Gov’t to lose $10-M under single tax rate

The Department of Finance has projected revenue loss of over $10 million, based on current tax collections, if the government implements a legislative proposal seeking simplified taxation system in the CNMI.

The bill would also mean higher taxes for more than three-fourths of wage earners on the islands as well as over two-thirds of business establishments here, according to Finance Sec. Lucy DLG. Nielsen.

She made this analysis in a written testimony to the House Ways and Means Committee which is reviewing the measure offered by Speaker Benigno R. Fitial.

HB 12-232, otherwise known as the “NMI Tax Reform and Simplification Act of 2000,” seeks to provide a single tax rate under the business gross revenue, wage and salary and earnings tax. It will also increase general business license fee.

Based on the proposal, it will establish a basic two-rate excise tax system — one will impose a duty of one percent for basic necessities and five percent for others — from the much-criticized multi-rate system currently in place.

Designed as initial step toward a flat tax system in the Commonwealth, the legislation will help revamp the current local tax code which has been described by the bill as “complex, inefficient, unfriendly to the creation of new jobs and business, punitive to existing workers and businesses, and unfair in its multiple tax rate structure.”

“[N]otwithstanding the intent of HB 12-232 to simplify, and enhance the fairness and equity of the NMI tax system, we believe that based on available data we have estimated that the CNMI will lose over $10 million under this bill,” Ms. Nielsen said.

Adverse impact

The DOF chief testified to a public hearing called by Ways and Means Committee chair Rep. Antonio M. Camacho the other day as part of the review before recommending action by the lower house.

She said instituting a single rate of five percent for wages and salary or earnings would raise taxes paid by those whose annual salary range between $1,000 to $15,000.

Current law provides for a tiered tax rates of zero to nine percent with the top rate imposed on wages or earnings greater than $50,000.

But 77.8 percent of the total individual taxpayers of 43,822 in 1999 fall between the salary range of $1,000 to $15,000, who will be adversely impacted by the single rate if the proposal becomes law, said Ms. Nielsen.

“This means that those earning under $15,000 will pay more tax for a total amount of about $1.9 million and those earning over $15,000 will pay less tax for a total amount of about $4.8 million,” she added.

Based on last year’s records, the government collected about $27.7 million in wage and salary taxes. Under the proposal, this would translate to $24.7 million or a loss of $3 million for the local coffers, said the finance secretary.

Less BGRT collection

On the proposed single rate of four percent for business gross revenue or BGRT, Ms. Nielsen disclosed this would affect 67.5 percent of businesses on the islands out of the total 3,230 filers.

These are establishments whose gross income amounts to between $10,000 to $500,000 per year, who pay taxes below four percent of the BGRT under the present tiered tax rates of zero to five percent.

The bill would be advantageous to taxpayers whose gross revenue is between $5,000 to $10,000 and those over half a million dollars, Ms. Nielsen said.

“In sum, this change would decrease BGRT taxes to 18.2 percent of CNMI business filers. We estimate that the [government] will lose close to $6 million under this arrangement,” she said.

On proposed change to the excise tax, she estimated the loss at more than a million dollar, while she anticipated a “dramatic decrease” in business license fee revenues should a single license cover all activities and lines per business despite increase in the fee from $50 to $125.

“We would like to suggest that rather than requiring the [DOF] to pay over the $25 share of the license fee to the mayors, it makes better financial control to have such amount deposited into a special account which shall be available for appropriation by the senatorial district,” said Ms. Nielsen.