New Taxes--Who Will Pay How Much?

The Observer, January 11, 1997



he $285.9 million 1997 Federal Budget, which passed the National Assembly on 18 December, included a number of tax increases as well as two tax cuts. The budget involved an increase of some 28% over the 1996 budget. Many people have expressed confusion about how these changes will affect them. The following is an attempt to layout the new taxes and what they mean for citizens and businesses alike.

Tax Increases
The Social Services Levy has been increased from 2% to 3% for both employees and employers (employees earning less than $230.77 weekly or $1,000 monthly are exempted). This means that affected employees will pay an additional 1% of their gross salary in taxes (for example someone with a salary of $1,500 per month would pay an additional $15 monthly in social security tax).

The Travel Tax, which is levied on the cost of tickets involving travel originating in St. Kitts/Nevis, has increased from 7.5% to 10%. This will primarily affect airline and cruise ship travel. (For example, on a roundtrip airline ticket to New York which costs EC$1400, the tax would increase by $35.)

The Wheel Tax and Drivers Licence fees will also rise significantly. The Wheel Tax increase varies from $25 to $80 depending on the type of vehicle. Driver's Licence fees are hiked significantly. A basic licence rises from $30 to $50. A duplicate licence changes from the current cost of $10 to a cost even greater than the original licence ($60). Fees for learner's authorisations, instructor's licences and related fees also rise substantially, with a dealer's licence increasing from $5,000 to $6,000.

The Chamber of Industry and Commerce (CIC) specifically targeted the more than tripling of the fee for a visitor's temporary drivers licence from $30 to $100 for criticism, calling it "an unwise decision at this stage of our tourism development." One car rental company told The Observer that "not only will it affect car rentals," but that several families which had planned to vacation on St. Kitts or Nevis have already changed their plans to visit other Caribbean islands after hearing about this increase.

Dr. Douglas revealed to The Observer that a new category of visitor's licence, good for only three months, would be established at a cost of $40 or $50. He said "we do not believe that this will be a disincentive to the tourist industry," noting that "we have spent millions of dollars improving our roads."

Douglas Richardson, Comptroller Inland Revenue, described "an increase in the rate of Consumption Tax payable in respect of chargeable services from 2.5% to 4%." This is a tax on services which is levied on the gross receipts of businesses. An update on the budget address stated that new businesses would be exempt from the increase for their first three years of operation, being required to pay at the current rate of 2.5% during that period.

A second modification in consumption tax involves "a change in the method of computing the tax on goods imported from overseas." The tax was previously calculated as a percentage of the CIF (Cost, Insurance and Freight). Now the applicable customs duty will also be added. This duty varies depending on the type of goods involved. Most food items (those coming from within CARICOM) will not be affected, while food and other items from outside the region will be taxed at a higher level. The largest increase will be on cars, which are taxed at the highest rate.

"This change is required to ensure that we achieve greater harmonization with the other members of the Caribbean Community," Dr. Douglas told the nation on Monday 16 December. While acknowledging that this change does accomplish the above, the CIC expressed concern about how this will affect the cost of living. They said that "a preliminary review of this measure" shows it will increase the cost of some goods by 5%. Financial Secretary Wendell Lawrence called such a figure an "extreme case." According to his calculations "an overall increase of less than 1% is expected," since food, which is exempted or taxed at a low rate, is such a major expense for most people.

Small businesses will also be hit by an increase in the Traders Tax from 2% to 3%. This tax is on gross sales of businesses which are not incorporated. The first $8,000 in income each month is exempt from taxation.

Fees on licences for various businesses and professional occupations will also be increased.



Tax Cuts

The tax increases outlined above were accompanied by the elimination of two taxes. The $3 monthly Cable TV tax was eliminated, along with duties and taxes on the purchase of personal computers. While the Labour Government consistently champions its role on behalf of "the little people," it is difficult to see how these steps help those truly in need.

Those most in need are likely to live in the 3,750 households without Cable TV. (According to The Cable there are about 8,250 cable subscribers in St. Kitts and Nevis out of a total figure of 12,056.) While encouraging the use of computers may be a valuable step in overall national development, poor people are even less likely to be importing personal computers.

The Prime Minister sees the computer tax exemption as part of a broader effort toward's increased computer literacy, asserting that "by the year 2000 we want every child in the Federation to be computer literate. We believe that education is the only instrument that can break down the class barriers," he said emphatically. He added that government is making a strong effort to attract computer assembly operations to the Industrial Site. If this is successful, computers would become much more affordable.

Moreover, Prime Minister Douglas' emphatic assertion that "a promise is a promise," about the elimination of the duties on computers, rings hollow when one notes that the Labour Manifesto `95 says a Labour Government will "Abolish Insurance, Cable TV, Telephone and Restaurant taxes." (emphasis added) In that same section of their manifesto, Labour asserted that it "is strongly of the view that the existing Tax Regime imposed by the present government constitutes too heavy a burden on the people of this country." On balance, it is difficult to dispute that this year's budget provides for a significant tax increase.

Douglas argues it is better "to be cautious rather than to create deficits." He has made a commitment to the private sector to reduce the corporation tax from 40% to 35% by the year 2000. This year's expected 1% reduction was put off because of economic uncertainties, though he plans for a "2% reduction next year."

"To protect the little man," the newly-created Consumer Protection Agency will guard against unwarranted increases in the cost of food items. Pointing out that price control legislation is designed to prevent increases in the retail cost of foods without justification. Douglas emphasised that these regulations will be enforced and new ones generated if necessary.



Promoting Growth

Critics of the budget assert that nothing in it will promote economic growth. "In a recession new taxes is not the answer," said Leader of the Opposition Hugh Heyliger. "None of the Labour Ministers tried to justify the increase in taxes." He pointed to the lack of capital investment or stimulus to private business to create new jobs, and bemoaned the increases in government personnel. The Chamber stated that the budget "does not identify specific quantifiable measures that would stimulate private sector investment in 1997."

Responding to his critics Douglas noted the announcement that 300 new houses will be built the coming year, a major public works project. A major roads project to resurface the remaining third of the Island Main Road will also create needed jobs. Finally, Douglas reiterated the pledge that two new hotels would begin in the coming year. He stated that a 500 room facility would begin construction in March to the north of the Jack Tar Village. Hotels on the Southeast Peninsula and in "a rural part of St. Kitts" (the Prime Minister refused to be specific on this score) are expected to begin within the year as well.

The Prime Minister maintains that reduced access to international financing requires greater self-sufficiency, and an increase in taxes which he says is temporary. Whether one agrees with him will depend to a great degree on how well one thinks the budget money is being spent.