The V.I. cigarette tax may see an increase from its current 35 percent to 45 percent, raising about half a million dollars in new revenue for the cash-strapped government, if a bill sent out of committee Tuesday is enacted into law.
Bill 31-0023 is sponsored by Sen. Sammuel Sanes and increases the rate, sets up a special fund and allocates 5 percent of the tobacco tax revenues to fund the V.I. Council on Alcohol and Drug Addiction.
"We are trying to do all that is possible to decrease the deficit we are facing," Sanes said when introducing the bill.
Finance Commissioner Valdamier Collens testified in support of the measure, saying that, all things being equal, it would increase revenues by $443,000 a year. But he said raising the tax rate might reduce sales, lessening the increase in revenues.
Richard Berry of Leeward Islands Management Company testified against the bill, saying it will "hurt the income stream to the Virgin Islands for two reasons."
Leeward Islands Management Company is owned by Topa Properties, which also owns Bellows International, Prestige Wines, and other companies which wholesale alcohol and tobacco in the territory.
Berry said the territory would receive less money from the 1998 Master Settlement Agreement with tobacco companies and would lose cigarette sales to St. Maarten.
But it is not clear there is factual support for those assertions.
Berry said money from that agreement could be reduced if the tax is increased because "it is allocated through the amount of tobacco imported to the territory."
"If in any way tobacco sales decline in the territory and we are reporting less sales to the U.S., then obviously our income from that will decline," Berry said.
Contrary to Berry’s assertion, the Master Settlement Agreement gives each state and territory a fixed percentage of the total payment. The MSA itself specifies the U.S. Virgin Islands will receive 0.017359 percent of the total fund annually. It is fixed and does not change with local tobacco sales.
A tobacco company’s annual share of the total, nationwide payment can decrease if its share of cigarettes "shipped in or to the 50 United States, the District of Columbia and Puerto Rico" decreases. But not because of local sales changes. And V.I. data are not considered in the MSA. [Tobacco Master Settlement Agreement]
Berry also said the territory may lose tobacco sales to cruise ships and to St. Maarten if V.I. prices increase.
"Legally we have an advantage" because cruise passengers can only bring one carton from St. Maarten while they can bring five from the USVI, Berry said, adding that, "Personally I don’t believe it is policed very well."
A carton currently retails in St. Maarten for $17.99 to $19.95, while V.I. prices run $19.95 to $23.95 now, Berry said. If the increase is enacted, V.I. prices may go up more, and if retailers do not absorb it, more customers could decide to purchase on another island, according to Berry.
For comparison, a carton of Marlboro regular cigarettes cost $51.80 in Virginia on April 21, 2015. Virginia is tied with two other states for the lowest cigarette prices in the U.S.A.
Sanes asked if passengers would run the risk of not being able to bring back more than one carton from St. Maarten, and if St. Maarten was now posting signs warning cruise passengers of the one-carton limit.
"I don’t know that," Berry said.
"It is a fact," Sanes said.
"I do understand what the private sector has sacrificed" in the recent economic troubles, Sanes said. "But right now we are in a predicament. We need help for the Waste Management Authority that everyone relies on, the police everyone relies on, the hospitals that everyone relies on, and so on and so on. Any little bit helps," Sanes said.
Budget Director Nellon Bowry said he would like to see an economic impact study done of the bill before implementing it, in case it could hurt revenue or harm the economy.
Sanes agreed to ask the Bureau of Economic Research for an analysis before the bill is heard in the Rules and Judiciary Committee. Then the Finance Committee voted without opposition to send the bill on for further consideration in the Rules and Judiciary Committee.
Former Gov. John deJongh Jr. vetoed similar legislation in 2012, citing the economic environment and burden on businesses.
Voting to send the bill out of committee were Sanes, Sens. Kurt Vialet, Marvin Blyden, Myron Jackson and Clifford Graham. Sens. Terrence "Positive" Nelson and Tregenza Roach were absent.