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Pacific Islands Development Program, East-West Center

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


Higher Tax Rates, Limited Breaks Recommended For Guam
Public auditor: government has not ‘acknowledged’ looming bills

By Gaynor Dumat-ol Daleno

HAGTA, Guam (Pacific Daily News, Jan. 9, 2013) – Raising more revenue through a higher tax rate, as well as implementing meaningful spending cuts, should be discussed as a possible way to help the government avert a potential shortage of cash, Guam’s public auditor recommended.

Public Auditor Doris Flores Brooks made the suggestion in light of big bills the government of Guam faces this year, including a few potential expenses that aren't part of this year's budget.

A combination of increased revenue – in part by raising taxes and limiting tax exemptions –and cutting expenses, such as reducing GovGuam's cost of Retirement-Fund-related expenses, should be part of the discussion on potential solutions, the public auditor said.

A $22 million bill that was due to the Internal Revenue Service on Jan. 1, $105 million in tax refund obligations for this year, $21 million in additional compensation to landowners whose property was condemned for the Layon landfill, $4.5 million in merit and qualifications-based bonuses owed to Guam Department of Education personnel are some of the big spending items.

There has been a shortage of public discussion among elected officials on how to deal with the looming big bills, Brooks acknowledged.

"We're not ignoring the problem," said the public auditor, adding: "We haven't acknowledged the problem."

One option is to consider raising the Gross Receipts Tax, Brooks said.

While GovGuam's decision to raise the GRT almost a decade ago from 4 percent to 6 percent of businesses' gross revenue was unpopular among some, including the business community, Brooks said, doing so helped GovGuam stay afloat during an economically tough time. The increase was rolled back in 2004.

Opposite effect

Certified financial planner Carl Peterson said raising taxes will achieve the opposite of GovGuam's goal to collect more revenue.

As taxes increase, consumers will spend less, workers will lose their jobs and the government will collect less taxes, he said.

As an example, he said if a store raised the price of a can of tuna to $10, consumers won't buy the tuna.

He said if a family goes through economic hardships, it makes sacrifices, such as reducing electricity use and cutting other spending. Peterson asked why a family's solution for dealing with cash challenges was a folly for the government.

Peterson said the governor has asked the Legislature to agree with him on reducing expenses, but the Legislature won't let the governor do so.

In some states, sales tax rates are now up to 8 percent, Brooks said. She emphasized that she isn't proposing converting from the GRT system to a sales tax. Businesses pay the GRT each month and pass on the cost to consumers, but the sales tax is assessed as consumers pay at the cash register for a product or service.

"I know the conventional economic wisdom is you don't raise taxes at a time of a recession; all I am offering are ideas on where to go."

Gov. Eddie Calvo has proposed spending cuts that, by his fiscal team's estimates, would have saved about $30 million on its first year and $60 million to $70 million total over five years. Lawmakers, however, rejected the bulk of his proposals after the Government of Guam Retirement Fund stated its financial future would be compromised.

Government of Guam entitlement programs for its employees and for future retirees also have become too big, Brooks said.

For example, nearly 30 cents of every $1 of GovGuam's personnel-related expenses go toward retirement benefits payments, Brooks said.

Also adding to GovGuam's fiscal challenges is its history of overestimating revenues. Historically, at the end of a fiscal year, GovGuam ends up $20 million to $30 million short of its projected cash collections, she said.

"Meaningful deficit reduction will not occur until entitlement benefits are reduced, overtime is brought under control, tax credits and tax exemptions are limited," along with a host of other measures, Brooks stated in her inaugural address Monday for her fourth term. She is the island's first elected public auditor and has served in that capacity for 12 years.

Brooks suggested that some retirement benefits that are costing GovGuam a lot of money, such as allowing retirees to receive retirement pay based on the top three years of their pay history, should end. Retirement should be based only on base pay, she said.

Here are some details of the bills that are coming up:

  • Unless the IRS says otherwise, GovGuam owes the IRS $22 million. IRS overpaid GovGuam $22 million in tax refunds reimbursement and that the money was due Jan. 1.

GovGuam doesn't have an extra $22 million, the governor's office stated last month, so it proposed offsetting that amount with part of $590 million, which the local government states is owed by the federal government for the cost of public services for regional migrants. The federal government stated previously, however, that GovGuam's calculations of the cost of providing services to regional migrants have not been balanced with the economic contributions of the immigrants who pay taxes and hold jobs.

Revenue and Taxation Director John Camacho said that, as of Jan. 7, he hasn't heard if the IRS will agree to the offset. An offset would require federal legislation, so that's not likely to happen soon, Brooks said.

  • Approximately $4.5 million is owed to Guam Department of Education employees whose performance- and qualifications-based bonuses from previous years weren't paid, Pacific Daily News files show. Other executive branch employees received their bonuses during the holiday break.

  • $105 million in estimated tax refunds for tax year 2012, which GovGuam would no longer be able to delay for years, once a federal judge issues an order approving a timeline for timely payment of tax refunds. At the federal court's urging, the plaintiffs in a taxpayer class-action lawsuit proposed that tax refunds should be paid within six months of the filing of income tax returns. The government of Guam proposed a one-year time period.

Regardless of whether the judge rules in favor of the plaintiffs or the local government, Calvo has stated that whether GovGuam would be ordered to pay tax refunds within six months or a year, such decision will alter the way GovGuam spends and operates.

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