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May 31, 2005
Honorable John W. Snow
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Secretary Snow:
I would like to add my voice to the increasing number of public officials and individuals who may have written to you regarding the final and temporary regulations on "Residence and Source Rules Involving U.S. Possessions and Other Conforming Changes" pursuant to the passage of the American Job Creation Act of 2004.
In order for us to resolve our differences regarding the final and temporary regulations on "Residence and Source Rules Involving U.S. Possessions" it is important to reference historical issues involving the Department of the Treasury decisions in the past, and the inconsistent treatment of the territories in formulating and extending U.S. Policies, Laws and Programs, in order to foster mutually beneficial tax policies in the future.
On February 7, 1985, the General Accounting Office issued a report entitled "Issues Affecting U.S. Territory and Insular Policy." This report was requested by the Chairman of the Senate Committee on Energy and Natural Resources the Honorable James A. McClure, and the Chairman of the House Committee on Interior and Insular Affairs, the Honorable Morris K. Udall. "The objectives of the report were to address (1) the background and history of U.S. Territorial and Insular Policy, and (2) the extent to which the territories and insular areas have been considered in the formulation and conduct of U.S. foreign and domestic policy, (3) whether policies, laws, and programs designed with stateside objectives in mind consider the effect on the political, social and economic development of the territories, and (4) whether the present federal organization is adequate to coordinate the delivery of federal programs and services to these areas, and provide a consistent basis for policy, including treatment under U.S. laws." (Source: GAO Issues Affecting U.S. Territory and Insular Policy, February 7, 1985)
The detailed findings of this report can be retrieved from the GAO; however I want to refer to a few of its findings in order to bring this entire matter in the context of our current EDC ordeal, and to convey to your office in the most passionate way the need for open dialogue between your office and the territories before any Treasury regulations are made final. We must forge a clearer understanding of our economic dilemma, while demonstrating mutual respect for Americans in the Virgin Islands who have shed their precious blood to bring freedom to the world in every major American conflict, but return home unable to vote for the Commander in Chief. We do not have a significant voice in Washington, Mr. Secretary, and this has been disadvantageous for the territories for more than 80 years, and the main reason why policies can be shepherded through the Congress without our input, and without concern, at times, for the devastating impact on the small, noncontiguous economies in the territories of the United States of America. On November 28, 1984, in response to the GAO Report Former Governor Juan F. Luis issued the following recommendation to the Director of the US General Accounting Office, National Security and International Affairs Division:
"Congress should promptly enact a law giving the Flag Territories the authority to develop a Federal policy compact subject to negotiation and approval by Congress, which encompasses and determines the economic and social direction, as well as the political status of the Territory. The policy should include a significant economic development financial assistance package for each Territory. After Congress gives its approval on the negotiated compact, then it should be returned and presented, unaltered, for a final referendum vote."
This recommendation is still applicable even today, more than twenty one (21) years after it was written.
In the GAO report, it was revealed that "there is no federal policy which details how the territories should be treated in formulating and extending laws and programs. Territory officials identified instances when federal policies, laws and programs have constrained economic and social development because they were inconsistently applied, insensitive to unique territorial circumstances and needs, or inappropriate for local conditions." Examples cited in the report were the Caribbean Basin Initiative provisions affecting the rum industry in the Virgin Islands and the tuna industry in American Samoa; Department of Treasury rulings preventing the use of tax exempt bonds; legislation to eliminate import tax benefits to Puerto Rico; and shipping, tax, immigration, and environmental laws which constrain development initiatives." These findings are true even today, more than twenty (20) years since this report was published.
Over the years, legislation that has threatened the economies of the territories have been introduced, and respectfully withdrawn because of the devastating impact on the Territories. We must also foster increased education campaigns nationally for members of the Executive Branch and the Congress about the American territories so that our well-
being is not constantly threatened by proposed treaties, legislation or other rules because a proponent did not know the impact on a US territory.
We have maintained mutually respectable relations with the Department of Interior over the years, and we appreciate their leadership. Ironically, the issue surrounding our EDC program did not gain prominence until the Department of Interior offered to assist us in marketing our program to the private sector at two economic development conferences on the mainland. I attended the conference in Washington, DC. We were excited about the Department of Interior's interest in our economies, but little did we know that this same department, which oversees the territories, could not come to our aid when the Department of Treasury decided to change the tax regulations which essentially crippled this very program Interior touted as a viable economic tool for greater self-reliance and economic development in the US Virgin Islands.
The GAO Report addressed the concerns of territorial officials at the time regarding "the institutional capacity of the Department of Interior to meet their needs. For example, they believe Interior does not have sufficient influence to represent them in the budget process or in policy matters involving other federal agencies." It is not a coincidence, in my view, that 20 years after the publication of this GAO report, the Department of Interior faces the same challenge to demonstrate sufficient influence in reversing or amending the policy changes recommended by the any federal agency of the US Government, in this case, Department of Treasury. We face the same challenges today that our territorial officials faced in 1985, and their suggestion that a well-defined federal policy framework which clearly defines our future relationship with the United States, and how the territories should be treated in order for us to achieve greater economic self-reliance and social development is even more necessary today.
Mr. Secretary, I understand fully your need to generate sufficient revenue to reduce the nation's deficit. I also understand the need to close any tax loopholes, and make clearer treasury policies that may have been used by some individuals or corporations to avoid taxation. What I do not understand is the passage of a law that has such a devastating economic impact on the United States
Virgin Islands, yet every plea for understanding and reconsideration has not yielded any adjustment in Treasury policies. I respectfully submit that the United States policy of encouraging economic self-reliance and social development is at odds with the passage of "Residence and Source Rules Involving U.S. Possessions and Other Conforming Changes." These changes have removed the prospects of encouraging greater economic self-reliance, and will, in my humble view, encourage greater dependence on the federal government in the coming months and years.
The passage of this bill has already had a serious negative impact on the economy, and every report issued on these changes has indicated that the worst is yet to come. We are not only losing the investors who took advantage of our Congressionally-approved EDC program, but we are now potentially losing our "snow-birds" who travel to the islands annually for rest and relaxation. These taxpayers are now remitting tax payments to the US Department of the Treasury out of fear that they may be violating federal law, instead of sending those payments to our local Bureau of Internal Revenue where they have traditionally been paid. Some taxpayers are also selling their real estate holdings and moving back to the United States altogether, since they can no longer benefit from the residency rules that they have enjoyed over the years. We have lost some fond friends of the Virgin Islands, who have provided much needed revenues to local foundations and community programs, and this is really tragic. Long-terms bonds of friendship between our people and mainland Americans who made the Virgin Islands their home are being broken, and in my humble view I believe that the territories of the United States were the sacrificial lamb in this process. We have no vote, nor a voice, so we have to make our plea on "bended knee" with the hope that we can convince the "powers that be" in Washington to have mercy on us. Mr. Secretary, this is not a good posture for our Government or our people. Changing the tax rules midstream is not a fair process, and ignoring our concerns was unfortunate.
In the long-run, Mr. Secretary, the revenue shortfall we face will have to be made up by higher taxes, and that may not be sufficient to keep this government afloat. It has been an honor to serve this territory for more than 23 consecutive years as a member of the Legislature, and I am not inclined to tax my people who are already confronting the highest electricity rates in the United States, rising food costs, and whose high cost of living far surpasses most of your major cities in the U.S. We have a serious fiscal crisis that was relieved by the passage of our EDC law, but this setback has dealt a serious blow to this fragile economy, and we must now look for new ways to generate much needed revenue to keep our government afloat.
I have taken the initiative to offer legislation to tighten the territorial laws regarding EDC beneficiaries and open up opportunities for V.I. residents. That legislation is now before the Economic Development, Planning and Environmental Protection Committee of the Legislature, and will probably be passed at our next session at the end of June. We are working tirelessly to make all necessary modifications to our laws that will provide the necessary safeguards to make our EDC program viable.
In light of the decision by the Department of the Treasury to make tax policy changes as a result of the passage of local legislation, we must identify some mutually beneficial mechanism where the Department of the Treasury can provide technical assistance or tax guidance to the Virgin Islands Government on pending legislative matters that may impact our EDC program, since it is a fact that the Congress can change our policies with your recommendation or the recommendation of any federal agency at any time. Additionally, the Virgin Islands government may have to rely on the Federal Government for a significant increase in federal funding in the nature of an outright "economic stimulus" subsidy or grant to negate our own budget deficit, and sustain us through our financial crisis in view of the significant losses sustained by the passage of the new Treasury rules.
In conclusion, Mr. Secretary, the Virgin Islands has unique economic opportunities to recover from the economic fallout we face. We are working tirelessly to rebuild our economies so that we can be more self-reliant and less dependent on federal assistance. We are a resilient people, and a proud people, and have played our part in the historical development of the United States of America. It was Alexander Hamilton, who was raised on the island of St. Croix, and was our nation's first Secretary of the Treasury, who made the ratification of our U.S. Constitution possible over the objections of the Antifederalists. It is in this same spirit of cooperation that I share my thoughts with you by way of this letter. Ironically, this island which Alexander Hamilton once called home was eventually purchased by the United States of America in 1917, and that very U.S. Constitution he so vehemently supported would, in many instances, not apply to the American citizens of the territories of the United States, especially the US Virgin Islands, his home.
I close with the following words of a great Patriot, Alexander Hamilton written on July 2, 1788 in support of the ratification of the U.S. Constitution:
"The erection of a new government, whatever care or wisdom may distinguish the work, cannot fail to originate questions of intricacy and nicety; and these may, in a particular manner, be expected to flow from the establishment of a constitution founded upon the total or partial incorporation of a number of distinct sovereignties. 'Tis time only that can mature and perfect so compound a system, can liquidate the meaning of all the parts, and can adjust them to each other in a harmonious and consistent WHOLE." (Source: The New York Historical Society)
Mr. Secretary, I share these words of a great Virgin Islander with the sincere hope that his call for the "a harmonious and consistent WHOLE" will be the same spirit we espouse in the development of mutually agreeable policies that have had adverse economic impacts on the territories of the United States.
Sincerely,
Lorraine L. Berry
Senate President
