While the massive $858 billion federal tax cut bill signed by President Barack Obama Friday may help stimulate the economy, it might put a dent in the territory’s finances and needs study, Gov. John deJongh Jr. said Friday in a statement. Delegate Donna Christensen raised similar concerns while praising parts of the bill in a separate statement from her office.
Local revenue projections were based on the tax laws as they were written. The lowering of rates will reduce how much the local government will now collect and so worsen the territory’s budget deficit, deJongh said.
“What needs now to be studied is how great this impact will be and how best it can be mitigated by local actions,” deJongh said. “We have little control on the tax structure set by Congress and the president, but the responsibility to find the funds to run our government rests, as always, with us.”
Dejongh has directed his financial team to assess the new legislation’s impact as soon as possible, he said. “(B)ut I fear early celebration of federal tax cuts may prove premature."
The rum cover over, in which federal excise taxes on imported alcohol are largely remitted back to rum-producing territories, was also extended, despite increased public scrutiny and congressional challenge over the last two years after the Virgin Islands government inked deals with Diageo and Fortune Brands to use cover over proceeds as part of 30-year deals for the expansion of production capabilities on St. Croix. The bill extends the current $13.25 per proof gallon cover-over rate, which was approved without amendment, until the end of next year. Two bills before Congress that would limit how territories can use the funding will die when Congress adjourns this weekend, according to Government House. Christensen said she too was happy the rum cover over was extended, “despite a year and a half campaign to derail legally binding agreements which stand to benefit the Virgin Islands.”
The extension will provide $80 million in revenue to Puerto Rico and $20 million in revenue to the U.S. Virgin Islands annually, according to Christensen.
While the rum cover over extension and other parts of the bill are very valuable, Christensen said, she too is concerned about its long-term impact.
“I am very concerned that the size of the tax agreement has the potential to begin the unraveling of Social Security and will make it harder for us to get the funding our communities need for health, education, housing and other important programs,” she said.
The bill extends current income tax rates for individuals over the next two years, including the new 10 percent rate for lower-income taxpayers, as well as lower rates for middle and upper income taxpayers. “Importantly, the bill also provides a one year payroll tax cut for Virgin Islands and U.S. wage earners earning up to $106,000,” deJongh said. The payroll tax cut, which temporarily reduces the social security tax rate from 6.2 percent to 4.2 percent, will mean an extra $1,000 in the pockets of a typical Virgin Islands family earning $50,000 and more than that for higher earners, he said.
The payroll tax cut provision could provide $30 million of new economic stimulus to the Virgin Islands economy at no cost to the local treasury. Payroll taxes, unlike income taxes, are paid directly to the U.S. Treasury.
The bill also extends unemployment benefits for an additional 13 months, maintaining the current extended benefit limits, which range from 60 weeks of benefits in states and territories with less than six percent unemployment to 99 weeks in states and territories with unemployment greater than 8.5 percent.
It also includes an array of other tax breaks that will benefit V.I. families, including a one year extension of the college tuition tax credit that was originally enacted as part of the American Tax Recovery and Reinvestment Act federal stimulus package. That tax credit, which could be worth up to $2,500 for qualified tuition expenses, also includes a provision negotiated by the deJongh Administration which requires the U.S. Treasury to reimburse the Virgin Islands for any revenue losses to the local treasury as a result of the credit, according to Government House.
There are also provisions in the bill which extend tax breaks for families with children, which is also reimbursable, and the earned income tax credit for lower income working families. It also extends a number of business tax breaks designed to encourage businesses to invest in jobs and economic expansion. The U.S. Virgin Islands and other states and territories whose tax structures parallel the federal tax code have expressed concern that some of the business provisions could lower state revenues unless those are offset by some federal relief, according to Government House.
