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USVI Governmental Finances: ‘Account Ability’

Sometimes when there are serious problems – as there are with the V.I. government’s finances – it is useful to ask for comments from disinterested but caring observers. With that in mind the Source has enlisted David North, a former Office of Insular Affairs official in Washington, D.C., and an occasional Source contributor; his son Rodney North, who has worked in international economic development for 20 years, and Rodney’s spouse, Donna Desrochers, a former Canadian journalist. David North wrote the following article, the first in the series, and the others will write most of the rest.

When we saw the alarming news in the Source – that the USVI government had exactly five-days’ worth of cash in its coffers, that the bond market (understandably) did not want to lend any more money, and the governor said there would be no layoffs – we decided to step back and look at the big picture.

We knew that the islands were poor, that the government was too free and easy with its funds, and that tax collections were not carried out rigorously. We sensed that to some extent that the USVI had the productivity and the wealth of a mid-level income nation (e.g., Slovenia and Trinidad and Tobago) but expected its government to deliver services on par with that of a high income nation (e.g., Canada).

We were aware that there had been for a long time an overly casual investor community continuing to lend money to the territory, certain that if the V.I. government got into serious trouble Uncle Sam would bail it out.

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But what we found in the last week was a shock:

There is a very, very large debt in comparison with other troubled economies;

There is a much lower per capita tax burden, in comparison to citizens on the mainland.

This suggested three things to us:

    1) the only answer to such a dire situation will ultimately involve help from the mainland;

    2) that help will come more easily and more generously if there is a spirited, visible effort in the islands to at least start cleaning up its own act;

    3) and real change in the way V.I. government handles its own taxes would be far more financially significant than anything that can be done with ongoing sources of federal funds, though efforts in that direction would be quite useful.

While most of these policy areas are beyond the scope of what we are researching for the Source, there appears to be a strong need for higher taxes, taxes on things not now taxed (perhaps a sales tax), sharp reductions in government spending, a freeze of wages, and an older retirement age for the civil servants.

That the territory is doling out tens of thousands of dollars to each of dozens of civic organizations, including Boy Scout troops, will probably have to end. The recent increase in worker contributions to the GERS retirement system, on the other hand, is to be welcomed.

But we want to stress that we recognize that it will be up to the citizens of the USVI and their elected leaders to make the hard choices and trade-offs around such matters. The focus of our series is to offer an outsider’s perspective and share suggestions about practices that have been found to work elsewhere.

As to the size of the V.I. government’s debt, estimates vary, but $4.3 billion is a useful measure. This means that the per capita debt of the islands is about $41,000, well ahead of that of Greece, about $34,000, and almost three times as high as that of Puerto Rico, $15,000. This does not include, for either P.R. or the USVI, the thought that its citizens are also involved in the huge debt (of a rich nation, the U.S.) of about $58,000 per head. If Puerto Rico needs help from the mainland, what does that say for the USVI?

Regarding the comparative tax burden of the islands, it is useful to note, first, that there are three variables that are very, very favorable (or should be) to island taxpayers:

    1. They do not pay federal income taxes, a blessing that escapes 98 percent of the people under the U.S. Flag.

    2. They do not fund either county or municipal governments. No one else except the residents of the District of Columbia have this advantage.

    3. They are assisted by an annual federal grant to the territory, often advanced before it is due – the rum tax cover.

While the size of the subsidy is in question, as the Source reported on Feb. 6, the origin is not: it is from Washington, and major segments of it are sent to the rum industry or used to pay off past debts. Were it to be $100,000,000 that would come to $961 for each resident of the islands every year.

However, despite these very substantial advantages, the territorial government is broke. There are, of course, arguments that were the USVI a state, there would be a greater flow of federal funds. That is probably perfectly true but not terribly helpful at the moment.

Let’s look at some data on the comparable tax burden in Mississippi, the poorest of the U.S. states, where the average household income was about $37,838 compared to $24,704 in the islands in 2014. Were we to compare to the average household tax burden in the U.S. as a whole, the differences would be much more dramatic.

We are using Census and V.I. budget data, and information from the Tax Foundation, whose most recent data on these matters relates to 2012. In that year, according to the islands’ budget, some $324,862,082 was collected from a population of about 104,000.

Here’s what we find:

Per Capita Tax Burden

                                      Mississippi              USVI

Federal taxes                   3,504                     0

State and local taxes      $2,742               $3,123

Total                                 $6,246               $3,123

So Mississippians, with about 50 percent more income than U.S. Virgin Islanders, have been paying 100 percent more in taxes.

Similarly, property tax rates in the USVI are remarkably low by mainland standards. For example, the average property tax rate in LaFayette County, Miss., is 0.740 percent, and the property tax rates in that state are only about half of those in the nation as a whole. The tax rate for residential property in the islands is 0.377 percent, or about half of that for homes in Mississippi.

Ergo, property tax rates in the USVI are approximately one-fourth of those on the mainland average. And there is no federal income tax in the islands at all. Nor do the islanders pay a sales tax.

The balance of the articles in this series deals with suggested ways that the Virgin Islands can increase net revenues without raising tax rates. If all of our suggestions were to be adopted, they would not close the budget gap but they certainly would help meet that goal.

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1 COMMENT

  1. You are mistaken US Federal Income taxes are imposed on residents of the Virgin Islands and are paid to The Virgin Islands government the same as the states. Also social security taxes are paid (to the IRS not the VI IRB) if you are resident and are self employed.

    Remember there is a 5% gross receipts tax (on all businesses even if you rent a room out in your house or are a handyman, etc) and a 4% excise tax (on anything brought in to the territory that is not produced in the US or Puerto Rico.

    I agree property taxes are usually comparatively lower overall than most stateside property taxes. However property taxes are imposed under the guise of providing services for the residents who pay the taxes. I believe for the level of services residents here in the VI receive, the property taxes are just about right. Look at our roads, garbage situation, schools, street lighting, police and fire and ambulance issues.

    For 105,000 people (even on four separate islands) a $700,000,000. – $800,000,000 (at one point 10 years ago we were near $1,000,000,000 annual budget is outrageous. Tax and spend is not the answer. Collect the unpaid taxes, trim the waste within government (personnel and the bricks and mortar) When elected officials become accountable for the taxpayers monies and are blocked from the reckless spending then maybe if we are still short they can ask for some sort of increased revenues from the taxpayer.

    Leaders are supposed to lead by example. If the taxpayers behaved like those we elect we would all be in jail.

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