‘Abandon the proposed HB 18-169’

Dear Members of Legislature: I would like to thank you for providing me a draft of House Bill 18-169 and your interest in my opinion of it. Being member of the CNMI and Saipan tour industry for more than a decade, I would like to share with you my thoughts about HB 18-69. The bill seeks to assess a Special Environmental Management Impact Tax on all tour packages and to reserve the funds collected from the tax for the Marianas Visitors Authority.
Paragraph 1 states that the “Legislature find that tourism provides major development opportunity on Commonwealth of Northern Mariana Islands.” From my experience with tourism, I can say that this business is a very hard one. Big money is spinning in it, but it is very difficult to scoop some money from this great stream of cash because of cutthroat competition and the war of prices. There are some countries like Spain, Italy, Bulgaria, and Czech Republic that have massive tourism industries that produce great input into their national gross domestic product. Tourism in these countries helps to sell nationally produced food and beverages and other products, which provides a great train of positive effect on other domestic industries. I would call it the Tourism of the First Kind. I cannot say that CNMI tourism falls under this definition. It is based on imported finance, labor, food, and shopping items. Therefore, CNMI tourism cannot provide that train of positive effects on the local economy.

It is a pity that the Legislature does not see any other opportunities for local economic development, but instead drives away investors and people with ideas. People who’ve lived and worked on Saipan much longer than I have told me stories about investors who came with propositions to modify the local energy system or set up some business other than tourism and they were chased away. This disturbs me that you, legislators, do not see any opportunity for economic development except tourism and casino. Those industries are great supplements for any national economy, but due to high volatility and dependence on a great number of factors (such as wars, epidemics, natural disasters etc, which not one government can control) they cannot be the backbone of a sustainable economy.

Paragraph 1 further states that intent of the bill is to “impose an impact tax” for the maintenance, protection, and preservation of tourist sites. In addition, there is a need to assist MVA to promote the CNMI “as a prime tourist destination. I would like to point out that the Legislature has already burdened the local tourism industry with a $15 per head fee (the solemn purpose of which was to assist MVA) and increased the room sale tax by up to 15 percent, which makes the CNMI hotel tax the highest in the entire Micronesia (room sale tax in Guam, 11 percent; Palau, 10 percent; Yap, 10 percent; Chuuk, 10 percent). Faced with the highest power rates in the region and a looming minimum wage hike, the CNMI tourism industry already operates under very unfavorable conditions. I already mentioned the cutthroat competition in the global tourism market and there are no prisoners in this battle.

CNMI tourism is already pushed against the wall. Now it will be made to endure another handicap in the form of an additional 10 percent tax. Let’s refer to math. If a hotel sells a room for $100, the client has to pay $100 + 15 percent = $115. Now the seller has to charge another 10 percent: $115 + 10 percent = $126.50. This is just a net rate. From experience, I know that share of sales via agent is as high as 70 percent and tour agents live on commission. There are bank and other commissions. With a 15-percent room tax, CNMI tourism has to swim with a backpack of rocks. I do not know how it will stay afloat with an additional 10 percent tax.

Beside hotels, the proposed tax will affect every single operator on the tourism market. All tours and all meals will become more expensive overnight. There is a break point in sales: you negotiate a higher price ’til some point when a customer realizes that this negotiated price is out of his league. Then the customer just walks away and he or she will not listen to any offers. Such a customer is lost for the seller. I am afraid that, with the proposed 10 percent tax, CNMI tourism will reach that break point.

Another question is why the proposed tax has to be imposed? All subjects of the tourism industry pay taxes already. However, this is true with regards to legal operators only. Illegal operators will benefit from the prospective tax because their competitors will have to raise their rates. And those illegal operators do not pay any taxes at all. We are talking about private operators and whole sectors of the local tourism market. Saipan Tribune published the letter of one young gentleman about practices of the Korean market. I myself shared the information about illegal activity of a particular agency during discussions at the Legislature. It was one year ago. To this date there is no reaction from any local or federal agency and said illegal tour agency continues its business. Maybe the Legislature should turn its attention to this issue instead of increasing taxation. This will legalize a cash flow that currently stays under the radar. Otherwise, the lack of action by official agencies can motivate legal operators to follow the example of illegal ones.

HB 18-169’s expressed concern about the environment is a right one. Saipan beaches and roadsides are littered. Some time ago policy makers implemented penalties for beach littering. Later it was scrapped “because the local population could not afford to pay the penalty.” This is strange because the purpose of any penalty is to make breaking of rules prohibitive, expensive. Now the whole tourism industry has to pay for beach maintenance. I think Saipan and other islands’ environments need attention. Almost all islands get red-flagged beaches. This problem has been existing for decades and it is not the fault of the tourism industry. Significant financial effort is required to solve this problem. With no regards to a tax scale, required funds have to be accumulated through a period of time. I am afraid that the proposed environment maintenance fund will be “reprogrammed”; we all witnessed such maneuvers previously.

As for the assistance to MVA and the great benefit of CNMI promotion to local operators, I would like to say that nobody could explain the exact reasons for the growth that local tourism is experiencing in the last two years. Probably contributing to the growth factors are lack of epidemics, natural disasters and wars in Asia and relative stable finances. Local tourism suffered from such factors a few years in a row. Those factors can be classified as macro-factors and their scope is way beyond the CNMI’s control. Currently, local tourism has reached its physical capacity. No matter how hard and actively we promote the CNMI, we cannot accommodate the current demand. Active promotion that is not backed by a real capacity can diminish the CNMI’s credibility. I think the current task for MVA marketing is to maintain the CNMI’s presence in the market. With the growth of capacity, the marketing can be intensified.

Based on these matters, I would like to ask the honorable ladies and gentlemen of the Legislature to abandon the proposed H.B. 18-169. As an alternative, it could be more effective to produce laws and rules to regulate and certificate the local tourism. In case of any questions, I can be contacted via e-mail: belkatours@pticom.com.

Alexander Vekhov
Owner/general manager
Sasha Co., Ltd.