In radio and television interviews Monday, Gov. John deJongh Jr. said he was optimistic that federal lawmakers would avert the automatic tax hikes and spending reductions set to kick in at the start of the new year.
The fiscal cliff, as those hikes and reductions are termed, could trigger a second recession and adversely impact the territory’s economic recovery, he said.
The tax hikes and spending reductions would harshly affect states and territories “just now beginning to getting some semblance of normality,” deJongh said in interviews and in a statement from Government House on Tuesday.
“The last thing we need to deal with are these sorts of cuts that will disrupt the amount of revenues and expenditures that are taking place,” deJongh said.
The phrase "fiscal cliff" is a misnomer of sorts, as both these events will actually improve the fiscal situation of the federal government and reduce the deficit. But economists and analysts at the Congressional Budget Office have warned that sharp austerity in the form of abrupt spending decreases and tax increases is likely to lessen economic growth and increase unemployment in the short term. (See: Congressional Budget Office Report on Fiscal Cliff in Related Links below.)
In the U.S. Virgin Islands, the impact would be felt on three levels: the spending reductions would eliminate $10 to $12 million in grant funding each year for a decade; it would wipe away tax deductions that benefit many Virgin Islanders; and it would reduce the disposable income of Americans who travel to the Virgin Islands, which deJongh predicted could harshly impact the territory’s tourism industry.
“From our standpoint, we are looking at tremendous economic and financial impact,” deJongh said, citing that as the reason he signed a letter with 10 other governors urging a compromise in Washington.
DeJongh said a recent meeting between House Speaker John Boehner and President Barack Obama was a good sign that both sides understand the tremendous negative repercussions of a failure to reach a deal.
On another subject, deJongh spoke about the federal Internal Revenue Service changing the period businesses require to establish V.I. residency and participate in the territory’s Economic Development Commission programs.
The uncertainty added by federal policy has resulted in “a tremendous number of audits that put undue expenses on businesses participating in the program that wanted to establish residency,” deJongh said.
By changing the statute of limitations on how far back auditors could scrutinize EDC participants, the IRS has further created the kind of uncertainty businesses abhor. In turn, many employers have withdrawn from the program by failing to renew certificates and moving out of the territory.
“The EDC is a way to diversify our economy and create employment opportunities, especially for young Virgin Islanders. By fighting for the residency, by fighting for the source income, we are fighting for the means to build back our program,” deJongh said.
To revitalize the EDC program, the territory is challenging the policy in court, continuing discussions with the U.S. Treasury Department and the IRS, and working to promote new legislation in Congress to ameliorate changes enacted in the 2004 Jobs Act, deJongh said.
And finally, Government House said negotiations continue with the owners of the defunct Hovensa oil refinery to continue providing fuel to local suppliers. Both parties are negotiating in good faith, deJongh said, working to balance the needs of community and the company’s goals for future operations.
While Hovensa has honored its commitment to supply the V.I. Water and Power Authority and local service stations up to now by maintaining operations of its St. Croix fuel rack, the deadline for that arrangement expires at the end of the year.
The V.I. Energy Office and the Department of Licensing and Consumer Affairs are both working on ensuring there will be no service disruption at the start of 2013, deJongh said.
Government officials have reached out to fuel providers on each island to ensure they have an alternate fuel supply available in case negotiations with Hovensa fail to extend their fuel rack operations.
“In a perfect world, we would like to have the Hovensa rack keep operating,” deJongh said, “but all our service stations need to look for alternative fuel providers, and I am confident those markets exist.”
Some franchise stations are already bringing in fuel from Puerto Rico and other locations.
The territory’s independent stations must start establishing relationships with new providers to secure their fuel supply through the New Year, deJongh said, adding that new sources of fuel will not necessarily be more expensive.
