Even before Puerto Rico was devastated in September by Hurricane Maria, the island existed in a strange netherworld.
Its residents are U.S. citizens, but they can't vote for president. They pay payroll taxes, but not income taxes. They receive benefits from some government programs, but not others.
The same is true for other U.S. territories, but Puerto Rico is the largest and most populous.
The island has an area of 3,515 square miles, a population of 3.4 million and, in 2016, a per capita gross domestic product of $38,400.
It's larger than two states, more populous than 21 and outranks six in per capita GDP. The five states most similar to Puerto Rico in terms of population and median household income are Alabama, Arkansas, Kentucky, Mississippi and Oklahoma.
It's unlikely Puerto Rico will become a state any time soon, if ever. The prospect divides its residents nearly in half, and even if they agreed in favor of statehood, it would take an act of Congress.
But if did happen, residents would receive billions more in federal dollars and they would pay billions more in federal taxes.
To assess the economic impact, the U.S. Government Accountability Office examined expenditures for programs it determined would be affected by Puerto Rican statehood, as well as tax revenues collected from individuals and corporations.
Because it's unknown at what rate eligible residents of Puerto Rico might participate in different programs and because some companies might relocate, the GAO estimated a range of potential effects.
Overall, it found that as a state, Puerto Rico would have received $8.8 billion to $12.5 billion from the four largest federal programs, instead of $7.1 billion. Its corporations would have paid $5 billion to $9.3 billion in taxes instead of $1.4 billion, assuming none relocated. And its residents would have paid $2.2 billion to $2.3 billion in individual income tax.
The GAO conducted its analysis in 2014 and generated estimates based on Puerto Rico being treated the same as the states in either 2009 or 2010, depending on which year it had the most current data.
Here's the breakdown of the largest of 11 programs the GAO determined would be affected by Puerto Rican statehood:
Medicare: Puerto Rican residents, who pay payroll taxes at the same rates as residents of the states, received $4.5 billion in Medicare benefits. But Medicare funds allotted to Puerto Rico are capped, and if it had been a state, it would have received up to $6 billion.
Medicaid: Medicaid spending in Puerto Rico was $685 million, but as a state, it would have received $1.1 billion to $2.1 billion. The estimates don't include home-health services or nursing homes because of a lack of data and because Puerto Rico lacks a network of nursing-home facilities. If that changed, costs would likely go up.
SNAP: Spending on a program similar to the Supplemental Nutrition Assistance Program was $24 million. As a state, residents eligible for SNAP would have received $1.7 billion to $2.6 billion. The low end is less than actual spending because benefits received from Supplemental Security Income, for which residents would also become eligible, would affect SNAP benefits.
SSI: Spending for a program similar to Supplemental Security Income was $24 million, but as a state, residents eligible for SSI would have received $1.5 billion to $1.8 billion.
The total for all four would amount to an increase in spending of 24% to 42% in Puerto Rico and represent 1% to 1.4% of the total spent by the federal government on those programs.
Individual Income Tax: On the revenue side, Puerto Ricans paid $20 million in payroll taxes, but if the island had been a state, residents would have paid $2.2 billion to $2.3 billion.
Corporations are trickier.
Puerto Rican corporations are considered foreign entities under U.S. tax law and, in general, don't pay federal tax. Meanwhile, U.S. parent corporations with subsidiaries in Puerto Rico can defer tax on foreign income until it is repatriated to the U.S.
Corporate Taxes: The GAO estimated that corporations paid $1.42 billion in taxes. Had the island been a state, they would have paid $5 billion to $9.3 billion, assuming none relocated. If some did relocate, the GAO calculated the range of corporate receipts would be from a loss of $100 million to an increase of $3.4 billion. The negative figure at the low end was attributed to potential tax write-offs by U.S. corporations for prior-year losses.
Together, revenues from individual and corporate taxes would increase by as little as 48% to as much as eight times what was actually collected.
The GAO cautioned that the effect of statehood would be influenced by the terms of admission, strategies to promote economic development and other decisions.
In addition, the report doesn't quantify the effect of Puerto Ricans who have migrated to the states. As of 2013, 5.1 million Puerto Ricans lived in states where they qualify for equal treatment under all federal programs.
More have left since Maria struck -- but according to the Stafford Act, which governs federal response to major disasters, in this instance, the federal government should treat Puerto Rico like a state.
Write to Jo Craven McGinty at Jo.McGinty@wsj.com
(END) Dow Jones Newswires
November 03, 2017 09:14 ET (13:14 GMT)