In 1996, the U.S. General Accounting Office found that if IRS tax rules are applied to residents of Puerto Rico:

(1) the residents would owe around $623 million in federal income tax before taking into account the earned income tax credit (EITC); (2) the aggregate amount of EITC would total $574 million; (3) 59 percent of the population filing individual income tax returns would earn some EITC;(4) 41 percent of the households filing income tax returns would have positive federal income tax liabilities, 53 percent would receive net transfers from the federal government, and 6 percent would have no federal tax liability; (5) more Puerto Rican residents and married couples would file federal tax returns if they qualified for EITC; (6)the average EITC earned by eligible taxpayers would be $1,494;

Our estimates do not reflect other potential behavioral responses to the availability of the credit or the imposition of the federal income tax. For example, we were not able to estimate the number of potential EITC claimants who currently are not filing, even though they are legally obligated to file.

Potential noncompliance with the EITC provisions and behavioral responses to the availability of the credit could result in a larger aggregate amount of EITC being earned than we have estimated. A previous GAO report and studies by IRS have raised concerns regarding the vulnerability of EITC to noncompliance including fraud.

One reason why Puerto Rico's per-capita income tax is relatively low is that per-capita personal income in Puerto Rico is significantly lower than that in any of the 50 states and the District of Columbia. In 1992, Puerto Rico's per-capita personal income was $6,428, compared to $14,083 in Mississippi, the state with the lowest per-capita personal income.

Repeal of 936 Not A Big Revenue Gain for U.S.

If a tax credit were eliminated, taxpayers would be likely to seek ways to avoid paying the full amount of tax that the credit had previously offset. For example, if the possessions tax credit were repealed, U.S. corporations might shift some of their investment out of Puerto Rico to operations in foreign countries, where some of the income might not be immediately subject to U.S. taxation.

Full Text of GAO Report.