And not just federally tax-exempt bonds: Congress went on at length to bar anyone from taxing Puerto Rico’s bonds, presumably never dreaming how this would play out a century later — which, on Wednesday, led to the territory declaring a form of bankruptcy
because it could not pay the $123 billion in bonds and unpaid pension debts it owes.
It has only $2.3 billion of bond debt outstanding — a fraction of Puerto Rico’s burden — but
that is still $23,000 in debt for every person on the island.
The 100-year-old law stipulates that no one — not any state, not any county or city, not the District of Columbia,
not any other territories, not even Puerto Rico itself — can tax the interest that Puerto Rico pays its investors.
Such mutual funds were popular in higher-tax states like New York,
but not all states issued enough debt to make the funds possible — at least until fund managers remembered that Puerto Rico’s were tax-exempt everywhere.