States typically have three sources of tax revenue: income tax, property tax, and sales tax. Each state imposes its own balance of taxes to pay for roads, schools, and other public goods. Some states do not have sales tax; other may not have income taxes. Puerto Rico is a territory, not a state, but the Island has its own tax system, too.
Puerto Rico is well known for using low income tax rates as an incentive to bring businesses and high-income individuals to the Island. Property taxes in Puerto Rico are comparable to the rates in states, though there have historically been challenges in the property tax system. Sometimes taxes have been raised suddenly because of fiscal need on the Island.
But the area where Puerto Rico really stands out is sales tax. Puerto Rico has the highest sales tax rate in the United States, at 10.5% for the territory plus 1% municipal tax. Most states have sales tax rates from 2% to 6%.
We often hear the claim that the Jones Act causes higher prices in Puerto Rico. This claim is not supported by the Government Accountability Office or by major national retailers, but the high sales tax unquestionably causes higher prices.
Tax on Food
Most states do not tax grocery purchases. Among states that do charge taxes on food, most set a lower tax rate, typically 1%. Puerto Rico taxes food at a rate of 7% — higher than the total state sales tax rate of most states.
Puerto Rican faces extremely high rates of food insecurity: 40% of the residents are food insecure, according to Johns Hopkins. 85% of the food eaten in Puerto Rico is imported, a circumstance which tends to make food costs higher. Adding 7% sales tax makes groceries significantly more expensive in Puerto Rico than in the states.
Puerto Rico also has higher levels of chronic diseases such as diabetes, heart disease, and hypertension, all of which are affected by eating choices. Higher food costs can lead to poor food choices. The consequences of the higher sales tax on food can be far-reaching.
Does status affect sales tax?
State taxes are set by states, not by the federal government. As a territory, a state, or an independent nation, Puerto Rico would always set its own tax rates. However, each territory that has already become a state has become more prosperous as a state than it was as a territory. It is generally agreed that territory status is harmful to the economy of Puerto Rico. With a stronger economy, a state of Puerto Rico could be in a position to bring sales tax rates down to the level most often seen in the states.
