Guam – On Friday Governor Calvo signed bill 248 into law. The measure increases the business privilege tax or gross receipts tax by25% and creates a new 2% sales tax.
What kind of effect will this have on consumers and on the economy? PNC sat down with UOG Professor of Economics Dr. Roseann Jones to find out.
“Nobody likes a tax; they just don’t like it. They like the freedom of being able to spend what they earn,” said Dr. Jones.
The UOG professor says that there is still a lot that is unknown about how tax increases will affect Guam’s economy.
“But we do know that it doesn’t add economic value or stimulus to the private market when those taxes happen. So there is a down side to taxation, and if it gets too burdensome you can actually stall your private market economic activity,” said Dr. Jones.
“The consumer has to now spend more for what they wanna buy and the producer or the seller would like to increase the price, but they can’t so they’re still getting the same price that they had to pay. And so, neither the seller nor the buyer are better off for this tax and so it actually leaves the market place and comes into the government. So, there is this dead weight loss of economic activity it’s kind of a draining of monies out of the free market into the government. I think there’s always a fear that government will get used to this and then continue to grow government and then come back again for the next increase and then the next increase,” said Dr. Jones.
However, Dr. Jones says taxes are necessary in order to run a government. The issue is determining how much to tax to fund the government without over burdening the economy. Dr. Jones says there are some potential positive effects of these tax increases at least in the short term.
“So, there’s kind of this—in economic terms a stocking up effect so we actually see maybe in the short run a bit of a stimulus that people start going and buying things that they know aren’t perishable and will last a while and so okay now’s the time to buy before this tax goes in,” said Dr. Jones.
On April first the business privilege tax also known as the gross receipts tax will go from 4% to 5%. This increase will last until the end of this fiscal year: September 30. Then, the BPT will revert to 4%. A replacement 2% sales tax will kick in on October 1st or the beginning of the next fiscal year. Dr. Jones says this 2% sales tax is on the low end of sales taxes nationwide.
“They can have upwards of 6, 7, 8 percent sales tax and it’s a tax on consumption. So, in some sense what they’re trying to do is say well this is a discretionary kind of tax and you can avoid it by not consuming so much,” said Dr. Jones.
However, Dr. Jones says this sales tax will probably be easier for those with higher incomes to swallow.
“While perhaps upper income levels can avoid some of the tax by doing without or it doesn’t take as much money you know 2 percent is not that much money to a high income household but it begins to add up to lower income households,” said Dr. Jones.
The UOG Professor says those on food stamps or the SNAP program will have to pay the sales tax out of pocket.
“The food stamp program the SNAP program does not compensate for a sales tax,” said Dr. Jones.
Dr. Jones says a lot of the other potential effects are still unknown at this time like whether there will be a decline in spending by tourists or how much the tax will affect consumer spending especially for those with lower incomes.