Puerto Ricans voted, in 2012, to abandon the island’s status as an unincorporated territory and adopt statehood. The current territorial system subjects Puerto Rico to some federal laws and privileges but exempts it from others. Income taxation is one area in which Puerto Rico is traditionally exempt from federal law. In an effort to generate employment and compensate for the privileges that are not extended to Puerto Rico, the United States implemented several tax policies between 1921 and 1996 designed to incentivize investment in the island from the mainland. The last of these tax incentives was phased out as ineffective in 2006. This Comment describes the unique economic challenges Puerto Rico faces as an unincorporated territory, examines why the tax initiatives that the United States applied to Puerto Rico all failed, and posits that statehood offers superior opportunities for Puerto Rico’s long-term economic outlook.

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