(Adds detail from letter, background on Puerto Rico's economy)
By Nick Brown
NEW YORK, Aug 26 (Reuters) - Rehabilitating Puerto Rico should include removing caps on the island's federal Medicaid funding and giving the U.S. territory's citizens access to earned income tax credits, two Obama administration cabinet members said on Friday.
Treasury Secretary Jack Lew and Health and Human Services Secretary Sylvia Burwell, in a letter to members of a congressional task force studying Puerto Rico's economy, urged them to focus on proposals to address the island's healthcare crisis and restore economic growth.
The island is hamstrung by $70 billion of debt and a 45 percent poverty rate. It receives proportionately less federal Medicaid funding than U.S. states and is expected in 2017 to exhaust other one-time federal health care funds.
A law signed by President Barack Obama in June will bring Puerto Rico's finances under federal oversight, to the chagrin of many island leaders and locals, who have protested against the move as a sign of colonial rule.
The law, known as PROMESA, will also give Puerto Rico access to a bankruptcy-like process that could enable it to reduce its sizeable debt burden.
The eight-member task force, which includes Republican Senators Orrin Hatch and Marco Rubio and Democrats Bill Nelson and Nydia Velasquez, is expected to make recommendations on what can be done through federal legislation to help the island restore economic stability.
Treasury officials have been engaged on Puerto Rico for months, visiting the island multiple times and testifying before Congress about the commonwealth's problems. Some of Treasury's early recommendations, like giving the island access to a debt-cutting process, wound up being legislated under PROMESA.
Healthcare is a crucial and growing issue on the island, especially as the mosquito-borne Zika virus continues to spread there.
Puerto Rico's health department last week reported more than 10,000 cases, and local environmental groups have protested aerial mosquito spraying, which they see as more harmful than the disease itself.
"Reforms should include removing the cap on Puerto Rico's Medicaid program and gradually increasing the federal support Puerto Rico receives through the federal Medicaid match," the letter said.
Lew and Burwell also urged the task force to consider recommending that Puerto Ricans be made eligible for an earned income tax credit, or EITC.
"Adopting a locally administered EITC ... would pull 54,000 Puerto Ricans out of poverty," they said.
(Reporting by Nick Brown in New York; Editing by Daniel Bases, Dan Grebler and Meredith Mazzilli)