Puerto Rico's Tax Incentives: A Double-Edged Sword for High-Net-Worth Individuals and U.S. Fiscal Policy

Puerto Rico's tax incentive programs, particularly Act 22 (now integrated into Act 60), have long been a magnet for high-net-worth individuals seeking to minimize their tax burdens. These programs offer a 100% exemption on Puerto Rico-sourced income, including capital gains, dividends, and interest, after meeting residency requirements according to a 2025 analysis. While proponents argue that such incentives stimulate economic growth and attract investment, critics highlight significant fiscal and equity challenges. The interplay between Puerto Rico's local economic ambitions and U.S. federal tax compliance efforts has created a complex landscape, raising questions about the sustainability of these programs and their broader implications for wealth distribution.

Economic Growth vs. Revenue Loss

Act 22's allure lies in its ability to transform Puerto Rico into a tax haven for individuals with substantial unrealized capital gains. According to a 2025 study, . This figure underscores the scale of fiscal sacrifice, as 5,800 decrees have been issued under Act 22, . The incentives have drawn high-net-worth individuals, particularly from high-tax states like New York and California, who relocate to Puerto Rico to exploit the tax exemptions.

However, the economic benefits are unevenly distributed. While the government hopes to offset revenue losses through increased economic activity, critics argue that the programs primarily benefit a small cohort of wealthy investors. For instance, the Esencia megaproject , exemplifying what opponents call "state-subsidized luxury." Meanwhile, local residents face rising housing costs and displacement, as demand from newcomers drives rents up by 600% since 2022. This disparity highlights the tension between attracting investment and preserving affordability for Puerto Rico's existing population.

Federal Scrutiny and Compliance Challenges

The IRS has intensified its scrutiny of Act 22 beneficiaries, particularly those who may not meet residency requirements under . In 2023, the IRS identified approximately 100 high-income individuals who potentially claimed benefits without fulfilling the 183-day physical presence rule or other criteria. Despite this, enforcement remains limited: as of 2024, , and no back taxes had been collected.

The IRS's limited resources and communication gaps with Puerto Rico's (DDEC) have hindered effective oversight. Compounding this, states like New York and California-known for aggressive residency audit programs-may also target taxpayers who claim Puerto Rico residency, creating a patchwork of compliance challenges. For example, individuals who moved from high-tax states may face conflicting residency standards under federal and state rules, increasing the risk of audits and penalties.

Equity Concerns and Federal Policy Responses

The distributional impacts of Puerto Rico's tax incentives have sparked federal attention. A 2025 report by the GAO criticized the programs for exacerbating wealth inequality and depriving the federal government of revenue critical for funding programs like Social Security and Medicare. The report also highlighted Puerto Rico's compliance shortcomings, including 29% of individual investors and 15% of service exporters remaining out of compliance with tax rules.

In response, the IRS has agreed to enhance data sharing with Puerto Rico's Treasury Department and improve enforcement mechanisms. Meanwhile, the Democratic staff of the U.S. Senate Committee on Finance has launched an independent investigation into the oversight of these exemptions. These efforts reflect growing bipartisan concern over the programs' fairness, particularly as Puerto Rico's economy remains stagnant and local residents bear the brunt of rising costs.

Balancing Growth and Equity

The challenge for policymakers lies in balancing Puerto Rico's economic development goals with federal tax compliance and equity. While tax incentives can attract investment, their design must address unintended consequences such as housing affordability and revenue erosion. Puerto Rico has taken steps to mitigate these issues, including doubling the annual nonprofit donation requirement for residents and forming a Compliance Review Committee. However, critics argue that these measures are insufficient without stricter federal oversight.

For high-net-worth individuals, the risks of non-compliance are rising. The IRS's expanded audit campaigns and state-level scrutiny create a complex compliance environment, particularly for those who fail to meet residency criteria. Investors must weigh the potential tax savings against the growing likelihood of audits and penalties.

Conclusion

Puerto Rico's tax incentives represent a high-stakes experiment in economic development. While they offer significant benefits to a select group of high-net-worth individuals, their broader implications for federal tax policy and local equity are profound. As the IRS and Congress intensify their focus on compliance, the programs' future will depend on their ability to align with both Puerto Rico's economic needs and the U.S. government's fiscal priorities. For investors, the path forward requires careful navigation of an increasingly scrutinized landscape.