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Governor Tells House Subcommittee That Federal Changes Are Needed

Feb. 27, 2007 — Gov. John deJongh Jr. on Tuesday presented testimony to the House Subcommittee on Insular Affairs on issues that he deemed are “critical to the economic development and fiscal independence of the Virgin Islands.”
According to a Government House release issued Tuesday, deJongh’s testimony centered on five key topics: V.I. tax returns and the statute of limitations, the removal of the cap on rum excise taxes returned to the Virgin Islands, the elimination of the cap on Medicaid funding, earned income credit cost sharing, and the establishment of a border patrol unit in the Virgin Islands.
Regarding V.I. tax returns, the governor is seeking to clarify that an income tax return filed in good faith by a taxpayer in the Virgin Islands shall be treated as a tax return filed in the U.S. for purposes of the statute of limitations in both jurisdictions.
DeJongh also commented on actions taken in recent days by the Internal Revenue Service. “The issuance of a memorandum last week without the policy input of the local government is a step backwards,” deJongh said Tuesday. In the memorandum, the IRS said that the tax status of about 8,500 Virgin Islanders who earn more than $75,000, including employees of hedge funds, would face renewed scrutiny as the agency steps up efforts to root out tax evaders.
The IRS memorandum sets a three-year limit on audits of upper-income residents who immediately provide federal tax returns for the past 20 years. The notice also requires residents to file tax information with the federal government in addition to the returns filed with the local Bureau of Internal Revenue. While residents are subject to U.S. tax rules, up to this point they have only been required to file tax returns locally. At issue is an IRS ruling last year that said the statue of limitations restricting the agency from examining more than three years of tax returns does not apply to those claiming residency in the Virgin Islands.
The Feb. 21 notice requires those who earn more than $75,000 to file a form 1040 that reports zero income but includes the filers’ name, Social Security number and address. Residents must also include a statement declaring residency in the Virgin Islands and an affirmation that a tax return was filed with the local Bureau of Internal Revenue, as well as details about the amount of income reported and tax paid to the territorial government.
In making the case for the removal of the cap on rum excise taxes returned to the Virgin Islands, deJongh pointed out that as part of the longstanding tax relationship with the territory, Congress historically provided that all federal excise taxes on all products, including rum (manufactured in the territory), shall be returned to the local treasury.
The governor’s testimony urged Congress to remove the cap on the cover-over rate and authorize the return of the full amount of rum excise taxes to the Virgin Islands.
The government, deJongh said, is requesting that a permanent solution to the rum formula be created by removing the rum tax cap in the Bush administration’s next budget submission to Congress.
In his Tuesday testimony, deJongh also stated that the ability of the V.I. government to assure adequate health care to residents is being hampered by a “discriminatory cap on Medicaid funds provided to the Virgin Islands and the other U.S. territories.” While Congress approved an increase in the amount of Medicaid funds to the territory two years ago, such increases only narrowed the gap between the funds allotted the territory and the funds the Virgin Islands would be entitled to if the territory were treated as a state under the Medicaid formula. DeJongh requested the administration’s support in making further improvements in the Medicaid formula that would “ensure the neediest residents in the territories receive no less favorable treatment than the neediest residents in the United States.”
After acknowledging the work of Delegate Donna Christensen towards the establishment of a Border Patrol Unit in the Virgin Islands, deJongh restated his administration’s desire for such a unit to be formed in the territory. He pointed out that there is no Border Patrol Station in the Virgin Islands, and that "the coastlines of the Virgin Islands [have been] largely exposed and vulnerable to human smuggling and drug trafficking.” As a result, deJongh said, international drug smugglers and organized crime have been increasingly utilizing the Virgin Islands as a major transshipment point into the United States.
“The scourge of smuggling and illegal drug trafficking has had a direct impact on the crime rate and the quality of life in the territory,” he said.
DeJongh asked that the federal agencies tasked with assessing the need for such a unit in the Virgin Islands render its findings as quickly as possible.
DeJongh will offer similar testimony on Wednesday when he testifies before a meeting of the Interagency Group on Insular Affairs at the Department of the Interior.
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