The territory’s economic development program did not maximize the potential economic benefits, according to an audit by the V.I. Inspector General’s Office released Thursday. The audit covered the years 2009 through 2011 and was done at the request of the Economic Development Commission.
During those years, the EDC issued 14 certificates to eligible beneficiaries each year. The number of active beneficiaries reported during the audit period was 109 in Fiscal Year 2009, and 93 in each of Fiscal Years 2010 and 2011.
In its response, EDC Chairman Percival Clouden said the agency will use the findings to work toward making progress. He also noted that some improvements in the EDC program were made since the audit was done.
“As a result of an internal review of our practices and procedures, we have implemented many changes and adjustments,” Clouden wrote in his response.
The EDC program provides tax exemptions and reductions in tax liabilities up to a 90 percent exemption on personal income taxes, up to a 90 percent exemption on corporate income taxes, up to a 100 percent exemption on gross receipts taxes, up to a 100 percent exemption on business property taxes, up to a 100 percent exemption on excise taxes, and up to a 1 percent custom duties rate.
Among other findings, the study found that the government received a relatively good return on investment from the beneficiaries’ participation in the EDC program and that the program helped diversify the local economy by attracting and retaining businesses that provided a high economic impact.
The study also pointed out disparities in the economic performances between various types and categories of businesses.
From an industry standpoint, accommodations and food services businesses were linked to high cost/benefit ratios, which meant they had high economic and fiscal impact in relation to the waived tax revenues. In contrast, professional services businesses were linked to low cost/benefit ratio.
In its findings, the Inspector General’s Office listed several issues. It indicated the EDC has reduced its ability to effectively negotiate benefits packages that can provide reasonable revenues to the territory as beneficiaries become more established and profitable.
Additionally, it said that the government lost revenues due to beneficiaries receiving extended tax benefits for which they were not entitled, the infrequent compliance reviews did not promote an environment of ongoing compliance, and the EDC did not have timely information to determine the compliance statuses of beneficiaries.
The audit continues that beneficiaries potentially could have continued to receive economic benefits, although their certificates were in a suspension or termination status, and the application process was not always effectively used as a means to facilitate economic growth.
According to the audit, the EDC did not have a mechanism in place to require the timely measurement, assessment and reporting of the overall economic and fiscal impact of the EDC program on the territory’s economy. It does not promote higher levels of participation by certain business types found to have a relatively low economic and fiscal impact on the territory, the audit says.
The Inspector General’s Office explained that, during the course of the audit, some major revisions were made to the law that affected the EDC program. In October 2014, the Legislature passed a bill that increased the tax benefits given to businesses participating in the program. That bill indicates that St. Thomas/St. John district beneficiaries were entitled to 100 percent benefits for 20 years but those on St. Croix were eligible for the 100 percent benefit for 30 years.
The audit continues that the EDC used rules and regulations that contradicted the territory’s laws regarding extension of benefits, and in extending benefits, granted full benefits to beneficiaries not eligible to receive them at that level under the law, and granted extension of benefits in numbers and durations in excess of what was allowed under the law.
The EDC performed infrequent compliance reviews, did not effectively ensure that beneficiaries complied with reporting requirements, did not always promptly inform regulatory agencies of changes in the certificate statuses of beneficiaries, did not consistently adhere to the time requirements for the various phases of the application process, did not adequately monitor the collection of information needed to process applications for economic development benefits, and did not always process applications in an organized and systematic manner, the audit says.
The audit recommended that the Legislature institute a law requiring the EDC to measure – and assess on a regular basis – the tax incentive program’s overall economic and fiscal impact on the territory’s economy for waived tax revenues and to report impact results to the Legislature and appropriate governmental authorities.
It suggested the EDC establish and implement policies and procedures to efficiently obtain financial data from beneficiaries in order to conduct timely and accurate assessments of the tax incentive program’s impact on the territory.
The EDC should establish and implement policies that encourage and require the various categories of beneficiaries to contribute more equitably to the territory’s economy based on their cost/benefit ratios, the audit said.
Lastly it suggested the EDC ask the Legislature to revise the V.I. Code allowing the EDC to grant benefits “up to 100 percent” to new beneficiaries, for the purpose of implementing a sliding scale approach in determining reduction amounts in tax liabilities based on historical cost/ benefit trends for the various categories of businesses.
To read the entire audit, visit www.viig.org/pdf/audits/AR-01-EDA-14.pdf.