For years, individual US states have exploited tax fatigue to attract those looking to save a few dollars by moving to a place that doesn’t treat them like a milk cow. The offer is simple: at no more than modest cost or inconvenience, you can move to our state and protect up to 10% or more of your income from the tax collector. The income-tax-free states of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming all make that offer. Nevada has drawn thousands of Californians to Incline Village, Nevada’s interstate tax haven on Lake Tahoe.
Even more conspicuous is Florida, with zero state income tax plus property tax rates that decline with the age of the owner. As a bonus, Florida throws in exceptional asset-protection laws. For decades, it has attracted wealthy retirees who grew their nest eggs in New York, New Jersey, or other high-tax states and want to enjoy their money in a sunnier climate.
Florida presented what was until recently the best balance of lower taxes and a tropical lifestyle available to Americans who didn’t want to give up their citizenship.
Your alternatives just got better. There is a new option that out-Floridas Florida, and by a big margin.
Puerto Rico—More than “The Better Florida”
If Florida sounds attractive, head in that direction. But if you’re an investor or the owner of the right kind of service business, keep going until you get to Puerto Rico.
In 2012, to spur job growth and economic activity in general, the Commonwealth of Puerto Rico introduced extraordinary tax incentives for incoming residents and service businesses.
Puerto Rico is no novice at sculpting tax rules to attract foreign investors and expatriates. For decades the country has offered tax incentives to many types of businesses, especially manufacturers, which is why today you’ll find plants belonging to Praxair, Merck, Pfizer, and other big names dotting the island’s lush interior.
Those incentives worked well to bring companies seeking low-wage, low-skill labor—businesses that could help the economy move forward… but only so far. Eventually the door to foreign competition opened by NAFTA and other regulatory changes eroded Puerto Rico’s advantage over Mexico in exporting to the US.
So the Commonwealth government reently went a step further and passed tax incentives to in part make up for the dwindling return from previous tax incentive programs, culminating with the bell-ringing changes enacted in 2012.
That latest round of legislation focused on three economic trends that had been passing Puerto Rico by, even though the island was well qualified to ride them:
- The flow of investors and money managers from all over the world to stable, low-tax jurisdictions, such as Singapore, Hong Kong, and the Cayman Islands;
- The boom in call centers and technical support facilities in low-cost, English-speaking countries, especially India and the Philippines; and
- The aforementioned migration of America’s and Europe’s wealthier retirees and investors to warm, comfortable places.
As Puerto Rico aims to ride these trends, it has an advantage few competitors can hope to match.
Puerto Rico is a territorial possession of the US. Under the US Internal Revenue Code, an American who becomes a resident of Puerto Rico begins a second tax life: all the income the person earns from Puerto Rican sources is subject to Puerto Rican income tax only, not to US income tax.