"It is a basic premise"—of the Five Year Operating and Strategic Financial Plan—"that the government cannot rely on tax increases as the sole and only means to achieve revenue growth, as such increases are counter-productive to attaining real economic growth."
This does not mean, however, that the Plan excludes recommendations for any changes in the territory's tax system. In fact, it suggests many adjustments and even a few increases.
The Plan discusses income tax (which is mirrored on the U.S. income tax system), as well as gross receipts and excise taxes, property and stamp taxes, the hotel room tax and various fees.
The V.I. tax code has not been changed since the early 1980s and is overdue for reform, according to the Plan. It recommends the revival of the tax commission which was created on paper in 1994 but never activated.
Tax reform would include "professional evaluation of an alternative to the mirror income tax that has existed since 1922."
A major concern is the earned income credit that the U.S. income tax system imposes on the mirror system in the Virgin Islands. The Plan cites the example of a taxpayer with two qualifying children. If he earned less than $30,580 in 1999, he may receive an income credit of up to $3,816. "This threshold income is significantly greater than the average annual gross pay for all income earners in the territory."
In three different sections, the Plan cites three different figures for the total cost of the earned income credit. The estimates range from $12 million to $20 million annually. It is also unsure about the territory's chances of getting a friendly ear in Washington to listen to a request for relief from the earned income credit obligation.
Likewise, the Plan notes that any claim by the Virgin Islands to a cover-over of federal excise taxes on gasoline is a long shot. It is unlikely Congress will return the funds, the Plan states, so it does not include it as a funding source for future revenue projections. Still, encouraged by conflicting decisions in the courts, the Plan states that "the government should continue to support the Gasoline Excise Tax Task Force to lobby the U.S. Congress for the cover-over of all or a portion of the gasoline excise tax on petroleum products produced in the U.S. Virgin Islands and shipped to the United States."
Similarly, it says the local government should continue to lobby for a greater share of the tax on rum produced in the islands and shipped to the mainland.
The Plan also recommends two changes in the area of exemptions to the excise tax, both designed to encourage local business. The first would remove the exemption from excise taxes and custom duties on goods brought into the territory for personal use. This means residents buying stereos, VCRs, furnishings, household goods, clothes, etc. through catalogs would be subject to tax. The rationale is that it would level the playing field for local businesses that sell those products.
The other initiative would extend the list of so-called tourist items that are exempt from excise tax and custom duties under the controversial Bill 0411 which was passed in the early 1980s. Besides such items as china and jewelry, the exemption would include distilled spirits, fragrance and luxury fabrics.
The 4 percent gross receipts tax is a transaction tax "and can be levied as many as three times on a single item," according to the Plan. This cumulative application may be hurting consumers and driving them toward off-island purchases. The Plan stops short of recommending any decrease in the tax, however. It does recommend extending the period of the statute of limitations for the government to collect unreported gross receipts taxes from three years to six years. It also says "the revenue impact of eliminating the personal use exemption should be estimated."
The 8 percent hotel room tax should be assessed to see if it should be modified, the Plan says. And the government should apply some sort of tax to timeshare units.
No taxes are collected on nearly half the property in the Virgin Islands, according the Plan. It does not suggest changing the rate of the tax, but does recommend changing when it is collected, to the first of the year rather than in September. This change should be made gradually, two months a year, to reduce the impact.
Currently the stamp tax on residential property sales is a flat 2 percent of the purchase price. In order to encourage real estate sales, the Plan recommends replacing that with a sliding scale that starts at 1 percent for residential properties under $100,000 and tops out at 2.5 percent for properties over $750,000. All commercial transactions would be at a rate of 2.5 percent.
The Plan does not suggest changes to the franchise tax either, but it notes that litigation may determine how it is computed, and the decision will have a significant impact on government revenues. Some companies were paying the percentage tax based on the amount paid for the initial issuance of stock in the corporation plus subsequent issued stock. But a few years ago, the government said the tax must be figured also on paid in capital. Several corporations are challenging that calculation.
Among its other recommendation, the Plan suggests:
– Leveling tipping fees for sewage treatment/disposal services;
– Eliminating the road tax exemption for taxis;
– Studying the feasibility of replacing the entertainment tax with an income or gross receipts tax on earnings from a one-time event;
– Rethinking the 14 cent per gallon gasoline tax to see if it is reasonable.
