This article is one in a series about how to strengthen the V.I. government’s finances without raising tax rates. Each deals with a specific proposal.
One of the things that the V.I. government needs is more cash income – right now.
While some of the suggestions we will be making about fiscal management will deal with larger-scale issues, most of them will bring benefits only slowly. What we suggest today can start bringing in money within weeks, if quickly approved by the Legislature. And though by itself it is relatively small compared to the scale of the islands’ debt and recurring deficits, it can be a strand in a larger fabric of solutions, as well as serving as an illustrative example of solutions that are already helping other territories and mainland communities.
Background: Many individuals in the U.S. and in the USVI send money via wire transfers to relatives abroad. Usually called remittances, the World Bank has estimated that the total outflow from the nation is about $50 billion a year; a small segment of that flow starts in the USVI and goes primarily to other islands in the region.
Remittances should be allowed to continue, of course, but legislators should be reminded that any money sent out of the islands is money that subsequently will not circulate within the islands, and will not bring any of the economic benefits that would have come from each followup transaction. Money spent on groceries or entertainment or housing within the islands is much more useful to the islands’ finances than money that leaves it.
There is a strong suspicion, furthermore, supported by some mainland data we will get to shortly, that some of these wire transfers are made from undertaxed sources, and that a smaller portion may actually be tied to the drug trade.
As we will do again occasionally in this series we would like to offer here an example of a proven practice from the mainland that might benefit the USVI. We will start with Oklahoma, which has a tiny population of foreign-born residents, and which decided several years ago to attach a $10, or 1 percent fee, whichever was larger, to all individual wire transfers to persons outside the state. The fee does not apply to corporations. The fee is designed to be small enough so as not to encourage residents to switch to other, more expensive and dangerous ways of remitting funds, while still being large enough to raise a meaningful amount on a recurring basis.
Additionally Oklahoma decided that it would be much better if the charge were not simply a fee, but something that could be used as a partial payment toward state income taxes, much like a tax withholding by an employer. In other words, the new arrangement would not actually cost tax payers a dime, even while it would raise funds from non-taxpayers.
Interestingly Oklahoma found that more than 90 percent of the fees were not reflected in later income tax filings, suggesting that it had indeed found a source of untaxed income.
Proposal: That the V.I. government introduce a $10, or 2 percent fee, whichever was larger, to be paid at the time of the transmission. To simplify the bookkeeping, the fee would be rounded to the nearest dollar. The fee would be collected by the wire transfer companies (who would get, say, a $1 payment for themselves, with that item to be subtracted from the V.I. government’s fee.)
At the end of each month the wire transfer companies would send the net proceeds from the fees to the V.I. government, along with the names of those paying. The wire transfer companies would give the sender of the funds a receipt that to be used at income tax time. Any fees paid would be eligible for a dollar-for-dollar tax credit. The receipt can even include a reminder of the tax credit. Therefore island taxpayers would not, in effect, experience any additional out-of-pocket expense. The fee would only truly be borne by non-taxpayers, who arguably ought to be contributing more to supporting the island government and its various public functions.
We assume that legislation will be needed.
Predicted Results: Oklahoma received more than $12 million in the most recent year from this source. There were about 36,000 foreign-born residents of the USVI in the last census and there were about 207,000 foreign-born in Oklahoma, or about six times as many in the islands. Since this is the population most likely to send remittances, these numbers at first suggest that the V.I. government would collect about one-sixth of the fees collected by Oklahoma; however, since we are proposing higher fees than Oklahoma, we predict an approximate revenue stream of $3 million a year for the islands. The Oklahoma figure has increased by 8 percent year in every year since it was introduced.
Both the wire transfer companies and some of those sending remittances can be expected to object, but virtually any proposed reform will be opposed by someone.