Published: December 28, 2012
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ST. THOMAS - If Congress and President Barack Obama cannot come to an agreement on the "fiscal cliff" before Jan. 2, the territory could lose more than $10 million per year in federal funding, according to a report released by the V.I. Bureau of Economic Research Thursday.
At the same time, the territory would stand to gain about $10 million per year in revenue from tax cuts that would end if no agreement is reached in Washington, D.C.
While it might seem like a wash, Bureau of Economic Research Director Wharton Berger said that going over the "fiscal cliff" would still negatively impact the territory's economy.
During a conference call Thursday, Berger discussed a report he compiled analyzing the so-called "fiscal cliff" and how it would impact the territory. Berger looked at various federal programs and grants that come to the territory to see which ones could be cut and which ones will be left alone.
"January 2013 will have an immediate and long lasting impact on the Virgin Islands economy and social system," according to Berger's report. "Higher tax rates will affect consumer spending, which could impact the territory's tourism revenues."
According to the report, the Virgin Islands' Gross Territorial Product could lose $100 million annually.
"Tourism, trade and investment demand will falter as the Territory is attempting to recover from the St. Croix refinery closure, as it simultaneously recovers from the Great Recession," Berger wrote in the report.
Starting Jan. 2, a series of tax cuts put in place by the Bush Administration in 2001 and 2003 will expire - and will be retroactive to affect the 2012 tax year.
A law passed last year to slash billions in federal spending - the Budget Control Act of 2011 - will take effect in the new year as well.
Add to that the end of the extended unemployment benefits program today, and the total impact could bring on another recession for the nation, Berger said.
Unless alternative legislation is put in place, the Budget Control Act will go into effect Jan. 2.
The legislation allows for uniform percentage cuts in all programs, projects and activities but allows for exemption and special rules for Medicare, Children's Health Insurance Program, Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF) and Child Nutrition programs.
The territory has about $161.6 million in federal grants included in the Fiscal Year 2013 budget. Of that amount, about $34.8 million is exempted from the scheduled spending cuts, according to the report.
After his analysis, Berger estimates about $10 million to $12 million annually will be cut from federal funding in the territory through 2021 - a total of more than $100 million in lost funding.
If cuts to the federal funds are made, the local government will have to find a way to absorb the costs or consider cutting or eliminating certain federal programs or activities, according to Berger's analysis.
Berger said it is difficult to gauge the impact of federal spending cuts to many social aid programs in the territory, including education programs, such as Head Start, Title 1 and special education grants; HIV and cancer screening; immunization programs; substance abuse programs; veterans assistance programs; job training and employment services for recently and long-term unemployed workers and dislocated worker programs; child care subsidies for working parents; and adjustments to entitlements programs, including Social Security, Medicare and Medicaid.
The territory's federal rum excise tax will not be affected by the spending cuts, nor will the majority of Department of Interior grants and programs in the territory, according to Berger.
The other major aspect of the "fiscal cliff" is a set of expiring tax cuts.
Berger said one of the taxes that will affect the territory the most is the restoration of the Alternative Minimum Tax income threshold from $74,450 to $45,000.
Berger said the current tax cut affects about 4 million taxpayers nationwide and applies to about one-third of taxpayers in the Virgin Islands.
The employee share of the Social Security payroll tax would revert to 6.2 percent from the current 4.2 percent, and the child tax credit will be reduced by half and will no longer be refundable, he said.
For investors and business owners, capital gains will be taxed higher at 20 percent and dividends will be treated as ordinary income, according to the report.
In addition, new limits on itemized deductions will raise individual and corporate capital gains rates by an additional estimated 1.2 percent, he said.
The marriage penalties for joint filers will increase, and various tax benefits for education, retirement savings and low-income individuals will disappear, Berger said.
Berger said he estimates the territory would collect about $10 million a year in extra tax revenues once the cuts expire.
However, that does not necessarily mean that the spending cuts will be balanced out by increased tax revenues, according to Berger.
From an economic viewpoint, increased income taxes can reduce overall tax collections as reduced disposable income lowers personal and business consumption - negating the tax revenue increase received from the expiring tax cuts, Berger said.
Higher taxes can also lead to taxpayer noncompliance, he said.
Gov. John DeJongh Jr. said in a statement released Thursday, that despite the dire predictions, he is confident federal lawmakers will make a deal to avoid an unnecessary economic blow to the entire nation and to the territory.
- Contact reporter Aldeth Lewin at 714-9111 or email email@example.com.