The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian spending on Florida shopping is at least 60 per cent higher than “healthy” for this economy, a retail entrepreneur yesterday warning that this was “killing jobs” and economic growth.

Elizabeth Covington, owner of the Tommy Hilfiger and his fashion stores, plus Fab Finds and My Favourite Things, estimated that Bahamian and expatriate residents were currently spending $2 billion per year - a sum equivalent to 25 per cent of annual gross domestic product (GDP) - in Florida.

Suggesting that this figure should be closer to 5-10 per cent of the Bahamas’ annual GDP, Mrs Covington, in a series of e-mailed replies to Tribune Business’s questions, said properly-executed tax reform would expand local business volumes and job growth.

Pointing out that the Bahamas’ “outdated” reliance on Customs duties was placing Bahamian retailers, especially high-end ones at a competitive disadvantage, she added that this counterproductive for an economy relying on the services and retail sector for job growth.

Praising the Christie administration for starting discussions on tax reform, via its Value-Added Tax (VAT) proposal, Mrs Covington said this had the potential to ‘level the playing field’ if its introduction coincided with the elimination of Customs duties.

Such a move, she added, would allow Bahamas-based retailer to both tap into the 350,000-strong resident market and five million visitors who were currently put off by the relatively high prices.

However, Mrs Covington added her voice to those warning that the lack of concrete information provided to-date on the Government’s VAT plans had “not inspired confidence or faith in the business community”.

Suggesting that this had created the “opposite” effect, the retail entrepreneur added that many Bahamian businesses were in “a holding pattern”, waiting to see how tax reform would impact their operations and investment decisions.

Focusing on what many Bahamian retailers refer to as the ‘Florida problem’, Mrs Covington said: “Think about this: Our country has a GDP of about $8 billion, and we spend about $2 billion of that in Florida every year.

“That’s 25 per cent of our economy and a massive drain on our foreign reserves. In a healthy situation, that figure would be closer to 5 per cent or 10 per cent of our economy’s GDP, not higher.”

And she added: “Many Bahamian and expat consumers, despite not paying income tax if they work in the Bahamas, complain that prices for personal products are too high. Many of them, not willing or unable to see the bigger picture, then turn around and shop in Florida.

“The cycle then repeats and intensifies, and our economy and job growth stagnate over time as more and more individuals and families follow this pattern of consumption.

“We, as a country, have what retailers in the Bahamas like to refer to as the ‘Florida problem’, and it is killing jobs and stunting the growth potential of our domestic economy. If we revised the tax structure and made it more competitive, the volume of business in the country would expand rapidly, as would job growth.”

Expressing concern over how young Bahamians would find jobs in such an environment, Mrs Covington said it was to the Christie administration’s “credit” that it had started tax reform discussions now.

However, it was only when the economy was “in critical condition” that reform efforts were made.

Describing the current tax and duty structure as the greatest challenge for Bahamian retailers, Mrs Covington said this was being exacerbated by Florida’s proximity and the growth of online shopping.

The problem was especially acute for mid and high-end clothing, footwear and accessories retailers, who typically had to pay 30-45 per cent import duty on their products.

In contrast, Bahamians or expatriate residents were either able to bring such products in duty-free, stuffed at the bottom of suitcases, worn or passed off as clothes they took with them, or use their annual Customs exemption.

“As years go by, fewer and fewer individual consumers pay duty on personal items,” Mrs Covington told Tribune Business.

“This reality favours the Florida market for retail over our own Bahamian market, and it kills the job and growth potential of the domestic retail sector.

“In terms of the country’s economic development, it is a backwards system because we don’t really manufacture much, and we are highly dependant on jobs in the service and retail sector for domestic employment.”

Emphasising that she was not criticising the Customs Department or its staff, Mrs Covington said the existing system was effectively impossible to police, given the difficulty in proving that clothing and footwear items had been purchased abroad.

Customs also had to deal with long airport lines, and Mrs Covington said: “This is the reality of our country’s ‘Florida problem’. Expecting Customs officers to police that and levy taxes on an individual basis is not realistic, so the duties on those items, for retailers in the Bahamas, need to be rationalised to avoid the Florida problem in the first place.

“It’s always better to treat the disease than to try and treat the symptoms. In this case, the disease is high rates of duty, and the symptom is petty smuggling. If prices in the Bahamas are closer to prices in Florida, then Bahamians won’t feel the need to shop abroad for their personal items.

“Such a change would transform our economy because it would empower Bahamians, expats and tourists that are in the country to shop locally with better prices.”

Mrs Covington told Tribune Business that VAT “does have the potential to fix this entire broken system”, provided that import tariffs were removed simultaneously with its implementation.

“If duty is eliminated completely in favour of VAT, then not only would 350,000 Bahamians spend more in retail businesses in the Bahamas, but we would tap into the more than five million tourists that visit our shores every year who don’t really shop here currently because they view prices as being too high,” she said.

“ Do you know what a consumer economy based on the consumption of 5.35 million people would bring in terms of jobs and economic growth?”

She urged the Government to implement VAT in a “transparent and accountable manner”, but warned that the Government had “not inspired confidence or faith in the business community to date with its pronouncements on VAT”.

“It isn’t clear at all what the Government is planning,” Mrs Covington said.

“That lack of clarity means that all businesses are in a holding pattern, because they need to wait to see how the new taxes will be structured in order to make informed investment decisions.

“If VAT is added on top of duty, then taxation will strangle private enterprise in this country. The American recovery is underway. In order to translate that into job growth for the Bahamas, the taxation structure of the Bahamas needs to be settled as soon as possible so that Bahamian businesses have clear investment strategies moving forward and are ready for that recovery. VAT could be the solution, but knowing details is critical.”