CNMI protests new federal tax law

The CNMI government is protesting a newly enacted federal tax law, warning that it poses grave risk to the fiscal self-sufficiency of the Commonwealth.

Gov. Juan N. Babauta said that the American Jobs Creation Act of 2004 or Public Law 108-357, which changes the definition of “residency,” would result in the CNMI losing revenues “in the millions.”

The law, he said, allows individuals now paying taxes to the CNMI to have a tax liability instead with the U.S. government.

Further, he said the law would convert the CNMI and other insular areas and their residents “into a source of revenue for the federal government—a relationship that could be characterized as colonial in nature.”

He made these comments in a December 2004 letter to Department of the Interior Secretary Gale Norton.

“Although the full extent of this shift in tax liability is difficult to estimate, given the limited fiscal resources available to the Commonwealth, any diminution in these resources must be protested,” said Babauta.

He noted that Section 701 of the CNMI-U.S. Covenant recognizes the essential link between self-government and fiscal resources.

Further, Section 703 (b) of the Covenant commits all federal income taxes derived from the CNMI and all other taxes levied on the inhabitants of the CNMI to the Commonwealth Treasury.

Although these provisions are not specifically protected from amendment by mutual consent of both parties, “certainly because of their essential relationship to the right of self-governance, they cannot be changed without breach of the overarching spirit of the Covenant,” said Babauta.

In fact, he said, Section 908 of the new federal law would reverse the longstanding “supportive benevolence” that characterizes the U.S.’ relationship with the CNMI and convert the islands and their residents into a source of revenue for the federal government—“a relationship that could be characterized as colonial in nature.”

Babauta, in his letter, lamented that the CNMI was never given a chance to comment on the changes.

Such lack of transparency, he said, “has raised concerns about the long-term intentions of the federal government with respect to tax policy and economic development, generally, in the insular areas.”

Babauta said specific impact of the law—how much the CNMI would be losing in potential revenue—cannot be quantified yet since the Internal Revenue Service is still drafting the necessary regulations.

“But the Commonwealth has been denied access to these regulations until after their publication, thus limiting our ability to mitigate the effects of the Act though its regulatory interpretation,” he said.

He said Guam would similarly lose some $10 million to 20 million but this could not be independently verified.

The governor is asking Norton’s office to sponsor a joint meeting of representatives of all five insular areas to identify problems associated with the law; establish a permanent committee composed of representatives of the U.S. departments of Interior and Treasury and the insular areas to foster self-sufficiency through the coordination and implementation of federal tax policies; and amendment of the law and in the interim participation by the DOI and the affected insular of implementing regulations by the IRS.

Babauta said the PL 108-357 is the only immediate concern these recommendations would address and he believes there is “a longer term need to deal comprehensively with the issues of insular area tax policy.”

There has been no response from the Interior Department since Babauta sent the letter in December 2004.