I’ve read with interest the views of the two sides representing, on one end, those seeking an extension to the tax concessions provided under the Hawksbill Creek Agreement (HCA), which are due to expire in August 2015, and those that are generally calling for the tax concessions to be done away with upon expiration.
The side seeking a continuation of the tax incentives beyond 2015 state that to let them expire would spell doom for the Freeport/Lucaya area, and lead to greater hardship for the persons living there. They provide no supporting evidence for this view.
The side seeking an end to these tax incentives at their expiration state that these concessions, particularly the real property tax break, have acted to disincentivise investors to develop their properties. They, too, provide no supporting evidence for this view, but have formed the opinion mainly based on the view that the main landowner and developer in Grand Bahama, the Grand Bahama Development Company (DEVCO), has not been moved to develop the land in Lucaya because it does not incur the annual carrying cost of real property tax. This reasoning has also been extended to individual lot owners and a hotel developer in the Lucaya area.
My humble view is that both positions are a little skewed. While no one would deny that, generally, the tax incentives provided under the HCA have been a major cause of Freeport’s development in the past, I believe they have had little positive impact on the development of Freeport and Lucaya in the last 15 years. Certainly, not to the level one would expect from the type of tax concessions provided under the HCA.
One need only look at the economic environment in Freeport and the economy’s performance over the last 15 years for supporting evidence. At the same time, it is far-fetched to think that doing away with the tax incentives would force current investors to develop or sell-off their investments simply because they would have an annual carrying tax cost.
For the purposes of this short note, I will limit my views to the real property tax concession. Real property tax concessions as an economic development tool are generally a difficult proposition. It is difficult to assess the effectiveness of this tax incxentive. At best, it is considered by experts a complimentary tax incentive when mixed with other more impactful and attractive concessions. Some of the general issues are:
As a tax incentive it is unlikely to have a significant impact on a firm’s profitability, since real property taxes are a very small part of the total cost for most businesses – averaging much less than 1 per cent of the total annual costs of a business. If one were to apply this to the households created by business development, the same materiality issue exists.
The Government of the Bahamas provides the real property tax incentive to investors all across the Bahamas. Its use is widespread; not just in the Bahamas, but by our island nation competitors. Therefore, its effectiveness as a tax concession in Freeport/Lucaya, is probably limited and less likely to affect a business location decision for an investor. Existing businesses may view this differently but that has yet to be seen.
As a tax incentive it rarely causes a business to decide it will invest in a location. Added to other tax breaks it perhaps may carry some weight, but on its own and given its lack of materiality it is unlikely to cause a business to place much value in it as a concession.
The business would choose to invest in Freeport/Lucaya because of other more important factors. Therefore, the real property tax concessions have merely acted to deplete the tax base without promoting economic development.
It is my humble view that when one weighs the economic development benefits of the real property tax incentive against the foregone revenue, there is little option but to allow this tax concession to expire as a ‘one size fits all’ tax incentive under the HCA. It does not appear to have been a major positive factor in developing Freeport/Lucaya in the last 15 years. It has not been an effective instrument to promote economic development. There have been other much more important positive factors that have helped to promote economic development in Freeport. Some of these factors have also lost their attraction to investors.
I would recommend that the real property tax concession be offered on a case-by-case basis during new investor negotiations, and for limited renewable lengths of time. Further, I would recommend that real property tax be imposed on all lots in the Freeport/Lucaya area from September 2015 onwards.
We should be cautious here not to place too high a cost burden on those already paying material annual service charges to the Grand Bahama Port Authority or the Lucaya Service Company (LUSCO). However, it should be noted that of the just under 10,000 active service charge accounts in Freeport, the majority pay under $50 in annual service charges.
Further, of the under 25,000 active service charge accounts in Lucaya, the majority pay under $40 in annual service charges. Of note is that more than 15,000 of the active service charge accounts in Lucaya are held by foreigners, and the majority of the related lots are vacant/undeveloped.
Perhaps a two-tiered system, where non-residents/foreigners, corporate owners and those residential property owners already paying material service charges, are subject to a different rate of taxation would be appropriate.
I would estimate that by not imposing real property tax in Freeport/Lucaya in the last 10 years, the Government has foregone at least $15 to $25 million annually in revenue.