Link: Pacific Islands Report
Pacific Islands Development Program, East-West Center

With Support From Center for Pacific Islands Studies, University of Hawai‘i


Looming U.S. ‘Fiscal Cliff’ Expected To Burden CNMI
CNMI residents may lose $17 a month due to tax increases

By Haidee V. Eugenio

SAIPAN, CNMI (Saipan Tribune, Nov. 28, 2012) – If the Obama administration and Congress fail to craft a deal to address the so-called "fiscal cliff" before Dec. 31, working-class people in the Commonwealth of the Northern Mariana Islands will have less money in their pockets and more will go into paying taxes. (Haidee V. Eugenio) If the Obama administration and Congress do not reach a deal to address the so-called "fiscal cliff" before Dec. 31, working-class people in the CNMI and the rest of the United States will have less money in their pockets and more will go into paying taxes. Lt. Gov. Eloy S. Inos said the CNMI could also get less federal funds because of automatic spending cuts in the U.S.

The fiscal cliff, which national media calls a man-made disaster waiting to happen, will take effect on Jan. 1 and includes $7 trillion worth of tax increases and spending cuts over a decade in the United States, including its territories.

A government or private sector employee earning the CNMI's minimum wage of $5.55 an hour and works 80 hours biweekly, for example, would see an additional $8.88 in deduction from his paycheck every two weeks or $17.76 a month.

"That $17-plus could [be] used to buy a sack of rice and other food items to feed my family. Instead, it will go to more paycheck tax. We [nearly] couldn't afford the taxes deducted from our paycheck right now and we'd see more deductions," Osmundo Roxas, 53, said yesterday.

Government and private sector workers' paychecks will shrink next year because the 2 percent U.S. Social Security tax holiday for employees will expire on Dec. 31, unless extended by Congress and the Obama administration.

Without an extension of the tax holiday, employees' Social Security tax deduction every payroll will go back to 6.2 percent, from the current 4.2 percent. Employers' share will still be 6.2 percent.

Social Security and Medicare are covered by the Federal Insurance Contribution Act, or FICA, taxes that are deducted from the payroll of working-class people.

A minimum wage earner working 80 hours biweekly will have $230.88 that will be taken out of his annual payroll, on top of what is already being deducted from his paycheck right now.

Inos, who oversees government finances and a former Finance secretary, said this means "diminished disposable income" for employees paying federal taxes.

"And that also means money that is not available (or not circulating in) the local economy," Inos said in an interview with Saipan Tribune yesterday afternoon.

However, he said whatever amount is deducted from one's paycheck will go to an employee's Social Security or Medicare contributions, which will benefit them later.

Someone who makes $50,000 a year will pay another $1,000 in payroll taxes in 2013 if the tax holiday is not extended.

For employees like Roxas, more deductions mean less food on the table. And because he is a foreign worker in the CNMI, he might not even benefit from the regular FICA deductions in his paycheck, he said.

Once Filipino and Korean workers, for example, lose their job in the CNMI, the payroll deductions stop and their contributions are good as forfeited.

""It's like we're just giving our money to the U.S. government. I hope the U.S. will approve the CNMI government's request to exempt Filipino and Korean workers from paying FICA taxes," he said. "We don't even reach 80 hours per payroll, we only have 60 work hours per payroll. It's going to be more difficult for workers like us who are already earning too little to begin with."

Other impacts

Inos said the Bush era tax cuts will also expire unless the Obama administration and Congress strike a deal to extend them. This means income tax rates will go back up to their pre-Bush rates.

"The rates now are much lower than the pre-Bush tax rates," Inos said. "We pay income tax but currently on the reduced rate."

Inos said any income tax rate reversion to its former level will result in more collection for the government.

"We are drafting legislation right now that would capture additional taxes as a result of these tax increases.to go into a deficit reduction fund that will be applied to the [NMI Retirement] Fund liability," he said.

The government owes the NMI Retirement Fund over $300 million.

"It will go down once the effect of Public Law 17-82 is calibrated into the whole formula," he added.

Inos said the CNMI will also receive less federal funds as a result of the fiscal cliff. This depends on the federal department, agency, or program that will have expenditure cuts.

The CNMI receives more federal funds in a year than it generates in local revenue.

"The whole nation, the federal government, is at risk in many areas. We will feel it here. What programs would be affected remain to be seen. It is our hope that as much as we want to wean ourselves off many of the entitlement programs through positive economic development, the whole idea with the effort, at least with the current Obama administration, is to maintain the entitlement level-food stamp, SSI, Medicare," Inos added.

CNN reports that among the policies at issue concerning the fiscal cliff are: reductions in both defense and non-defense spending; the expiration of the Bush tax cuts; the end of a payroll tax holiday and extended unemployment benefits; and the onset of reimbursement cuts to Medicare doctors.

In addition, the debt ceiling-the legal limit on federal borrowing-will need to be raised by early next year from its current level of $16.394 trillion.

"If left in place, the fiscal cliff would lead to the biggest single-year drop in the annual deficit as a percent of the economy since 1969. But because it would be so abrupt and arbitrary, it also could throw the United States back into a recession next year, when more than $500 billion will be taken out of the economy. To avoid that, President Obama and Congress will need to act quickly to avert at least some parts of the fiscal cliff," CNN reported.

Child tax credit could also fall to $500 per child from $1,000. The refundable portion will also be reduced.

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