This article is one in a series about how to strengthen the GVI’s finances without raising tax rates. Each deals with a specific proposal. It was written and researched by David North, Rodney North Donna Desrochers.
A governmental entity facing a serious financial problem can do obvious, but painful, things like cut costs and raise taxes.
But – as this series has been exploring – it has other options that can help, even if only partially. One is simplicity itself:
Don’t send money to people who owe YOU money.
We are going to be exploring some of the gaps in the property tax system in future articles, but in the meantime – since this is income tax filing season – we wanted to discuss this subject immediately.
The truth is that the financial interactions between any government and its people are complex and two-sided, with money flowing both ways all the time. There are, for example, these payments made by the territorial government to its citizens:
– Income tax refunds,
– Pensions to former government employees,
– Salaries to current government employees, and
– Payments to vendors of goods and services.
On the other side of the equation there are regular taxes of various kinds, back taxes, fines, fees and other debts that people owe to the government.
This leads to our proposal: The territory should not send checks (at least not in full) to people owing back taxes until either those are paid or scheduled to be paid over a specified period of time.
This, while not now used to any extent by the GVI, is not a new idea. In fact, our research suggested that many years ago islanders’ tax refunds were docked if they owed property taxes. If so, that must have been before property tax collection was relocated from the IRB to the Lieutenant Governor’s office. Where I live, Virginia, before state income tax refunds are paid the state makes sure that the refund recipient does not owe money to the state or to any of its counties or cities. If so, those debts are deducted from the refund, and the money is redirected to the governmental entity that is owed, and the taxpayer is notified of this fact.
When the concept was first set in motion in Virginia, it upset some people. But as the years passed this practice has just become part of the financial woodwork and is no longer controversial.
How much can be raised in this way? What are the prospects, in terms of dollars, if a refund set-off were to be used in the islands?
The short answer is tens, or maybe scores, of millions of dollars the first year, and declining sums in the following years, as the cumulative total of delinquent property taxes – one hopes – shrinks.
A more precise answer rests on the following set of variables.
To what extent does the population of delinquent property taxpayers overlap with those being paid government funds? We assume that the property tax delinquents include some genuinely poor people, but we also assume that there is a group of scofflaws who simultaneously are collecting from the government and not paying their property taxes. There are clearly these two populations, but what are their respective sizes?
What portion of the delinquencies, which have built up over the years, can be, or should be collected the first year of the program? It might not be practical, useful, or even moral to try to collect the whole debt in the first year, especially from those with limited incomes. Therefore what portion should be collected only in the second or third year of the program, etc.? This decision would also vary based on to the kind of payment from the government.
For example, with income tax refunds the GVI might deduct 100 percent of any outstanding property taxes, while it might be appropriate to garnish no more than 5 or 10 percent of monthly pension checks until the debt is paid off. An income tax refund is more or less of a bonus to the recipients; the second may be the only income of the family involved.
A third variable is the zeal with which the government pursues the program. Unfortunately, the GVI does not have a history of rigorously collecting taxes. From my conversations with Tax Collector Ludence Romney, I believe his office is currently making a sincere effort to improve the thoroughness, rigor and consistency of the property tax collection process. And despite the poor record of his predecessors I also believe Romney when he stresses his office’s commitment to collect current and back taxes “in a professional, ethical and transparent manner” that is consistent the laws and regulations of the USVI.
However, I must respectfully add that I do not share his belief that the current tactics – including a new round of auctions of delinquent properties to be held later in 2017 – are sufficient for the task at hand. Romney is confident that the steps I outline below are not needed, and that when citizens see that the GVI is again auctioning properties to collect back taxes, and that the process is transparent and well-run, then they’ll be adequately motivated to step forward and pay what they owe.
In short, Romney believes that the territory’s power to sell properties so as to collect back taxes will, on its own, be enough to light a fire under those who are delinquent.
To that I would say that even the best-run auctions will take a long time to work through the backlog of 30,000 cases, and that is assuming that the auctions do spark a higher rate of compliance. Some property owners will see that only a small portion can realistically be auctioned a year and hence they will take their chances and wait.
Further, regardless of the success of the auctions, we do not believe this is an “either/or” situation. Rather, it is a “both/and” situation. The GVI ought to BOTH return to vigorously auctioning properties AND begin to collect back taxes from the streams of payments that regularly go out to individuals and businesses on the islands.
The numbers. There is no balance between unpaid taxes, on one hand, and outgoing government payments on the other. The amount of unpaid taxes is relatively static and is much smaller than the annual government outflows, meaning that it should be possible to recapture many millions of dollars in the first year of the program.
We gather from our conversations with the Tax Collector’s Office that the total amount of unpaid real estate tax is over $100 million; to that another $20 million, approximately, is owed in penalties or interest. So we have a total of taxes and related interest owed of about $120 million. This is a more or less static figure.
On the other hand, by definition, virtually all of the expenditures of the GVI, excluding debt service, are payments to its workers, to its former workers and to its vendors. For example, the most recent budget documents show the following out-flows of USVI funds:
Income tax refunds $60 million
Payment to current workers $426 million
Payments to retired workers $203 million
That’s $689 million a year, and does not include any vendor payments.
There is thus a very large flow of money, some of which – perhaps scores of millions – must go to people who owe the territory for back property taxes.
The current practice
The Tax Collector’s Office tells us that it does not seek to collect back taxes by tapping into government outflows, because the soon-to-be reinstated property auctions will suffice.
We talked with GERS, the retirement system and found, similarly, that it makes no deductions from its outgoing checks to pay for back property taxes, and were told that it could not do so unless the agency was presented with a lien. This suggests that if a tax lien were placed on real estate owned by a GERS recipient, the repayment could be made. Placing tax liens on delinquent properties is a common practice on the mainland. (A separate conversation with the Tax Collectors office suggested that were the GVI to pursue such a strategy, it would not require going to court, as is necessary with private liens.)
It strikes us that income tax refunds and GERS payments could be tapped into to pay delinquent taxes, immediately, if that were the policy. We did not explore the possibility that similar techniques could be applied to salaries of current workers – there might be union agreements involved, or to vendor payments, because of contracts. These two sources of funds, clearly, should be explored by the GVI.
We suggest that GVI take these steps immediately:
1) Check all outgoing income tax refunds with the Tax Collector’s Office, and withhold amounts needed to pay back taxes;
2) Check the list of GERS retirees against the same records and, when there is a tax delinquency, start withholding five or 10 percent of the check each month until the debt is satisfied;
3) Begin an immediate examination regarding the extent to which similar methods could be used vis-a-vis current employees’ checks and vendor payments.
This should lead to, over the next two years, tens of millions, if not more, in badly needed additional cash revenue – all achieved without touching current tax rates.