The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minster has warned that Dr Hubert Minnis’s Over-the-Hill tax break plan “may come back to bite”, as the main beneficiaries will be “wealthy absentee landlords”.

James Smith, also an ex-Central Bank governor, suggested that Dr Minnis’s proposals would not benefit Over-the-Hill residents and Bahamians who needed them most.

“In the inner city, for the most part you have absentee landlords,” he told Tribune Business. “You’d not be handing it to people who live there; for the most part you’d be handing it to wealthy property owners.

“That’s the unintended consequences. I’m sure your heart is in the right place, but if those programmes being proposed are not managed properly, they may come back to bite you.”

Dr Minnis has made tax exemptions a central theme of his, and the FNM’s, election campaign, promising to remove Value-Added Tax (VAT) from key products, utilities and services, while also introducing a menu of concessions for businesses and residents in inner-city areas.

The VAT-related ‘exemptions’ are billed as reducing living costs for middle and lower income Bahamians, with Dr Minnis describing the latter set of tax breaks as key to his strategy of revitalising ‘Over-the-Hill’ areas.

The Over-the-Hill tax breaks an FNM government would implement include the duty-free importation of construction materials for residential and commercial properties; no Business License fees or real property taxes; no taxes on household furniture; no taxes on capital goods and business equipment “after proper vetting”; and lower import duties on business vehicles.

Mr Smith’s argument is that tax breaks such as real property tax exemptions would benefit landlords and property owners who least need the concessions, rather than low income residents.

His concerns add to those expressed by others, such as businessman Sir Franklyn Wilson, who suggested that the Government instead seize abandoned Over-the-Hill properties, tied up in family issues and probate problems, for its low income housing programme,

Dr Minnis’s strategy appears to have been borrowed from the late US president, Ronald Reagan, who employed tax-free areas, known as Economic Enterprise Zones (EEZs), in a bid to attract businesses to revitalise depressed American inner-cities in the 1980s.

However, monitoring these ‘tax breaks’ to prevent fraud and evasion by those not entitled to them is likely to present difficulties for the Customs Department and other relevant agencies.

Family members living outside the ‘inner city’ may seek to evade due taxes by importing furniture through relatives who do live there, for example, with businesses also seeking to employ similar tricks.

Apart from the problems of ‘policing’, further issues relate to who will be eligible to receive such tax breaks, as not all ‘inner-city’ residents are poor or low income. And then there is the question of how to define ‘inner-city’ areas.

Mr Smith also suggested there would be ‘unintended consequences’ involved with Dr Minnis’s plans to ‘exempt’ breadbasket food items, electricity and water bills from the 7.5 per cent VAT levy.

“If you did away with VAT, which sounds good, on those consumer items because they’re consumed by low income households, don’t forget rich people consume the same goods,” he told Tribune Business. “They need to go back and reconsider some of these pronouncements.”

Mr Smith’s point is that such VAT exemptions would benefit higher income persons more than those targeted by Dr Minnis, as they consume greater quantities of these goods.

Besides, industries whose products are treated as VAT ‘exempt’ are unable to recover the 7.5 per cent levy paid on their ‘input’ (factors of production) costs, since they cannot charge the tax to their consumers.

As a result, ‘exempt’ businesses are left to ‘absorb’ the VAT, increasing their costs, which are inevitably passed on to consumers in the form of higher prices. This is another potential consequence of Dr Minnis’s campaign promises.