The economy of Puerto Rico: built by a tax break and broken by its removal

What the island makes

Manufacturing is about 46% of Puerto Rico's gross domestic product, spread across more than 2,000 plants, and more than half of that manufacturing is pharmaceutical.

The pharmaceutical sector employs over 18,000 people directly, pays more than 3 billion dollars in taxes, accounts for about half of all exports, and has generated more than a quarter of the island's GDP in each of the last four decades. More than 80 plants operate on the island. As of 2014, Puerto Rico produced 16 of the 20 best-selling drugs in the mainland United States and 7 of the 10 best-selling medicines in the world. Alongside that sits biotechnology manufacturing across more than two million square feet and medical devices from more than 50 plants.

The rest of the economy is services. Finance, insurance and real estate together are a substantial share of output, with real estate alone at about 14.8% of GDP while providing very little of the employment. Travel and tourism contributed 6.9% of GDP in 2019, and twenty casinos operate on the island, all of them required by law to be attached to a hotel or resort in a zone of historical or tourist importance.

And then there is what the island does not do.

Agriculture is about 808 million dollars, roughly 0.8% of GDP, and Puerto Rico imports 85% of its food. Only 6% of the land is arable, but most of the land is fertile, and the gap between those two figures is the story. Land went to industry, planning and terrain management were poor, and the agricultural workforce aged: studies suggest 65% of it is now older than the working population generally. An island in the hurricane belt importing that proportion of its food has a food-security problem that no amount of pharmaceutical output resolves.

How the island became industrial

In the early twentieth century the largest contributor to Puerto Rico's economy was agriculture, and the crop was sugar, which had displaced tobacco, cocoa and coffee. In 1935 the Puerto Rican Reconstruction Administration brought agricultural development, public works and electrification.

From the late 1940s, a series of projects known as Operation Bootstrap offered tax exemptions to firms establishing factories on the island. The campaign was explicitly industrialisation first, oriented toward export and overwhelmingly toward the United States market. It worked in its own terms. Manufacturing replaced agriculture as the principal industry, employment and per capita income rose sharply, and the World Bank came to classify Puerto Rico as a high-income economy.

It also fixed the island's exposure. An economy built on exporting manufactures to one market magnifies that market's recessions, and every United States downturn since has arrived on the island larger than it left the mainland.

What the repeal of one tax provision cost

Pharmaceutical companies began arriving in the late 1960s and 1970s to use a provision of the Internal Revenue Code. Section 936 allowed United States manufacturers to send all profits from their Puerto Rican plants back to the mainland parent without paying federal tax on them.

The effect was exactly what the incentive was designed to produce. The effect of its removal was equally predictable and far less discussed at the time.

Critics of Section 936 called it a windfall for wealthy corporations, which it also was. What its repeal did was trigger a deterioration of the manufacturing sector on which the whole post-war economy had been built, and the territorial government responded by borrowing to cover the shortfall rather than by rebuilding the base.

The recession that began in 2006 ran until 2017. Over those eleven years the economy contracted by 10%, the island lost 10% of its population, and unemployment reached nearly 15% in 2014.

Why the debt could grow that large

Borrowing on the scale Puerto Rico managed required a structure that made it easy, and the structure was old.

Since 1917, lenders to Puerto Rico have been exempt from local, state and federal tax on the interest, the so-called triple tax exemption. That single provision made Puerto Rican bonds unusually profitable to hold and unusually easy to sell, in every state, to buyers with no connection to the island. The territorial constitution compounded it by permitting the budget to be balanced with debt.

After Section 936 went, the government used that capacity. The 2007 and 2008 financial crisis lowered tax revenues further, ended an early-2000s construction boom and made investors nervous. Austerity followed, including public-sector layoffs that pushed unemployment higher, and so did arrangements that were dubious on their face, including government agencies borrowing from one another to repay bonds.

The money was also poorly spent. The infrastructure that the borrowing was nominally for is the same infrastructure that failed comprehensively in 2017.

How the default was resolved

Puerto Rico began defaulting on major obligations in 2016 with public debt above 70 billion dollars, and discovered that a territory has none of the exits available to either a country or a city.

It could not seek assistance from the International Monetary Fund, as Greece had. It could not file for Chapter 9 bankruptcy, the protection Detroit used, because Chapter 9 is available to a state's municipalities and Puerto Rico is not in a state. Its own legislature designed a restructuring process, and the Supreme Court struck the law down.

What remained was Congress, which passed PROMESA in 2016, creating an appointed Financial Oversight and Management Board with authority over the budget and a restructuring mechanism that did not otherwise exist. Negotiations took more than five years.

The board approved an austerity plan that cut services in order to repay creditors, many of whom held bonds carrying constitutional protection. Puerto Ricans call the board la junta. The restructuring restored access to capital markets, and it was imposed by people the island did not elect. Both of those are the same fact seen from different ends.

Who is left to pay

The population figure is the one that governs everything else.

An estimated 130,000 residents left for the mainland after Hurricane Maria alone in 2017, on top of the decade of departure that preceded it. More people of Puerto Rican descent now live on the mainland than on the island. Each departure removes a taxpayer and leaves the debt where it was.

The living standards behind that movement are stark. Median household income was about a third of the United States figure in 2024, and 37.3% of the population lived below the poverty line that year.

The federal relationship cuts in both directions here. Residents paid more than 5 billion dollars in federal taxes in the 2023 fiscal year while generally not paying federal income tax on island income, and the island receives more in federal spending than its residents pay in. It is also excluded from programmes available in the states: residents are ineligible for the Earned Income Tax Credit and receive less on average in Social Security and veterans' benefits. A district court found the exclusion from Supplemental Security Income unconstitutional in August 2020 and an appeals court agreed in November 2021, holding that it violated the Fifth Amendment. The Supreme Court reversed that decision in April 2022.

Since 2017, the Federal Emergency Management Agency has provided Puerto Rico with more than 50 billion dollars in disaster-recovery funding, which is a measure of both the damage and the dependency.

Who the tax laws bring in

Because residents of Puerto Rico generally pay no federal income tax on income earned there, the territorial government has built an industry out of that exemption. Act 20, Act 22 and Act 273, all passed in 2012, offer exemptions and benefits to high-net-worth individuals and business owners who relocate, to the point that a qualifying business owner resident on the island may pay very little tax of any kind. Their benefits now sit in Law 60-2019, the Puerto Rican Incentives Code, and in June 2025 the Senate approved a bill imposing a 4% tax on its new individual beneficiaries.

The policy is contested on the island for a reason a visitor can see quickly. It attracts wealth that arrives already made, competes for housing in the places most people cannot afford, and hands to newcomers a benefit long-standing residents do not receive. In August 2023 a proposal was floated to extend many of Act 22's benefits to all Puerto Ricans, which would at least correct that asymmetry, and which sits awkwardly with the restructuring.

The wider tax system is complicated in a way that compounds the problem. An ordinary retail sale can attract import taxes, sales taxes, property taxes, corporate income taxes, excise taxes and duties on specific goods, and the incentives, exemptions and deductions layered over that are not uniform.

What happens when the grid is the economy

Three infrastructure failures inside five years explain why growth figures on this island are read with caution.

Hurricane Maria destroyed the electrical grid entirely in September 2017 and left all 3.4 million residents without power for months. An earthquake at the start of 2020 caused another blackout. Hurricane Fiona in September 2022 brought flooding and mudslides and cut power to more than a million homes and businesses.

Each event does compound damage to a manufacturing economy. Pharmaceutical production requires uninterrupted power, controlled temperature and continuous validation; a plant that loses power does not simply restart, it revalidates. Each event also removes people, and the people who leave are disproportionately the ones with the qualifications to leave.

The recovery money is genuinely large. What more than 50 billion dollars of federal disaster funding since 2017 has not yet bought is a grid that survives the next storm, and the next storm arrives on a schedule the island already knows.

Where the recovery stops

Two readings of Puerto Rico's economy are both defensible from the same figures, and the disagreement is worth stating plainly rather than resolving.

The first reading is that this is a mature high-income economy. The World Bank classifies it as high income, its per capita output is high by Latin American standards, and on that account its low growth rates reflect the market saturation and convergence normal in an already industrialised place rather than any failure.

The second is that a territory with 37.3% of its population below the poverty line in 2024, household income at a third of the national average, and a decade of net emigration is not converging on anything. Both descriptions use real numbers. They differ on which comparison is the honest one, an island economy measured against Latin America or a United States jurisdiction measured against the states it is governed alongside.

The recovery underneath that argument is real and it is narrow.

Unemployment stood at about 5.7% in 2024, against a rate that had long run near twice the national average and peaked near 15% in 2014. Overall growth returned in 2021. Tourism has risen substantially, which observers connect in part to the Live Boricua cultural campaign, and the restructuring cut liabilities to about 37 billion dollars by 2023.

Manufacturing investment has returned as well: in 2025 one pharmaceutical company committed 650 million dollars to expand a plant at Juncos and another pledged 1.2 billion dollars to modernise a site at Carolina.

What has not changed is the structure. The economy still rests on one export sector attracted by a tax advantage, still imports most of its food, still cannot borrow or restructure on its own authority, and still has fewer people in it every year than the decade before. The 2020 earthquake and Hurricane Fiona in 2022 each knocked out power again within five years of Maria, which is the clearest possible statement of what the borrowed decades did and did not build.