The rising cost of living on Guam

 

Economists weigh the net effects of federal tax cuts vs Guam's tax hikes 

 

 

Starting Oct. 1, you will fork out an extra 76 cents for a 50-lb. bag of jasmine rice regularly priced at $37.99. You will pay an additional 20 cents for a $10 container of GAIN detergent. For $100 worth of groceries per trip, you will have to pay an extra $2 you can’t avoid — courtesy of the 2 percent sales tax, which accompanied the business privilege tax increase from 4 percent to 5 percent, which runs from April 1 to Sept. 30.

 

   The BPT hike and the new 2 percent sales tax are on top of the 4-cent incremental increase in liquid fuel tax, which went into effect in January— a threefold blow to taxpayers and consumers.

 

   “For those making more money, that may be a drop in the bucket. But for ordinary people like me, every cent matters,” said Adoracion Manibusan, a resident of Dededo.

 

    Manibusan makes $30,000 a year as an accountant. “To be able to make that amount, I have to take a lot of overtime work and do some freelance work besides my fulltime job,” she said. “Now with this sales tax, that’s an added overhead. I will have to adjust my budget and I will definitely be spending less.”

 

   Guam economists have yet to quantify the true impact of the BPT increase and the new sales tax on the economy, but the pain they inflict on everyone’s pocket book is felt immediately. According to the Guam Bureau of Statistics and Plans’ latest CPI report, overall prices went up 2.8 percent during the first quarter of 2018 compared to the same quarter last year, with the biggest increases in electricity (8.3 percent) and motor fuel (8.6 percent). The dollar’s purchasing power has shrunk to 53 cents compared to its 1996 value.

 

   “A tax increase will likely lead to higher prices of many goods and services in our economy,” said Dr. Maria Claret Ruane, professor of economics at the University of Guam. “We already saw fuel prices on the rise during this year alone, partly due to higher liquid fuel tax, but expecting further price increases in the world market as OPEC members look reduce oil supply to boost prices.”

 

 

   Ruane noted that inflation has been kept at bay since 2009, except for a 6 percent inflation rate in 2016 partly due to fee increases at Guam Memorial Hospital. But this year, she foresees bigger inflation ahead.

 

   The enactment of the law that raised the BPT and levies the sales tax was aimed at filling the $67 million revenue hole created by the Federal Tax Cuts and Jobs Act of 2017, which went into effect in January.

 

    “We knew from two years ago that tax collections would be reduced if then-candidate Trump became president and the Trump income tax reform passes,” Ruane said. “Although we could not calculate the expected tax revenue loss to GovGuam—for my own reference, I used the conservative estimate of $100 million —we had up to two years during which we expected that this scenario could happen. Anticipating lower tax collections, GovGuam should have looked for options, including finding ways to match these lower tax collections with lower expenses.”

 

   The federal tax reform reduces the federal corporate tax rate from 35 percent to 21 percent and allows full expensing for business investment in equipment. For withholding tax, the top rate bracket sees a slash from 39.6 percent to 37 percent.

 

   At this point, it is too early to know the effect of the tax cuts,” Public Auditor Doris Flores Brooks said at the Tax Forum hosted March 9 by the Guam Chamber of Commerce. “We need to give it some time to take its course.”

 

   Although local taxpayers don’t pay federal tax, the Guam tax structure mirrors the Internal Revenue Service code.

 

   Gary Hiles, an economist at the Guam Department of Labor, said the withholding tax cut means bigger take-home pay and more disposable income. However, he noted that the amount of savings that the American taxpayers realize is not the same for Guam. An average taxpayer in the U.S. mainland makes an average of $40,000 to $50,000 a year. Based on that figure, Hiles estimated that an average taxpayer takes home $38 per paycheck. “We have lower income levels on Guam, so the savings are smaller,” he said at the Tax Forum.

 

   According to the Bureau of Labor and Statistics, the annual mean salary on Guam in 2016 was $34,777.

 

Guam’s economy has never grown rapidly in the past 10 years, Ruane said. “So, a slight increase or decrease could mean a difference between a positive growth rate and a negative one.”

 

 

As for the corporate tax cut, Hiles said, local corporations will inject their savings into the local economy. But this projection does not necessarily apply to foreign corporations that operate on Guam. “Their tax savings will be withdrawn from the Guam economy and used for other purposes elsewhere,” he said.

 

     Ruane said weighing the net effect of savings from federal tax cuts and higher taxes on Guam can be tricky. “Consequently, someone will pay these higher taxes,” she said. “Tentatively, local businesses might absorb them as they charge the same prices while having to remit additional taxes to Rev&Tax. Over time, more and more businesses will pass these higher taxes on to consumers in terms of higher prices.”

 

   For businesses, Ruane said, the “simplest” approach to cover the additional cost resulting from the BPT increase would be to raise their product prices by 1 percent across the board. “This would work for now — until their suppliers raise prices,” she said. In which case, Ruane added, another round of price increases on products are likely to follow.

 

    “The question becomes whether the net effect —lower spending due to the higher BPT and sales tax vs. the higher spending made possible by additional after-tax incomes resulting from lower income taxes — will favor a slightly increased economy or a slightly decreased economy,” Ruane said. “Basic economics tells you that as prices of products increase, consumers will buy less of them, business will sell less of them, businesses will need less employees to operate. Ultimately, the economy slows down.”

 

   Guam’s economy has never grown rapidly in the past 10 years, Ruane said. “So, a slight increase or decrease could mean a difference between a positive growth rate and a negative one.”

 

   Guam’s real GDP, according to the Bureau of Economic Analysis, was valued at $4.685 billion in 2007, $4.887 billion in 2011 and $5.2 billion in 2016. “These show an average growth rate of 1 percent per year during a period when our tourism was breaking records. Admittedly this is better than a no-growth economy,” Ruane said. “However, a 1 percent growth does not leave much room to absorb the reduced overall tourist spending that has been happening as visitor arrivals from Japan continue to decrease, even if the number were made up for by visitors from Korea, as well as the net effect on demand.”

 

    In the end, Ruane said, the overall effect of the lower income taxes and the higher BPT or sales taxes would be difficult to measure because of “opposing” effects. “As people already see additional take-home pay due to the lower income taxes they are expected to pay beginning 2018, they will spend most of it on goods and services at expectedly higher prices, plus a 2 percent sales tax added to it.”

 

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