This is the first of a series on the best practices for our community to consider in revitalizing the Virgin Islands industrial incentive — or IDC — program.
It is clearly evident that any company engaged exclusively in the business of exporting commodities or services, with virtually no market in the location where the production occurs, must receive a set of tax/fee incentives sufficient to induce that company to operate there.
Such is the case with HOVENSA, Globalvest or any other similarly situated IDC beneficiary. These companies have no other reason to operate in the Virgin Islands, given that taxes and fees do exist.
Other factors, such as beautiful beaches, labor supply quality or onerous labor market legislation, may support or devalue the forgiveness of certain taxes/fees.
The balance of benefits offered to these companies and those received by the V.I. are unrelated. The benefits to be offered allow them to earn a level of profit greater than could be earned at any other feasible location.
That is the reason for locating in the Virgin Islands. If such were not true, the company would be obliged to locate wherever their profits are highest.
The analysis for determining the level of benefits to be provided rests not on a comparison between the benefits that would accrue to the Virgin Islands and the benefits that would accrue to the company.
Rather, the analysis must be based on a comparison between the cost of doing business in the Virgin Islands as opposed to the cost of doing business in another location. The bargaining is implicitly and truly between competing locations and not between a company and any particular country, state or territory.
It is possible to offer (more/less) benefits than are sufficient. If the benefit package results in the company earning a profit (higher/lower) than could be earned at the next best location, the (excess/deficiency) in benefits provided equals the difference in the benefit package available in the V.I. and the next best locations, plus one dollar; not between the value of benefits offered to the company and those received by the jurisdiction.
This perspective is the correct guide for use in deliberating the appropriateness of any benefit package offered to a new company or in considering a renewal/renegotiation of same.
Unfortunately, this perspective was extravagantly violated by the U.S. Interior Department, in what is inaccurately titled an "Audit Report" on the Hess Oil Virgin Islands Corp.'s Economic Impact on the Virgin Islands; Report No. 92-I-384, February 1992.
Beyond a number of factual errors that should have been caught during editing, the report reveals a misguided understanding of regional economic development programming.
The report's most damaging assertion is "We believe that the (V.I.) Government should attempt to negotiate additional tax concessions from Hess Oil in order to reach an agreement that more equitably balances Hess Oil's tax exemptions with benefits provided to the Virgin Islands." (par. 2 cover letter from Harold Bloom).
As shown above, this perspective and comparison is patently incorrect and damages the image of the Virgin Islands as a community able to negotiate tax/fee forgiveness packages beneficial to both parties.
In the next article, I'll offer a view on the implications regarding the export orientation of the company.
Richard W. Moore is a consulting economist in the Virgin Islands. He can be reached at 340- 774-4272.
