The territory would lose between $10 and $12 million a year for the next 10 years if negotiations in Washington, D.C., fail to avert the "fiscal cliff" effects scheduled to kick in Jan. 2, according to an analysis prepared by the V.I. Bureau of Economic Research.
Local tax revenues would increase by about $10 million annually, according to a rough estimate by BER Director Wharton Berger, as a result of reduced child care and earned income credits, limited itemized deductions and a lower alternative minimum tax threshold, as local taxes adjust to mirror the federal system and how individual taxpayers have prepared for it.
The report was released Thursday. Berger conducted a telephone press conference Thursday afternoon to walk reporters through it.
The so-called "fiscal cliff" is a self-imposed deadline facing Washington lawmakers. If federal negotiations fail to come up with an agreement for reducing the federal budget deficit by $1.2 trillion in the next 10 years, an amount equal to about 4 percent of the U.S. gross domestic product, the fiscal cliff kicks in automatically Jan. 2.
The tax "increase" is actually a return to the tax rate from the 1990s. The Bush tax cuts, enacted as a temporary measure in 2001, are scheduled to end Jan. 2, 2013, without further Congressional action. The debate in Washington, D.C., centers on whether to allow them to expire, extend all the tax cuts or let the tax cut for the wealthy expire while making them permanent for most Americans.
Berger explained that his office went line by line through the V.I. budget, looking at each program that receives federal funds, determining whether the funding source was exempt from the cuts or not, and how those cuts would affect the budget.
The analysis can be seen (here).
The territory has budgeted $161.6 million from federal grants, according to the BER report. The territory will lose about $10.45 million, leaving a residual federal fund budget to the territory for the 2013 fiscal year of $151.1 million.
Among those departments and programs likely to take the biggest hits are: The Department of Human Services, which the BER analysis estimated will lose $1.7 million from an original federal grant budget of $44.9 million; Department of Education, losing $2.63 million of an originally budgeted $38.6 million; Department of Public Works, $1.6 million out of $21.6 million; and the Department of Health, $1.46 million from an originally budgeted $38.6 million.
Berger pointed to economic warnings, saying that if federal negotiators are not able to come to an agreement before the deadline, the resulting spending cuts and tax increases could plunge the economy back into a recession just as it began to grow. This could impact tourism in the territory, he said, as people have less money to spend.
Berger said the estimate of an increase in tax revenue between $10 to $13 million is very rough. The changes in the tax law would take effect for the current tax year, and the actual amount will be determined both by how the rates and credit programs change, and how individuals have planned ahead for those changes.
