In the face of business opposition, the Senate voted without opposition Tuesday not to approve tax increases on alcohol, tobacco, soda and time share rentals that Gov. Kenneth Mapp’s administration proposed to begin reining in crippling government deficits. Senators said they had just received the proposal the previous day and needed more time to review it, adding that the legislation also needed input from the business community.
Some senators also said they could support tax increases but only smaller ones.
Finance Commissioner Valdamier Collens told senators Friday the proposed tax increases would raise about $50 million per year, with about $27 million from the sin taxes and $23 million from changing the time share taxes to match hotel room occupancy taxes. They include a new $15 per carton cigarette tax; taxes of between $10 and $12 per case of beer; a new 10 percent liquor tax; and a 1-cent per ounce tax on sodas.
The U.S. Virgin Islands has a current year deficit of about $110 million and structural deficits of between $140 million and nearly $170 million per year, in a locally funded budget of around $850 million.
Mapp’s administration had planned to cover the deficit by borrowing about $55 million for operating expenses and reduce yearly debt payments by $55 million through refinancing more than a billion dollars in existing debt at lower rates, but all three major international bond rating agencies – Fitch, Moody’s and Standard and Poor’s – downgraded V.I. bond debt this year, increasing the cost to borrow, closing the door on the chance to save by refinancing.
Instead the territory has to borrow the full amount or make draconian cuts that will ripple throughout the economy and reduce tax revenues further.
All three agencies cited the territory’s structural deficit, rapid debt accumulation, ongoing borrowing and reduced likelihood of being able to continue paying in full, as well as the massive shortfall in funding to the V.I. government pension plan.
Fitch also cited federal legislation to help Puerto Rico restructure its debt. While the USVI is not included in that legislation, it raised concerns that Congress could step in at some point, according to Fitch.
In September, Collens, Budget Director Nellon Bowry and other members of the Mapp administration introduced a draft of the five-year deficit reduction plan to the Legislature, outlining the increased taxes in very broad detail, along with austerity measures and hopes for a large increase in revenue from the territory’s tax incentive programs. At the time, Collens said if all the measures are carried out, the territory could balance its budget by 2021.
On Tuesday, Collens said they recalculated their projections to remove revenues that could come from a restart of the Hovensa refinery and other funds. Now the administration projects a smaller, roughly $56 million deficit in 2021, even if the new taxes and the rest of the five-year plan are all enacted and successful.
"Just so you know, we just got the bill,” Sen. Janette Millin Young said. “You don’t really expect us to act on this today?"
Collens said they hoped the Legislature would approve it. He said the territory had delayed until January a bond sale to cover operating expenses until and the territory needed to show potential lenders that it was serious about addressing its deficit.
Sen. Marvin Blyden asked if delaying the bill until the new Legislature convened in January would make a difference.
"Any delay will be seen as inaction," Collens said. Lenders’ perception of how well the territory is addressing its fiscal situation can affect the cost of borrowing.
Sen. Tregenza Roach was one of several senators who said he could support tobacco and alcohol tax increases but raised concerns about the amounts and the impact on business owners.
"We really do have to take into consideration the impact," Roach said.
Blyden said, “Tourism is one of our biggest products because we do not export anything. However, we must be fair to all entities involved which includes the private sector."
Similarly, Sen. Samuel Sanes said one of his biggest concerns "is that this measure has been around for several months and the private sector has not been involved in the overall process. There should have been several meetings which the business community should have been present."
Bowry said that "although, private sector was not directly involved in the formation of this measure, the governor has met separately with members of the private sector and legal counsels. The information gathered from the meetings is reflected in this bill.
Collens asked that if senators change the amounts of the tax increases, they try to find other ways to replace the lost revenue.
Senators voted 14 to 0 to hold the bill for now, with plans to hold more hearings once the Senate reconvenes in January. Sen. Jean Forde was absent.
Afterward the Senate adjourned the special session and convened a regular session already scheduled for Tuesday to consider other bills and an array of board and commission nominees.
