Puerto Rico’s voters made history in November when, for the first time, they voted in favor of becoming a state.
Whether that comes to pass, how it would come to pass, and how long it would take remain wide open questions, questions of interest to the municipal bond world because Puerto Rico, as a commonwealth, can now issue bonds exempt from taxation in any state.
With by far the largest population and economy of any United States territory or commonwealth, it is by far the largest source of such triple-tax-exempt paper.
Richard Larkin, senior credit analyst at HJ Sims, said statehood is unlikely to come to pass this year.
Puerto Rico is undergoing major economic difficulties, Larkin noted. Given these, Congress will think “long and hard” before it grants it statehood, he said.
Puerto Rico voters were asked two questions in November. In the first, 54% voted against conitinuing the island’s current self-governing commonwealth status. In a second question concerning what they thought should replace the commonwealth, 61% voted in favor of statehood.
Some commentators have pointed out that many voters chose not to answer the second question. However, Pedro Pierluisi, Puerto Rico’s resident commissioner in the U.S. House of Representatives, has noted that more voters (834,191) voted for statehood in the second question than voted for no change of status in the first question (828,077).
Both the Democratic and Republican 2012 party platforms say that if Puerto Ricans demonstrate their support for statehood then the self-governing territory should become a state. President Obama has also said that the island’s status should be up to its residents.
“Results of the recent status referendum in Puerto Rico indicate a significant development in Puerto Rican sentiment on the status question,” Sen. Ron Wyden, D-Oregon, said in an interview with The Bond Buyer.
“As incoming chairman of the Committee on Energy and Natural Resources, I believe they call for consultations with the [Obama] administration, ranking member [Lisa] Murkowski and representatives of Puerto Rico to better understand their significance and to consider what the next steps should be,” he said. “Puerto Rico’s political status is a pressing issue and I am committed to having Congress and the people of Puerto Rico continue to work together toward resolution.”
The Energy and Natural Resources Committee has juridiction over territorial affairs.
As of Jan. 10 the House of Representatives Natural Resource Committee had made no decisions about holding hearings on Puerto Rico’s status.
A House committee spokesman did not respond to an email sent to him on Jan. 23 asking for an update.
The normal next step would be for subcommittees of the Senate Energy and Natural Resources Committee and the House committee to hold sessions on the island’s political status.
Pierluisi has supported holding these hearings.
“My feeling is that the referendum in November did not result in a resounding majority in favor of statehood,” said Alan Schankel, the managing director of fixed-income research at Janney Montgomery Scott.
The new governor, Alejandro García Padilla, is opposed to statehood, Schankel noted, “and that calculus suggests there’s going to be little movement towards statehood this year.”
If Puerto Rico statehood did come to pass, it’s highly likely that it new bonds would not be exempt from state and local taxes for investors buying them in the rest of the states, according to Larkin.
That would probably increase Puerto Rico’s borrowing costs, he said. The commonwealth’s credit position is already tenuous after Moody’s Investors Service dropped its general obligation bond rating to Baa3 in December.
Of even more concern to holders of Puerto Rico paper is what would happen to the tax-exempt status of outstanding bonds if statehood comes to pass.
Precedent from Hawaii and Alaska suggests that Puerto Rico bonds sold before statehood would retain their triple-tax exemption.
In 1964 the California Franchise Tax Board ruled that the interest on Hawaiian and Alaskan bonds issued before statehood should retain its exemption from California taxes.
In 1914 the U.S. Supreme Court suggested that Oklahoma bonds from before statehood should retain their tax exemption from other states’ income taxes.
It’s been more than a half-century since Alaska and Hawaii became states, though it’s not the first time the question of Puerto Rico’s status has been raised. With more than 3.6 million residents it would be ahead of 22 other states in population.
Since 1967 to 2012 the territory has held occasional referendums whether it should become a state. In two referendums in the 1990s a plurality of the voters, but not a majority, voted in favor of the current commonwealth status.
Residents do not pay federal income taxes on income earned from Puerto Rican sources. They do pay federal income taxes on income earned in from sources located in the 50 states. They also pay Social Security taxes. They are eligible for Social Security at retirement but are not eligible for disability benefits. The territory gets much less Medicaid aid than it would as a state.
Residents in Puerto Rico elect delegates in presidential primaries but can’t vote for president in November elections.
They are represented with one resident commissioner in the House of Representatives, Pierluisi, but he has no vote on the final disposition of bills on the House floor.
He can vote in House committees. If Puerto Rico was a state it would have at least five voting representatives and two senators.
For both Hawaii and Alaska, statehood took some time to achieve.
In Alaska, it was in 1946 that the idea gained some momentum. In that year Alaska voters voted by a 3-to-2 margin in favor of statehood. At the time Alaska was a U.S. territory with a governor appointed by the U.S. president.
Over the following decade, measures for Alaskan statehood were introduced in three times. Some of these bills came close to success but ultimately failed.
In 1955, Alaskan leaders held a convention to draft a state constitution. A statewide referendum on the charter in 1956 overwhelmingly approved it.
Thanks partly to increased lobbying of lawmakers in 1958, Congress approved Alaskan statehood and on Jan. 3, 1959, President Dwight Eisenhower signed the declaration.
Hawaii was also a non-self-governing territory in the first half of the 20th century. As in Alaska’s case, there had been several efforts to make Hawaii a state during that period.
In Hawaii, wealthy plantation owners had economic interests against statehood and had opposed it in the first half of the 20th century. In the mid-1950s other sectors of Hawaiian society became more active and gained representation in the state Legislature. In the late ’50s Hawaiians heavily lobbied Washington for statehood.
In March 1959 Congress and Eisenhower approved the Hawaii Admission Act. In June of that year Hawaiians voted by a 17-to-1 margin to approve statehood and Hawaii became the 50th state two months later.
The United States gained control of Puerto Rico from Spain in the Spanish-American War of 1898. In 1917 the Congress made Puerto Ricans U.S. citizens.
In the middle part of the 20th century more efforts were directed for Puerto Rican independence than for statehood. In 1936 and 1946 U.S. senators introduced bills that would have made Puerto Rico an independent country.
In 1947 the U.S. government granted Puerto Ricans the right to elect their own governor, laying the last major brick of the current status.
“The results were clear, the people of Puerto Rico want the issue of status resolved, and a majority chose statehood in the second question,” White House spokesman Luis Miranda said Dec. 4, according to Politico. “Now it is time for Congress to act and the administration will work with them on that effort, so that the people of Puerto Rico can determine their own future.”