate federal income tax liability for 2010, as if each 

Puerto Rico individual income tax filer had filed a U.S. individual tax 

return per U.S. tax law as of January 2, 2013.44

 

43Essentially, assets held for more than 6 months, but less than one year—which would 

have qualified as long-term gains under Puerto Rico income tax law—would have been 

taxed as short-term gains at the federal level.

We also estimated 

payments in excess of tax liability for the three largest refundable tax 

credits: the American Opportunity Tax Credit (AOTC), child tax credit 

44The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, increased the 

tax rates for some income categories and extended some expiring tax provisions. Pub. L. 

No. 112-240, 126 Stat. 2313. 
Appendix I: Objectives, Scope, and 

Methodology

Page 56 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

(CTC), and earned income tax credit (EITC).45 These three credits 

accounted for 94 percent of obligations from refundable credits in fiscal 

year 2012.

In addition to the variations between Puerto Rico and federal tax returns 

as described above, the estimates are based on the following 

assumptions:

• Puerto Rico filers would not have changed their behavior related to 

work, investment, or income reporting as a result of the imposition of 

federal tax requirements.

• All filers who would have been eligible for the refundable credits would 

have claimed them.

• Puerto Rico residents’ compliance with tax laws would have remained 

constant under statehood.

Different assumptions would have resulted in different estimates. For 

example, some Puerto Rico residents who decided not to file a Puerto 

Rico return might have filed a federal return in order to receive payment 

from one or more of the refundable tax credits, had they been eligible. In 

addition, the Joint Committee on Taxation has noted that taxpayer 

compliance would likely increase under statehood because the federal 

Internal Revenue Service (IRS) has relatively more resources to enforce 

tax laws than does Puerto Rico’s Department of Internal Revenue.46

Under statehood, Puerto Rico filers may report their income at higher 

levels of compliance as a result.

We also developed an assumption to account for the possibility that 

Puerto Rico could change its own local income tax rates under statehood. 

 

45For the AOTC, we report the refundable amount of the credit reported on Puerto Rico 

returns, as Puerto Rico taxpayers were only eligible for 40 percent of the AOTC amount, 

up to the maximum of $1,000. We imputed the nonrefundable amount of the credit. For 

the CTC, TAXSIM produces estimates for both the nonrefundable and refundable 

portions. For the EITC, TAXSIM produces only a total credit amount; we estimated that 90 

percent of the total amount was refundable, based on a similar percentage for U.S. 

taxpayers. 

46Joint Committee on Taxation, An Overview of the Special Tax Rules Related to Puerto 

Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative 

Options, JCX-24-06, June 23, 2006. 
Appendix I: Objectives, Scope, and 

Methodology

Page 57 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Puerto Rico’s local income tax rates would be relatively high compared to 

those of the states. For example, the highest marginal tax rate in Puerto 

Rico for 2010 was 33 percent. In comparison, the 2010 highest marginal 

tax rate in the states was 11 percent (Hawaii and Oregon). How Puerto 

Rico’s government would respond to the imposition of federal income 

taxes is unknown. However, one possibility is that it would reduce its

income tax rates to be more in line with those from other states. Puerto 

Rico’s equivalent of a state income tax rate is relevant to estimates of 

aggregate tax liability and refundable credit payments because some 

filers would be able to deduct state and local taxes paid on their federal 

returns.

47 Accordingly, we developed an alternate scenario for estimating 

aggregate tax liability and refundable credit payments based on Puerto 

Rico reducing its income tax rates. Under this alternative scenario, we 

imputed amounts for the deduction for state and local taxes paid (using 

reported data from IRS’s Statistics of Income program for 2010) based on 

the national average deduction as a percentage of adjusted gross income 

(3.3 percent).48 

To determine the amount of federal income tax that Puerto Rico residents 

actually paid for 2010, we used data reported on Puerto Rico tax returns. 

We used these data because, although IRS publishes data on taxes 

collected by state (and for Puerto Rico) the amounts for individual and 

employment taxes are combined. According to IRS officials, the agency 

cannot separate the amounts for these two types of taxes at the state 

level. Instead, we used information reported on the Puerto Rico tax 

returns as a proxy for the amount of federal income tax paid. Puerto Rico 

allows a credit for taxes paid to the United States, its possessions, and 

foreign countries. According to officials from Puerto Rico’s Department of 

Internal Revenue, most of these taxes would have been paid to the 

United States. As a result, we used the aggregate tax amount that 

taxpayers reported in calculating the credit as the upper bound of federal 

income tax that would have been paid for 2010.

To estimate potential changes to corporate income tax revenue, we 

obtained data on net operating income or losses, losses carried forward 

from prior years, and credits for taxes paid to the United States for every 

 

47Filers with eligible deductions in excess of the standard deduction would have been 

expected to itemize their deductions; state and local taxes paid is an itemized deduction. 

48IRS’s Statistics of Income program reports aggregate taxpayer data based on a sample 

of individual income tax returns. 

Corporate Income Tax 
Appendix I: Objectives, Scope, and 

Methodology

Page 58 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

entity that filed a business income tax return for tax year 2009, the most 

recent complete year of tax return data available when we began our 

work. We obtained these data from Puerto Rico’s Department of Internal 

Revenue. We focused on these items because they are the best available 

proxies for the income and losses that would be taxed under the federal 

corporate income tax if Puerto Rico were to become a state. Net 

operating income or losses reported on Puerto Rico tax returns are 

computed in a manner broadly similar to how they are computed on 

federal returns (although the manner in which that income is taxed, if at 

all, can differ).49

We divided the Puerto Rico business entities into three categories based 

on the type of tax returns they filed.

• Regular corporations, which filed the standard corporate income tax 

return.

• Regular partnerships, which (in 2009) were subject to an entity-level 

income tax and filed returns largely identical to the regular corporate 

income tax return.50

• Exempt businesses, which had been granted partial or full exemptions 

of their business income under one of Puerto Rico’s tax incentive 

laws, and filed special tax returns.51 

Within the Puerto Rico tax return data, we could not always determine 

whether the filing entities were (1) branches of other corporations, (2) 

subsidiaries of other corporations, or (3) separate Puerto Rico entities. 

Likewise, officials from Puerto Rico’s Department of Internal Revenue told 

 

49Given the wide expected range of our estimates, we did not adjust the reported Puerto 

Rico data for any differences in details (such as depreciation schedules) or in inventory 

accounting rules between Puerto Rico and federal tax laws. 

50Another type of business entity, called a special partnership, also operated in Puerto 

Rico during 2009. These partnerships were not taxed on their income at the entity level. 

Instead, their income and deductions were passed through to their partners, who included 

those amounts on their individual tax returns. Puerto Rico now treats all partnerships as 

pass-through entities for tax purposes, similar to the treatment of partnerships under 

federal tax law.

51Among the items that exempt businesses reported on these returns were measures of 

net operating income or losses and losses carried forward that were similar to the 

measures reported by regular corporations and partnerships.
Appendix I: Objectives, Scope, and 

Methodology

Page 59 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

us that the data would not provide sufficient or reliable information on the 

country of incorporation for any of the filing businesses or for their parent 

corporations. Consequently, we made a range of assumptions regarding 

the percentage of the filing entities’ income attributable to either (1) 

branches or subsidiaries that would have been included in the 

consolidated federal corporate income tax return of a U.S. corporation, or 

(2) corporations that would have been taxed as separate entities under 

statehood. These distinctions mattered in terms of which tax rates we 

applied when making our estimates and how we treated accumulated 

losses. 

In addition, we did not have data for the amount of state and local income 

taxes that the filing entities would have paid in Puerto Rico if it had been a 

state. As a result, we needed to estimate these amounts, because they 

represent an important deduction under the federal corporate income tax. 

As with the individual income tax, Puerto Rico’s corporate income tax 

rates are relatively high compared to those in the states. For example, 

Puerto Rico’s highest marginal tax rate in 2010 for regular corporations 

was 19 percent; the highest corporate tax rate in the states in 2010 was 

12 percent (Iowa). How Puerto Rico’s government would respond to the 

imposition of federal corporate income tax is unknown; however, if Puerto 

Rico were placed in the same fiscal relationship to the federal 

government as the 50 states, it might reduce its rates to be more in line 

with those from other states. Consequently, we assumed that under 

statehood, the effective rate of Puerto Rico’s income tax would be similar 

to the average effective rate for income taxes levied in the states (the rate 

for profitable corporations was 3.8 percent of net income; for corporations 

with losses it was -1.0 percent).52 We used data compiled by IRS to 

estimate this average rate for the states. 

 

52The effective tax rate, which shows how much tax a corporation pays as a percentage of 

its taxable income, incorporates more aspects of the tax code than just the statutory tax 

rate; it also reflects, among other things, the impacts of tax credits, exemptions, deferrals, 

and other provisions that can reduce tax liability. As a sensitivity analysis, we examined 

how our estimates would change if we assumed, alternatively, that the effective rate of the 

Puerto Rico state corporate tax would have been twice as high as the average effective 

state rate (7.6 percent). Using this higher effective rate, we found that the estimate range 

changed from a range of $5.0 billion to $9.3 billion to a range of $4.6 billion to $9.0 billion. 

Incorporating the assumption that some corporations would relocate from Puerto Rico 

under statehood, the estimate range changed from a range of -$0.1 billion to $3.4 billion to 

a range of -$0.2 billion to $3.2 billion.
Appendix I: Objectives, Scope, and 

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Page 60 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

We also needed to make assumptions regarding which federal tax rates 

would have applied to these entities’ net income under statehood. In the 

case of corporations taxed as separate entities, we assumed an effective 

tax rate falling within a broad range (from 15 percent to 35 percent) 

around the average effective tax rate that U.S. corporations paid for tax 

year 2009.53 We used this range to reflect the possibility that the tax 

attributes of the typical corporation operating in Puerto Rico could have 

differed from those of the typical U.S. corporation. 

On the advice of tax experts from the Joint Committee on Taxation, we 

used a different approach to determine tax rates for entities included in 

the consolidated returns of controlled groups of U.S. corporations. For 

these corporations, the applicable rate of tax depended not only on the 

Puerto Rico entities’ net income, but also on the income and losses of 

other group members, and on the credits earned by the group as a whole. 

For these entities, we applied the marginal federal tax rate for the 

consolidated group to the net income (or losses) that the Puerto Rico 

entity would have added to the group’s tax return. For entities in the 

financial services and social services industries, we applied the full 35 

percent corporate marginal tax rate based on the assumption that these 

entities would not have qualified for the domestic production activities 

deduction.54 For all other corporations, we reduced the marginal rate to 

31.85 percent to reflect the effect of this deduction.

We estimated tax liabilities both before and after applying prior-year 

losses to offset income from 2009. We did so because the initial effect 

that these prior-year losses would have had on tax revenue may not have 

been representative of their effects over a longer time period. In the first 

year of statehood, when Puerto Rico subsidiaries of U.S. corporations 

 

53We used data that IRS collected (from a sample of corporate tax returns filed for tax 

year 2009) to estimate the total tax, after credits that U.S. corporations paid as a 

percentage of their taxable income: that figure was 22.3 percent. The weighted average 

across all tax years from 2001 to 2010 was 24.6 percent.

54In general, the domestic production activities deduction allows a taxpayer to deduct an 

amount equal to nine percent (for years after 2009) of the lesser of the taxpayer’s taxable 

income or its qualified production activities income. The deduction cannot exceed 50 

percent of the wages properly allocable to domestic production gross receipts paid by the 

taxpayer during the calendar year. 26 U.S.C. § 199. Under current law, specific rules 

apply for determining whether Puerto Rico is considered part of the United States when 

calculating domestic production gross receipts and the wage limitation for a taxpayer. This 

temporary provision was enacted in 2006 and applied to tax years beginning before 

January 1, 2014. 26 U.S.C. § 199(d)(8). 
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first become subject to federal tax and are consolidated into their parent 

corporations’ tax returns, large portions of their losses could be used to 

offset the taxable income reported on those returns, leaving only smaller 

amounts (or newly generated losses) available to offset income in 

subsequent years.

We also made assumptions to account for the potential relocation, under 

statehood, of businesses with activities in Puerto Rico. Tax experts at the 

U.S. Department of the Treasury and the Joint Committee on Taxation 

suggested that the changes in tax treatment that would occur under 

statehood likely would motivate some businesses to move their 

operations from Puerto Rico to lower-tax foreign locations—particularly 

those with substantial amounts of income derived from intangible (and 

therefore mobile) assets. For 2009, exempt corporations in the 

pharmaceutical and the medical equipment and supplies industries 

accounted for over 70 percent of the net income (and about 20 percent of 

accumulated losses) of the full population of exempt corporations. In 

addition, other industries with potential income from intangible assets 

accounted for significant shares of total net income. 

Using the other assumptions described above, we produced an 

alternative set of estimates to account for the potential relocation, under 

statehood, of businesses with activities in Puerto Rico. The first set of 

estimates assumes that all filing businesses would have maintained their 

activities in Puerto Rico. The second set of estimates assumes that (1) all 

filing businesses in the pharmaceuticals and the medical equipment and 

supplies industries would have relocated away from Puerto Rico, and (2) 

other filing business would have maintained their activities in Puerto Rico. 

To determine the amount of federal corporate income tax that entities with 

activities in Puerto Rico actually paid in 2009, we used data that U.S. 

corporations reported to IRS on Form 1118 on income they received in 

2009 from their Puerto Rico branches or subsidiaries. To estimate the 

amount of tax that would have been paid, we applied a tax rate of 31.85 

percent (the 35 percent corporate tax rate reduced to account for the 

domestic production activities deduction) to the remaining income.55

 

55We could not determine industrial classifications for the corporations filing Form 1118 

because the data did not include such information. Since a large majority of the income of 

exempt corporations (which include the corporations affiliated with a U.S. parent 

corporation) was earned by the corporations that were deemed to have qualified for the 

domestic production activities deduction, we used the 31.85 rate that incorporates the 

deduction for our estimate of actual taxes paid.
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Methodology

Page 62 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Separately, published IRS data show that the agency collected about 

$145 million (net of refunds) in business income taxes from entities in 

Puerto Rico in fiscal year 2009.56 However, this amount included taxes 

collected from any tax year, and we could not determine whether any of 

the amounts collected overlapped with amounts we estimated based on 

Form 1118 (any taxes paid by businesses incorporated in Puerto Rico on 

their U.S.-source income would not overlap with those amounts). 

Consequently, we did not include any of the $145 million in our estimate 

of the amount paid in corporate income tax by entities with activities in 

Puerto Rico.

We took several steps to assess the reliability of the Puerto Rico tax 

return data we used for our individual and corporate income tax 

estimates. For example, to identify possible outliers that could reflect data 

errors, we checked maximum and minimum amounts reported for each 

tax return line item we used. We also discussed the data with officials 

from Puerto Rico’s Department of Internal Revenue, and, in some cases, 

adjusted the data to address errors and inconsistencies.57 Based on our 

assessment, we determined that the data were sufficiently reliable for our 

purposes. We also discussed our methodology for estimating tax revenue 

with tax experts from the Department of the Treasury and the Joint 

Committee on Taxation, who generally agreed with our estimation 

approaches. 

To identify factors under statehood that could influence changes in 

federal spending and revenues, we reviewed economic data from the 

Puerto Rico government and reports on the Puerto Rico economy, such

as those from the Federal Reserve Bank of New York58 and the 

Congressional Budget Office.59

 

56Business income taxes included those for corporations; farmers’ cooperatives; and taxexempt organizations, which generally are required to pay tax on income from regular 

trade or business activities not substantially related to their exempt purposes.

We also interviewed officials from the 

57For example, out of over 1 million Puerto Rico individual tax returns, 162 records had 

errors in the date of birth information or were missing such information. We dropped these 

individuals from our analysis as the date of birth is important for determining certain 

federal tax credit or deduction with eligibility based on age.

58Federal Reserve Bank of New York, Report on the Competitiveness of Puerto Rico’s 

Economy (New York, June 29, 2012).

59Congressional Budget Office, Potential Economic Impacts of Changes in Puerto Rico’s 

Status under S. 712 (Washington, D.C.: April 1990).

Factors That Could Affect 

Federal Spending and 

Revenue
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Methodology

Page 63 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

current and past Puerto Rico government administrations and Puerto 

Rico business associations representing large economic sectors in Puerto 

Rico to obtain their views on the potential impacts of statehood on Puerto 

Rico’s economy and public finances.

 

We conducted this performance audit from June 2012 to March 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
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The Patient Protection and Affordable Care Act (PPACA), enacted in 

March 2010,1 makes substantial changes to Medicare and Medicaid, as 

well as other components of the federal budget. There are significant 

uncertainties surrounding the effects of PPACA on health care spending 

and on other factors that influence future health care costs more 

generally—such as how the development and deployment of medical 

technology, future policy decisions, and cost and availability of insurance 

affect growth in per-capita health care spending. These factors could 

influence our estimates of federal spending for Medicare, Medicaid, and 

the State Children’s Health Insurance Program (CHIP) under Puerto Rico 

statehood. Below we summarize selected PPACA provisions that may 

affect federal Medicare, Medicaid, and CHIP spending in Puerto Rico.

PPACA is projected to decrease direct Medicare spending by almost 

$400 billion from fiscal years 2010 to 2019, according to the 

Congressional Budget Office (CBO).2 The following table summarizes 

selected PPACA provisions that have affected, or could potentially affect, 

federal Medicare spending in Puerto Rico.

 

1

Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and 

Education Reconciliation Act of 2010 (HCERA), Pub. L. No. 111-152, 124 Stat. 1029 

(2010). In this report, references to PPACA include amendments made by the HCERA, 

unless otherwise indicated.

2

Congressional Budget Office, H.R. 4872, Reconciliation Act of 2010 (Final Health Care 

Legislation) (Washington, D.C.: Mar. 20, 2010).

Appendix IV: Potential Effects of the Patient 

Protection and Affordable Care Act on 

Federal Spending for Medicare, Medicaid, 

the State Children’s Health Insurance 

Program under Puerto Rico Statehood

Medicare
Page 110 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

The Patient Protection and Affordable Care Act (PPACA), enacted in 

March 2010,1

makes substantial changes to Medicare and Medicaid, as 

well as other components of the federal budget. There are significant 

uncertainties surrounding the effects of PPACA on health care spending 

and on other factors that influence future health care costs more 

generally—such as how the development and deployment of medical 

technology, future policy decisions, and cost and availability of insurance 

affect growth in per-capita health care spending. These factors could 

influence our estimates of federal spending for Medicare, Medicaid, and 

the State Children’s Health Insurance Program (CHIP) under Puerto Rico 

statehood. Below we summarize selected PPACA provisions that may 

affect federal Medicare, Medicaid, and CHIP spending in Puerto Rico.

PPACA is projected to decrease direct Medicare spending by almost 

$400 billion from fiscal years 2010 to 2019, according to the 

Congressional Budget Office (CBO).2 The following table summarizes 

selected PPACA provisions that have affected, or could potentially affect, 

federal Medicare spending in Puerto Rico.

 

1

Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and 

Education Reconciliation Act of 2010 (HCERA), Pub. L. No. 111-152, 124 Stat. 1029 

(2010). In this report, references to PPACA include amendments made by the HCERA, 

unless otherwise indicated.

2

Congressional Budget Office, H.R. 4872, Reconciliation Act of 2010 (Final Health Care 

Legislation) (Washington, D.C.: Mar. 20, 2010).

Appendix IV: Potential Effects of the Patient 

Protection and Affordable Care Act on 

Federal Spending for Medicare, Medicaid, 

and the State Children’s Health Insurance 

Program under Puerto Rico Statehood 

Medicare
Page 111 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Table 10: Selected PPACA Provisions and Their Potential Affect on Federal Medicare Spending in Puerto Rico under 

Statehood 

PPACA provisions 

(legal citation) Effective date Potential effects on spending

Medicare fee-for-service (Medicare FFS) Part A

a

Starting in fiscal year 2014, hospitals receiving Disproportionate Share 

Hospital (DSH) program payments will receive 25 percent of the previous 

amount received under the current Medicare DSH payment statutory 

formula.b

PPACA, § 3133 (as amended by HCERA, § 1104) (codified at 42 U.S.C. 

§ 1395ww(r)).

These hospitals will also receive additional payments based on 

three factors, including their share of the total amount of uncompensated 

care for all Medicare DSH hospitals for a given time period.

October 1, 2013. This provision is estimated to save the 

Medicare program approximately $22.1 

billion from fiscal years 2014 to 2019. 

Although Medicare DSH payments are 

expected to decrease, hospitals are 

expected to receive additional revenue 

from other sources, such as from an 

expected increase of insured 

individuals.

The Centers for Medicare & Medicaid 

Services (CMS) determined that Puerto 

Rico hospitals eligible for Medicare 

DSH payments are eligible to receive 

empirically justified Medicare DSH 

payments and uncompensated care 

payments under the new payment 

methodology. CMS expects that in fiscal 

year 2014, Puerto Rico hospitals will 

receive a 41.3 percent increase, or 

about $74 million, in Medicare DSH 

payments. 

Payment updates will be reduced for many Medicare services, in 

accordance with a productivity adjustment.c

PPACA, §§ 3401, 10316(a), 10319(b), (d), (e), 10319(f), (g) (as 

amended by HCERA, §§ 1105(a)(2), 1105(b), (d), (e)) (codified at 42 

U.S.C. §§ 1395f(i)(1)(C), 1395l(i)(2)(D), (h)(2)(A), (t)(3), 1395m(a)(14), 

(h)(4), (l)(3), 1395u(s)(1), 1395rr(b)(14)F), 1395ww(b)(3)(B), (m), 

1395yy(e)(5)(B), 1395fff(b)(3)(B)). 

Varies depending 

on the Medicare 

service.

This provision is estimated to save the 

Medicare program approximately 

$156.6 billion from fiscal years 2010 to 

2019.

This provision would not be affected by 

statehood, as Puerto Rico providers are 

currently subject to the payment 

updates, according to CMS.

A Readmissions Reduction Program will reduce payments to acute care 

hospitals if there are excess readmissions of patients.

PPACA, §§ 3025(a)10309) (codified at 42 U.S.C. § 1395ww(q)).

October 1, 2012. This provision is estimated to save the 

Medicare program $7.1 billion from 

fiscal years 2010 to 2019 due to 

reduced payments.

Under statehood, Puerto Rico hospitals 

would be newly subject to the program. 

The effect on spending in Puerto Rico is 

unknown.

Appendix IV: Potential Effects of the Patient Protection and 

Affordable Care Act on Federal Spending for Medicare, Medicaid, 

the State Children’s Health Insurance Program under Puerto Rico 

Statehood
Page 112 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

PPACA provisions 

(legal citation) Effective date Potential effects on spending

Medicare Advantage (Medicare Part C)

a

Changes benchmarks underlying payments to Medicare Advantage 

(MA) plans to align more closely with Medicare FFS spending. The new 

benchmarks will be phased in from 2012 to 2017 and blended with old 

benchmarks. In 2017, county benchmarks will be one of four values: 95 

percent, 100 percent, 107.5 percent or 115 percent of Medicare FFS 

spending. Benchmarks could be increased for certain plans if they are 

new, demonstrate indicators of plan quality, or have low enrollment.

PPACA, § 3201 (as amended by HCERA, § 1102) (codified at, 42 

U.S.C. § 1395w-23(n)).

Phased-in from 

2012 to 2017.

This provision is estimated to reduce 

payments to MA plans by about $136 

billion from fiscal years 2010 to 2019. 

These reductions could result in 

reduced benefits and enrollments. 

When fully phased in 2017, 

benchmarks for Puerto Rico generally 

will be 115 percent of Medicare FFS 

spending plus any quality bonus 

payments. In the long term, the 

reduction will result in plans receiving 

lower payments. Given the high 

enrollment in MA in Puerto Rico, these 

changes could significantly affect 

Medicare spending. 

Medicare prescription drug benefit (Medicare Part D)

Higher premiums will be charged for beneficiaries who exceed certain 

income thresholds.

PPACA, § 3308 (codified at 42 U.S.C. § 1395w-113(a)(7)).

January 1, 2011. This provision is estimated to provide 

an additional $10.7 billion in Medicare 

funding from fiscal years 2010 to 2019.

Although Puerto Rico could benefit 

from additional funding, relatively few 

Puerto Rico Medicare beneficiaries 

may end up paying the higher 

premiums given relatively low incomes 

in Puerto Rico. This provision would 

not be affected by statehood.

Appendix IV: Potential Effects of the Patient Protection and Affordable 

Care Act on Federal Spending for Medicare, Medicaid, the State Children’s 

Health Insurance Program under Puerto Rico Statehood
Page 113 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

PPACA provisions 

(legal citation) Effective date Potential effects on spending

Discounts and additional subsidies must be provided to Part D 

beneficiaries who purchased covered drugs during the coverage gap, or 

“donut hole.”

a

d 

PPACA, §§ 3301, 3315 (as amended by HCERA, § 1101) (codified at, 

42 U.S.C. §§ 1395w-152(c), 1395w–153, 1395w–114a).

Beneficiaries who receive the Part D low-income subsidy 

would not benefit from this provision, as they already receive assistance 

with costs in the coverage gap. In addition, one-time payments of $250 

were provided to certain individuals who incurred costs for covered Part 

D drugs exceeding the coverage limit in 2010.

January 1, 2010 This provision is expected to increase 

Medicare spending by $42.6 billion from 

fiscal years 2010 to 2019.

As of March 2013, Part D beneficiaries in 

Puerto Rico have saved $143 million 

under this provision, according to CMS.e 

Source: GAO analysis.

This provision would not be affected by 

statehood.

a

Unless otherwise noted, projections are from: Congressional Budget Office, H.R. 4872, 

Reconciliation Act of 2010-- Final Health Care Legislation, (Washington, D.C.: Mar. 20, 2010).

b

Disproportionate Share Hospitals’ eligibility is based on a formula that includes certain factors, such 

as the number of treated patients who are enrolled in Medicaid or receive Supplementary Security 

Income benefits.

c

Many Medicare provider categories that are reimbursed on a fee-for-service basis receive annual 

payment increases based on the Consumer Price Index or market basket updates; both measure the 

increase in prices that each provider category must pay for the goods and services in order to serve 

patients. PPACA required that payment updates for these provider categories be reduced by a 

productivity adjustment, defined as a 10-year average of changes in annual economy-wide private 

productivity.

d

The donut hole refers to the point when standard Part D plans provide coverage for costs over 

$2,970, until out-of-pocket costs reach $4,750 (for 2013), when the plan covers most costs.

e

CMS provides online state-by-state information on donut hole savings, including for Puerto Rico. 

Centers for Medicare & Medicaid Services, Donut Hole Savings by State, accessed December 2013

http://downloads.cms.gov/files/DonutHoleSavingsSummary-March2013.pdf. 

CBO estimated that PPACA will increase federal spending on Medicaid 

and CHIP by $642 billion over fiscal years 2012 to 2022.3 The following 

table summarizes selected PPACA provisions that have affected, or could 

potentially affect, federal Medicaid and CHIP spending in Puerto Rico.

 

3

Congressional Budget Office. Estimates for the Insurance Coverage Provisions of the 

Affordable Care Act Updated for the Recent Supreme Court Decision (Washington, D.C.: 

July 2012).

Medicaid and CHIP 

Appendix IV: Potential Effects of the Patient Protection and Affordable 

Care Act on Federal Spending for Medicare, Medicaid, the State Children’s 

Health Insurance Program under Puerto Rico Statehood
Page 114 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Table 11: Selected PPACA Provisions and Their Potential Affect on Federal Medicaid and CHIP Spending in Puerto Rico under 

Statehood 

PPACA provisions 

(legal citation) Effective date Potential effects on spending

Increased Puerto Rico’s federal matching assistance 

percentage (FMAP) from 50 percent to 55 percent, as of 

July 1, 2011.

a

PPACA, § 2005(c) (as amended by HCERA, 

§ 1204(b)(2)(B)) (codified at 42 U.S.C. § 1396d(b)).

July 1, 2011. As a state, Puerto Rico’s FMAP would be 83 percent 

regardless of this provision. 

Authorized a $6.3 billion increase in Medicaid funding for 

the territories between July 1, 2011, and September 30, 

2019. The funding available for each territory must be 

distributed in proportion to the federal Medicaid funding it 

received relative to other territories.

PPACA, § 2005(a)(3) (as amended by HCERA, 

§ 1204(b)(1)(B)) (codified at 42 U.S.C. § 1308(g)(5)).

July 1, 2011. According to CMS, this provision qualifies Puerto 

Rico for a total of $5.5 billion in additional funding 

between July 1, 2011, and September 30, 2019. 

Appropriated $925 million to Puerto Rico for either (1) 

premium and cost sharing assistance (which are subsidies 

intended to help individuals pay for premiums and out-ofpocket expenses, such as deductibles and copays) for 

residents if Puerto Rico decides to establish an exchange 

through which residents can obtain health insurance; or (2) 

an increase in the funding allocation for Puerto Rico’s 

Medicaid program from 2014 through 2019, if Puerto Rico 

does not establish an exchange.

PPACA, § 1323 (as amended by HCERA, § 1204(a)) 

(codified at 42 U.S.C. § 18043).

January 1, 2014. Puerto Rico decided not to establish an exchange; 

the $925 million will be added to Puerto Rico’s 

Medicaid funding from January 1, 2014 to December 

31, 2019. 

Under statehood, either Puerto Rico or the federal 

government likely would be required to establish a 

health insurance exchange in Puerto Rico, according 

to CMS. 

PPACA provides for states to expand Medicaid coverage to 

most non-pregnant, non-elderly individuals with incomes up 

to 133 percent of the federal poverty level (PPACA also 

provides for a 5 percent income disregard when calculating 

modified adjusted gross income for determining Medicaid 

eligibility, which effectively increases this income level to 

138 percent of the federal poverty level).

PPACA, § 2001(a)(1), (3) (as amended by HCREA, 

§ 1201(1)(B)) (codified at 42 U.S.C. 

§§ 1396a(a)(10)(A)(i)(VIII) 1396d(y)). 

The federal 

government will pay the full cost of covering newly eligible 

beneficiaries until 2017, after which the federal share 

gradually will decline to 90 percent by 2020.

January 1, 2014. Under statehood, if Puerto Rico opts to expand its 

Medicaid program, the federal government would pay 

the full cost of expansion until 2017, and would 

reduce its share of costs to 90 percent by 2020.

Appendix IV: Potential Effects of the Patient Protection and Affordable 

Care Act on Federal Spending for Medicare, Medicaid, the State Children’s 

Health Insurance Program under Puerto Rico Statehood
Page 115 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

PPACA provisions 

(legal citation) Effective date Potential effects on spending

Provides that Medicaid payments to primary care 

physicians for services provided in 2013 and 2014 will not 

be less than the greater of the Medicare rates in those 

years or the payments rates that would be applicable in 

those years using the 2009 Medicare physician fee 

schedule conversion factor. The federal government must 

provide a 100 percent match for any increased payments. 

The territories, however, are not required to provide these 

increased payments to primary care physicians, nor are 

they eligible for this enhanced federal match.

a

HCERA § 1202 (codified at 42 U.S.C. §§ 1396a(a)(13)(C), 

1396d(dd), 1396u-2(f)). 

January 1, 2013. This provision is expected to increase federal 

Medicaid spending by $8.3 billion.

Puerto Rico is not eligible for this enhanced federal 

match. Under statehood Puerto Rico would be 

required to make these increased payments to 

primary care physicians and would receive an 

enhanced match for qualified payments, increasing 

federal and Puerto Rico Medicaid spending.

Medicaid DSH payments will be reduced under a specified 

methodology for 2014 through 2020.

PPACA, §§ 2551, 10201(e)(1)(B) (as amended by HCERA, 

§ 1203) (codified at 42 U.S.C. § 1396r-4(f)(7)).

October 1, 2013. This provision is expected to result in $14.1 billion in 

savings to the federal government from fiscal years 

2014 to 2019.

Since Puerto Rico does not qualify for a DSH 

allotment as a territory, there is no direct effect from 

this provision on actual federal spending in Puerto 

Rico. Under statehood, Puerto Rico would become 

eligible for a DSH allotment; however, according to 

CMS officials, the methodology for calculating that 

allotment is unclear because a state’s allotment is 

based on its prior year allotment.

b

Beginning October 1, 2015, the enhanced FMAP for CHIP 

will increase by 23 percentage points, not to exceed 100 

percent, which will continue until September 30, 2019. 

PPACA, §§ 2101(a), 10203(c)(1) (codified at 42 U.S.C. 

§ 1397ee(b)).

October 1, 2015. Under statehood, the increased enhanced FMAP 

may impact the level of CHIP coverage that Puerto 

Rico would select. 

Source: GAO analysis.

a

Unless otherwise noted, projections are from Congressional Budget Office, H.R. 4872, Reconciliation 

Act of 2010 (Final Health Care Legislation) (Washington, D.C.: Mar. 20, 2010).

b

The Bipartisan Budget Act of 2013 amended the reduction of Medicaid DSH payments. Specifically, 

it delayed the reductions for two years until October 1, 2015 and doubled the reduction that otherwise 

would have applied in that year. Additionally, it added another special rule for calculating Medicaid 

DSH allotments in 2023. Pub. L. No. 113-67, § 1204, 127 Stat. 1165, 1199. 

Appendix IV: Potential Effects of the Patient Protection and Affordable 

Care Act on Federal Spending for Medicare, Medicaid, the State 

Children’s Health Insurance Program under Puerto Rico Statehood
 Page 116 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Appendix V: Comments from the Governor of 

Puerto Rico
 Page 117 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Appendix V: Comments from the 

Governor of Puerto Rico
 Page 118 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

 Page 118 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Appendix VI: Comments from the Resident 

Commissioner from Puerto Rico
 Page 119 GAO

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 Page 120 GAO

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 Page 121 GAO

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 Page 124 GAO

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 Page 125 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

 Page 125 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

Stanley J. Czerwinski, (202) 512-6520, czerwinskis@gao.gov 

In addition to the individual named above, key contributors to this report 

were Jeff Arkin, Assistant Director; Susan T. Anthony; Benjamin Bolitzer; 

Gerardine Brennan; Christine Brudevold; Virginia (Jenny) Chanley; Steve 

Cohen; James C. Cosgrove; Kevin Daly; Bertha Dong; Deirdre Duffy; 

Elizabeth Fan; Ellen Grady; Shirley Jones; Michael Kendix; Kathleen M. 

King; Laurie King; Hayley Landes; Kathryn Larin; Dan Meyer; Donna 

Miller; John Mingus; Meredith Trauner Moles; Ruben Montes de Oca; 

Edward Nannenhorn; Jeffrey Niblack; Keith O’Brien; Rhiannon Patterson; 

Amy Radovich; Robert Robinson; Erin Saunders Rath; Cherié Starck; 

Andrew J. Stephens; Lindsay Swenson; Hemi Tewarson; Daniel Webb; 

Monique B. Williams; James Wozny; Robert Yetvin; and Carolyn L. 

Yocom.

Appendix VII: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(450979)
 Page 126 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

 Page 126 GAO-14-31 Fiscal Effects of Puerto Rico Statehood 

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