The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The initial 15 per cent Value-Added Tax (VAT) would have “eliminated” 9,000 Bahamian jobs and caused a $380 million drop in tourism sales in 2015, an industry study estimated.

The Ernst & Young accounting firm’s report on the likely economic impact from the Government’s first VAT proposal suggests that it could have resulted in potentially catastrophic consequences for Bahamian society, with the effects felt by almost everyone.

The study, conducted for the Bahamian hotel/tourism industry and obtained by Tribune Business, said the net tax burden on the sector would have increased by $320 million next year.

This was based on the combined ‘direct and indirect’ impact from a 15 per cent VAT and changes to the existing tax system. Ernst & Young based its findings on the lower 10 per cent rate that the hotel industry would have paid, plus the elimination of the 10 per cent hotel occupancy tax.

Parts of the accounting firm’s study, namely that a 15 per cent VAT would have increased tourism prices by 9 per cent and caused an 11 per cent drop in tourism consumption, have already been made public. What has not, until now, is the dollars and cents impact.

“As tourists respond to increased prices resulting from the VAT, they would reduce the number of visits and consume fewer goods and services in the Bahamas. The analysis estimates that this response would reduce tourism sales by $380 million in 2015 levels,” Ernst & Young said of a 15 per cent VAT.

“A $380 million reduction in tourism sales in 2015 would result in the elimination of 9,000 tourism and related jobs across the Bahamian economy.

“It would result in a loss of nearly 4,700 direct tourism sector jobs, relative to the baseline in 2015 (11 per cent reduction). The total domestic job loss would increase to 9,000 jobs when considering jobs supported by the tourism industry’s supply chain and employee spending (the ‘multiplier’ effect).

“By 2017, the economy-wide job loss would increase to nearly 13,200 jobs, of which 6,800 would be from within the tourism industry.”

Looking to the medium -term implications of a 15 per cent VAT, Ernst & Young added: “By 2017, the Government’s proposed VAT would reduce tourism’s contribution to GDP by more than $350 million (or 15 per cent).

“Under current law, tourism’s contribution to GDP (the most comprehensive measure of the industry’s current economic activity) would reach an estimated $2.3 billion in 2017. The imposition of the proposed VAT would reduce tourism sector GDP by $353 million by 2017.”

The accounting firm also projected: “The three-year cumulative loss in GDP (2015-2017) from the impact of the Government’s proposed VAT on the tourism industry is an estimated $890 million, relative to current [tax system].

“Over the three-year period, the tourism industry is estimated to contribute a total of $6.5 billion to GDP under current-law [tax system] growth projections.

“If the Government’s proposed VAT is enacted, the tourism industry would produce a total of nearly $5.7 billion of GDP in three years.”

The Ernst & Young report’s findings likely weighed heavily on the Government’s decision to drastically alter its VAT proposal at the last minute.

The study was presented to Prime Minister Perry Christie on May 21, just eight days before the Budget was unveiled in the House of Assembly. Its findings, together with those by the Coalition for Responsible Taxation, the New Zealand consultants and the Government’s own US advisers, Compass Lexecon, all recommending a lower rate VAT, appear to have been instrumental in persuading the Christie administration to accept a radically revised 7.5 per cent rate with few exemptions.

In their letter to the Prime Minister, the Tourism Industry Partners Group warned that a 15 per cent VAT would cause a $363 million drop in tourist spending, together with a $340 million drop in tourism’s GDP contribution by 2016.

The Group said the Bahamian hotel and tourism industry “faces unprecedented cost competitive challenges”, with the Ernst & Young study “validating” these fears.

Not that a 7.5 per cent VAT rate will exactly be benign for the sector. The Ernst & Young study modelled the impact of a 7.5 per cent rate on the industry, together with a 0.75 per cent employer payroll tax and 15 per cent VAT on the rest of the economy.

While not a direct like-for-like comparison with the Government’s revised 7.5 per cent VAT plan, the accounting firm projected that its model would result in a $117 million increase in net new taxes paid by the tourism industry.

Under the 7.5 per cent VAT model employed by Ernst & Young, tourism prices between 2015-2017 rose by 4.2 per cent, rather than 9.2 per cent, each year.

This still resulted in a decline in tourism sales, but only by $172 million compared to $380 million in 2015, and by $250 million as opposed to $554 million come 2017.

And, when it came to tourism’s GDP contribution, the 7.5 per cent VAT model employed by Ernst & Young said this would drop by $110 million in 2015, compared to $242 million at 15 per cent, and by $159 million compared to $353 million in 2017.

Jobs, though, would still be lost. Ernst & Young’s version estimated that 2,000 direct jobs could go under a 7.5 per cent VAT in 2015, as opposed to 4,700 at 15 per cent, with this figure increasing to 2,900 as opposed to 6,800 come 2017.