To the President of the Parliament of Sint Maarten
Drs. Rudolphe E. Samuel
Wilhelminastraat #1
Philipsburg
Sint Maarten
Re: Letter of concern regarding proposals in Draft 2013 Budget for Country St Maarten, specifically TOT
Honorable President Samuel,
In light of the first parliamentary meeting with regards to the 2013 Draft budget as published on your website earlier last week, the SHTA sees it as its duty to shed some perspective and outline the
repercussions of some of the measures outlined in this draft, this letter will deal with the envisioned TOT increases.
In general since its inception as a “temporary emergency measure” in the late 90’s TOT has been a detriment to local businesses. Its very nature incentivizes consumers (both private and commercial) to buy outside the tax zone. The higher TOT the higher this incentive.
Especially in tough economic times these savings can make or break a business and no business can be faulted for not buying locally when GOVERNMENT policy favors outside traders, even though these self-same outside traders do not contribute to the government coffers whatsoever through paying local taxes & licenses, employing locally & paying wages.
The detrimental effect on the economic base of this tax is undeniable. While initially the growth of that tax revenues is notable because the consumer does not react immediately the long-term reaction is on of a decline in tax revenues and an erosion of the economic base as more and more consumers start to look for more affordable options, in effect looking for a way to avoid the price-inflation that was imposed on their goods by their own government, the local companies start losing out same as they can no longer compete with competition that operates outside the scope of the local tax department and that is not burdened by the relatively high cost of doing business on this island nor any of the local taxes.
Their operational costs continue to increase (as the cost of doing business increases) while their revenues continue to decrease eventually leading to closures of the local operation and an increase in unemployment. For a historically relevant example one only needs to recall the 1997 increase (of approx 45%) in import duty on gasoline products.
This move drove the French side importers to start importing by bypassing the Philipsburg harbor and establishment of many a French side (unbranded) gasoline pump. Even when later the same import duty was reduced the damage was already done; direct imports had established themselves and unbranded pumps were there to stay.
And while initially the tax revenues were higher while the entrepreneurs figured out how to import directly, the long term effects on the tax revenues were leveling below the rate that they had before the import duty was increased, in addition to an increase in “onderstand” as more than 100 people lost their jobs.
Thus the 2011 shift from 3% to 5% TOT – a 66% increase instead of a “mere” 45% as in previous example– will also in the longer run turn out to be another erosion of the tax base, leading to not only more
unemployment but also an ever decreasing local private sector.
And while on the surface the initiative on the 2013 draft to increase TOT on Alcohol & Tobacco may appear to – at least on the near term – lead to a balanced 2013 budget ceteris paribus. History has already shown us “all other things will not remain equal”, and the consumer will adjust his purchasing behavior accordingly.
This will result in businesses having to take flanking measures even if that means moving part of their operation outside this tax zone; with all its accompanying consequences for (the Dutch side of St Maarten and) GDP.
The proposal, with increases that are 240% and 800% which in and of itself are draconian in sheer size, is the first step in crippling St Maarten’s competitiveness as the Duty Free Shopping Mecca of the Caribbean. The Dutch side of the island will no longer be able to compete against French Side
Retailers, the Duty Free Sector of neighboring Islands, or Onboard the Retail stores on Cruise Ships. This category, which represents 16% of the tourists on-shore expenditure according to a study by the FCCA (Florida-Caribbean Cruise Association), exists solely due to its competitive nature, once removed the exact same products will be sold by the above-mentioned competitors. This will ultimately reduce tourist spending across the board, and discourage tourists from shopping on Sint Maarten.
The Council of Advice (RvA) has already openly criticized the budget stating it “lacks an elucidation on policy, performance and resources for the seven ministries”, as reported by Today Newspaper on
March 28, 2013 adding that “they missed the ministry’s intended policy for realizing additional revenue through the introduction of legislation for taxing tobacco, alcohol and casinos” The council points out that “establishing the necessary legislation to facilitate the implementation of new taxes will take time and that this will also result in lower than budgeted revenue”.
It remains unclear exactly how and on who the tax is to be levied and “wholesale” and “retail” remain undefined. Without a clear policy this draft singles out a particular business sector for undue hardship by “raising retail TOT on alcohol and tobacco products”; but also opens the door to; when the need to balance another budget looms, target other sector on an ad hoc basis (electronics, jewelry, hotels, accountants or contractors, it could be anything) and without an overall view as to the implications for the local economy.
At the same time the same draft budget proposes to cut out a significant amount of funding (20.9%) for the one sector most important to our economy, namely Tourism, and the one sector that in effect
pays for the public budget. So the sector in effect receives a double blow.
In a nutshell:
1. As with previous TOT hikes, Alcohol and tobacco will get much more expensive on St Maarten.
2. Consumers will look for cheaper sources, be it the French Side, Off island, Duty Free zones, On cruise ships etc.
3. Business in the wholesale and retail of alcohol and tobacco will drop considerably.
4. Employment in these sectors will drop considerably
5. Business services to this sector will drop considerably
6. GDP will drop, especially private sector contributions to GDP
7. Government revenue will drop
8. Unemployment will increase
9. Demands on social services, welfare will increase
10. Problems particular to high unemployment will increase, i.e. crime and the cost of justice.
Successive Executive Councils and Ministries have promised to tackle our tax structure but have yet to do so. The current budget now attempts to set TOT rates for another 5 years, not inspiring much confidence that the tax system structure is to be changed in the near future either, lack of actions from which foreign investors and the private sector will draw their own conclusions that will impact their plans for the local operations.
We respectfully request that you consider these suggestions during this difficult economic period. Growing the government budget without stimulating the economy and broadening the tax payer base,
while increasing taxes on the other hand will only have a negative impact on the overall economic picture of the island.
Fact is if the present draft budget passes, more businesses will cease to exist. Fact is that they will have been put out of business by their democratically elected representatives.
We urgently call upon our leaders and urge them to be attentive to the irreversible damage this decision would ultimately have on our country.
We trust to have informed you sufficiently herewith.
Should you require any additional information after reading the above, please feel free to contact us at your earliest convenience.
Respectfully,
Emil Lee
President
St. Maarten Hospitality & Trade Association
