Cratered FY19 operations budget still 22% short

Appropriations Chairman and Legislative Speaker BJ Cruz listens to open testimony on Bill No. 315-34 (COR), a measure to increase Guam's Business Privilege Tax from 5% to 5.5%. Cruz and his Appropriations Committee hosted a public hearing on this legislation and on Bill 314-34 (COR) on Monday night at the Guam Congress Building in Hagatna. Bill 314 seeks to raise the local Hotel Occupancy Tax from 11% to 15%. Both measures were introduced by Cruz himself and are aimed at helping close an estimated $145 budget deficit approaching FY19.

New taxes or deeper cuts?

Walls close in on GovGuam’s underfunded spending plan

Guam – A demand and a question are rolled into one as the Guam Legislature, Calvo Administration, and private sector jockey for a solution to the island’s FY19 budget crisis. The demand is for a large cash infusion into the Government of Guam. The question is whether the bitter pill of tax raises can be made palatable enough to choke down before the next fiscal year—a year out of which the Trump Tax Cuts  are projected to take a $120 million to $160 million bite.

The public was invited to share testimony on Monday night on two bills to help GovGuam stop the bleeding. They are as follows:

Bill No. 314-34 (COR) would increase the Hotel Occupancy Tax from 11% to 15%.

Bill no. 315-34 (COR) would increase the Business Privilege Tax from 5% to 5.5%.

Both measures were introduced by Legislative Speaker and Appropriations Chairman Benjamin J.F. Cruz, who also called the public hearing at the Guam Congress Building in Hagatna. PNC will cover testimony on those bills in a separate report, but suffice it to say that neither Guam Visitors Bureau, nor Guam Hotel & Restaurant Association favors either piece of legislation.

An industry weighs in

A release issued by the GHRA on Monday evening suggests the island could lose hundreds of millions of dollars in visitor spending as a result of the tax increases.

“The Guam Visitors Bureau recently conducted an ‘Economic Impact to Guam Tourism of Tax Increases’ with Tourism Economics,” the release reads.

“Some key findings included:

– “A combined increase to the Hotel Occupancy Tax and Business Privilege Tax could cause Guam to lose approximately $201.1 to $525.4 million in visitor spending over its first five years of implementation. This represents the loss of 2.9% to 7.5% of visitor spending on a stabilized year basis.

– “The loss of visitor spending will lead to a decrease of $40.3 million to $105.4 million of total wages and salaries for local residents. On average, 200 to 523 fewer jobs will be supported by Guam’s visitor economy.

-“Due to decreased visitor spending, Guam is estimated to realize a loss of between $23.4 million and $59.1 million of tax revenues over the first five years , excluding the impact of the tax revenue that would be generated as a result of the tax increases.”

So the visitor industry aims to protect the profitability, viability, and regional competitiveness of Guam tourism by fighting tax increases. Meanwhile, lawmakers may be especially gun shy about revenue enhancements in an election year haunted by a progressive liquid fuel tax and a new sales tax that a majority of senators now want off the books before the start of the next fiscal year, which lands just a month and five days before this year’s general election.

Sales tax repeal still likely

Outgoing governor Eddie Calvo’s sales tax repeal veto last Friday was in defense of a bottom line that a majority of senators say should not be borne on the backs of the poor and working class at the price of a two percent levy on most goods and services, with a few possible exemptions. Especially since it’s been revealed that the Department of Revenue and Taxation had failed to collect tens of millions of dollars in due revenue, and had failed, too, to recruit at least 40 approved hires in the midst of accruing tax debts.

How to stanch the hemorrhaging?

If the Calvo Tenorio Administration’s most conservative budget request sticks, then Guam budget planners are still looking at a bare minimum need for $672 million necessary to meet Fiscal Year 2019’s General Fund Revenue for Operations, according to Cruz. And that bare minimum figure is after $125 million is already set aside to cover the cost of annual tax refunds.

“I need revenue to run this government, and $672 [million] is the absolute minimum that is going to be able to keep everything – warm bodies in place at Adelup, that they’ve had,” Cruz said to Newstalk K57 morning radio host Patti Arroyo on Monday.

“If we cut back any further, it’ll mean the people are going to have to go back to their banks and try to renegotiate their mortgages that were all built on the new CWA [Competitive Wage Act] salaries.”

Since President Trump’s Federal Tax Cuts and Jobs Act blew a gaping hole in Guam’s FY19 revenue forecast, the chips are down by approximately $145 million, according to Cruz’s figuring, due to federal cuts in corporate and income tax rates, as well as the revenue-negative effects of federal tax exemptions.

Cruz’s calculations suggest a 22% operations budget shortfall, so now the legislature is entertaining public testimony on the dire need to repair the damage, either through higher local taxes or painful cuts to GovGuam spending.

Chairman Cruz wants backup plans on the legislative agenda, whether the vetoed two percent sales tax survives an override attempt or not. That attempt is now slated for nine o’clock Tuesday morning. Cruz voted for the sales tax and against the repeal, even after several of his once pro-sales tax colleagues turned pro-repeal. But now even Cruz is having second thoughts.

“I may be reconsidering my vote, because I’m just wondering whether or not Revenue and Taxation is capable of implementing it in time,” Cruz said on K57.

The next question may be whether businesses can absorb any given local tax increase and still come out ahead after enjoying federal tax cut windfalls.

Cruz says Bills 314 and 315 would together spell $105 million in new revenue.

Objections noted

But Guam Visitors Bureau President and CEO Nathan Denight has already stated that raising hotel taxes on visitors would make Guam less competitive in the region. And that would mean fewer visitors to pay hotel taxes, anyway.

On the wings of Monday morning’s announcement that United Airlines is adding four more flights per week, between Guam and Nagoya, Japan, Guam Hotel & Restaurant Association was saying increases to Business Privilege and Hotel Occupancy Taxes could cost Guam hundreds of millions of dollars in visitor spending, right when visitor numbers are rebounding.

“You have to remember where we were last year,” Mary Rhodes told K57 midday host Andrea Pellicani on Monday.

“Last year we saw the exit, right, being announced with Delta Airlines, and then even United Airlines made some announcements and changes to not just routes but type of carrier, type of plane that leaves Japan and how many exit departures that they fly out of.”

Hope for relief

After vetoing what’s been called a veto-proof sales tax repeal bill on Friday, Gov. Calvo implored senators again on Monday morning to find an alternative if they don’t want the sales tax.

“At this point, I can only pray that the speaker can bring reason to the Legislature as they debate a budget for the upcoming fiscal year,” Calvo said in a press release. “I pray the budget they have allows the executive and judicial branches the ability to operate and provide services to our community.

Speaker Cruz is only one of four senators who voted against the repeal, but his support for the sales tax is waning on grounds that the Dept. of Revenue and Taxation won’t have the wherewithal to ramp up and enforce a new tax in time for the start of the next fiscal year, within two and a half months.

Cruz has called an emergency session for 9:00 a.m. Tuesday, in order to entertain the anticipated veto override for the sales tax rollback, before it kicks in October 1. Should enough senators have an unexpected change of heart and sustain the governor’s veto, they and their colleagues will need time to hash out sales tax exemption bills that hinge on the durability of the sales tax, and Rev and Tax will require sufficient time to issue new paperwork and train merchants to charge, collect, and pay the tax by the first day of the new fiscal year.