By Gerardo R. Partido
Variety News Staff

A U.S. Department of the Interior study has recommended that Guam get rid of its tax perks program so that the government can increase much needed revenues from the private sector.
The tax perks come in the form of qualifying certificates, or QCs, which provide the recipients with abatements and rebates on a variety of taxes such as the income tax, property tax and the gross receipts tax.
According to the study, tax incentives create distortions in the economy and by favoring certain activities over others, tax incentives inherently divert resources away from potentially more productive uses.
“In addition, taxpayers not intended to receive benefits will plan activities to qualify for the incentives. Thus, they create an unequal playing field in industries where some companies are receiving incentives and others are not,” the study stated.
The Department of Revenue and Taxation estimates that Guam companies enjoyed an annual average of $6.5 million in tax credits through the QC program between 1995 and 2003.
Based on this, the study said it appears that tax incentive programs are typically not cost effective and hard to target and administer effectively, leading to unnecessary losses of revenue for the government.
It is estimated that between 1995 and 2003, the island’s hotel industry alone enjoyed over $18 million in tax credits.
The hotel and tourism sectors have been major recipients of QCs in the past because relative to other tourist destinations, Guam’s tourism industry was still in its infancy, and thus, needed to be protected.
But now, with an average of over a million tourists visiting Guam annually over the last 10 years, the study said it may be more difficult to sustain this argument today.
In fact, the study said Guam’s tourism industry is relatively well-developed in terms of tourist penetration and maturity.
Guam ranks eighth among 36 economies in terms of tourist penetration based on visitor spending, visitor density and room density.
The board of directors of the Guam Economic Development Authority imposed a moratorium on the issuance of QCs to hotels between December 1989 and September 1997, the height of the island’s tourism boom.
However, hotels again became recipients of QCs in 1997 in response to the deteriorating economic environment, though there are still some who question whether this was an economically sound decision.
At present, a large number of industries are eligible for the QC program, including agriculture, aquaculture, commercial fishing, export trading, hotels/motels, insurance, mari-culture, manufacturing, residential real estate and tourism.
While the goal has been to stimulate investment and promote economic development, the study cited academic research that indicated that incentive programs are generally not cost effective.
“Studies conducted by the Foreign Investment Advisory Service and the International Monetary Fund indicate that in general, generous incentive programs do not lead to higher levels of investment and growth. Surveys of investors indicate that tax incentives do not affect the location decisions of most foreign direct investment. Investors typically care more about the overall environment and are likely to rate other factors more highly, such as a stable political environment, a reasonable tax code and the availability of infrastructure and labor,” the DOI study stressed.
In order to encourage the development of new industries on Guam, the study said a more attractive alternative to the QC program may be to lower corporate taxes across the board, as opposed to providing incentives to select industries.