Too little or too much?
During last week, landowners across the island started to receive their demand notices for the new Municipal Solid Waste Tax, and after ten months were able to quantify and confirm the additional tax burden they have again been called upon to bear.
Prime Minister Stuart said the following to the media this week: “Perhaps one of the unfortunate features of this tax is the timing of it. It comes at a time when the country is passing through other challenges and people are not disaggregating these challenges and separating out particular measures on their own merits.”
Purpose of tax. As a developing nation, there are several aspects of our society, economy and physical surroundings that should demand our attention and be given the requisite funding to further our journey towards developed status. For a small island state like Barbados, with its population density and scarce land resources, environmental management is indeed one such critical aspect. Solid waste management is a significant component of the environment and has created and posed several challenges for our Government and people over the last decade or more.
The Sanitation Service Authority (SSA) is currently utilizing the last available cell of the current landfill, and matters relating to tyre, metal and bottle disposal remain a serious challenge to date. With no other landfill zone designated, the creation of a waste to energy plant to reduce the volume of waste requiring landfill treatment has been sanctioned and approved by Government, which will also provide revenue once fully operational.
The Solid Waste Tax is therefore intended to fund the necessary investments and operational costs from the Government side to bring all of these solid waste treatment and disposal challenges under control in the short to medium term.
Financing of statutory entities. As Government attempts to bring some semblance of order to its overall finances, the operations of all statutory bodies are being reviewed with a view to improving efficiency, effectiveness, increasing revenue-generating capacity and most importantly reducing the level of transfers and subsidies. The target reduction for transfers to SSA operations has been previously stated as $30 million.
The Minister of Finance also highlighted the $30 million incurred to facilitate the activation of the final cell of the existing landfill. So, once again this tax appears logical and justifiable.
Other considerations. Having established relative merit on the above points, I now turn my attention to the timing of implementation and other considerations. The challenges in respect of timing are:
1. Taxpayers within the last two years have taken on increased tax burdens (VAT, NIS, consolidated tax) and loss of allowances that have resulted in a reduction in disposable household incomes, in the midst of a rising cost of living;
2. Other increases in the cost of living (food costs; new University of the West Indies fees);
3. Implementation comes at a time of rising unemployment and of salary levels which have been largely unchanged over the past three years;
4. Payment due dates are very close to the standard due dates for regular land tax remittances and in effect overlap, potentially creating a cash flow challenge for households.
For many taxpayers undue hardship will be created for the following reasons:
1. This tax is linked to the value of an investment made and one that will increase with time, as opposed to being a tax linked to earnings as is the case with the consolidation tax, and the tax treatment of allowances. The amount payable could therefore increase annually;
2. Taxpayers can own land with a value that is out of sync with their current earnings and ability to pay; this includes pensioners and persons receiving welfare assistance.
Issue of waivers and refunds. Section 5, of the Municipal Solid Waste Tax Act 2014 allows the Minister of Finance to remit or refund the tax to persons who have been able to demonstrate cases of undue hardship, but does not allow for waivers or any other such reprieve. The wording of the section also suggests that payment, as due and demanded, must be honoured and the taxpayer must then await the outcome of the assessment of “undue hardship”.
The act, however, to my knowledge, does not outline the criteria for assessing or determining undue hardship and this, I fear, will lead to yet another slippery slope.
I have previously stated my support for a restriction on the ability of ministers to grant discretionary waivers, but I firmly believe that this and other legislation should provide for certain legitimate categories of individuals or businesses to be exempt.
In its Article IV Consultation Report and in its recent review of our tax system the International Monetary Fund has lamented the level of tax allowances, rebates, exemptions and waivers that exist; so I have little hope at this point for any amendment or repealing of the act in this regard.
The economic policy challenge. The harsh reality is that the creation and execution of economic policy are nothing less than significant challenges for small island developing states like ours. Firstly, the inherent nature of economic theory often calls for a fragile balance between fiscal and monetary policy and, secondly, consideration must be given to all of the factors (firms, households, employment, inflation, and so on) that must necessarily influence economic policy and its outcomes.
In the midst of a recession, therefore, where unemployment is likely high and growing, investment –– both public and private –– is declining, and Government revenues too are declining, the revenue/tax component of the fiscal policy will be the easiest to adjust, even if with diminishing returns.
But can there be too much taxation in an economy, especially during recessionary periods? In my opinion –– yes!
Our Government’s need for additional revenue to close its fiscal deficit and to facilitate project investments cannot be at the cost of significant burdens on household incomes in the midst of rising unemployment. So yes, too much tax can be damaging to the economy as it lowers demand for and consumption of services, which then leads to further contraction and withholding of investment by the private sector.
In summary. While I support the intent of the Municipal Solid Waste Tax, in dealing with our waste management issues, I fear the disparity between taxpayers, based simply on their site values. And I believe that our solid waste management programme must be more comprehensive, starting at the source of the generation of waste, and incorporating recycling policies.
Our problems were not created overnight and therefore cannot be solved overnight, without significant burden to taxpayers; and this should guide us in our decision making.
Next week, I will examine the approach employed by one North American state and how a similar procedure could reduce the potential cost of our current challenge.
(David Simpson is Immediate past president of ICAB and a director of the Barbados Entrepreneurship Foundation (BEF), and serves as co-champion of its finance pillar.)