 The federal government plays a pervasive role in Puerto Rico, stemming from both the applicability of the U.S. Constitution, laws and regulations, and the transfer to the island of more than $13 billion in federal funds every year.
Under the 1950 Puerto Rico Federal Relations Act, the federal government treats Puerto Rico as a state for most purposes. While Puerto Rico remains an unincorporated U.S. territory, it exercises self-governing authority in local affairs, following the model of the states of the Union.
Federal laws apply to the island except in those cases where the U.S. Congress legislates otherwise. U.S. citizenship extends to anyone born in Puerto Rico as it does in the States; and U.S. courts, as well as many federal agencies, operate on the island.
Most federal programs extend to Puerto Rico, although not necessarily on parity with the rest of the states. Total federal spending in Puerto Rico, including transfer payments and administrative expenses, reached $13 billion in 1999. Federal income and excise taxes are not levied on island residents, although Puerto Ricans participate in the Social Security system and must pay into the trust fund via the Social Security tax.
Among the federal agencies with offices in Puerto Rico are: Internal Revenue Service; Small Business Administration; Veterans Affairs Department; Bureau of Tobacco, Alcohol & Firearms; Customs Service; Immigration and Naturalization Service; Drug Enforcement Administration; Federal Bureau of Investigations; Postal Service; Armed Forces; National Parks Service; Environmental Protection Agency; Fish and Wildlife Service; Department of Commerce; and others.
As it does in the States, the federal government controls customs and immigration, interstate trade between Puerto Rico, the fifty states and other U.S. territories, licensing of radio and television stations, and regulates financial institutions, telecommunications companies, air and maritime common carriers and others.
Seven active judges, three senior judges and three magistrates nominated by the president of the U.S. and confirmed by the U.S. Senate, serve on the U.S. District Court for the District of Puerto Rico. Its decisions may be appealed through the federal court system to the U.S. Court of Appeals for the First Circuit, and on to the U.S. Supreme Court. Decisions of the Puerto Rico Supreme Court may be appealed directly to the U.S. Supreme Court. Also present on the island is the U.S. Bankruptcy Court.
Notwithstanding the efforts of the local government, the U.S. Congress has failed to address in a decisive manner the results of a local government-sponsored status plebiscite held in December 1998. Committee hearings were held in May 1999 and an inconclusive report was issued in December, but no legislative action has ensued.
Following congressional action in 1996 to eliminate Section 936 of the Internal Revenue Code, the administration of Gov. Pedro Rossello () actively lobbied Congress to enact a substitute provision (Section 30A) to provide incentives for manufacturing investment on the island, without success.
Section 936, to be phased out by 2005, provided U.S. companies partial federal income tax exemption on revenue derived from manufacturing operations on the island. Starting in 1993, the tax loophole came under congressional attack as "corporate welfare" because it stimulated profit generation (to maximize tax avoidance) rather than job creation. Instead, Section 30A would provide U.S. corporations with tax benefits based on number of jobs created.
Despite the island government's efforts, Congress has not approved the measure. It did approve, however, a measure extending to Puerto Rico a much more limited federal incentive, currently available to the States, to stimulate research and development activities.
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