No political group going into the final weeks before the 22 May general election has said it will support the establishment of a tax on company payrolls.
However, the spectre of additional revenues for government – in some form or another – has never really left the Cayman Islands since last summer’s ill-fated proposal of a 10 per cent levy on non-Caymanian worker incomes.
The Cayman Islands budget operating deficit stood at nearly $45 million as of 31 December, according to Premier Juliana O’Connor-Connolly. And though it was considered good news at the time, other financial reports coming from inside government recently, including a request to access an additional $30 million, have seemed less good.
For the period 1 July to 31 December, 2012, the government recorded total revenues of $218.52 million, which were some $5.2 million higher than the year to date budget. Operating expenses of $263.40 million were $11.8 million less than the budget, resulting in an overall net deficit of $44.9 million for the period, about $17 million better than expected, she said.
The Cayman Islands government typically collects most of its revenues during the first four months of the calendar year when many licences and other fees are due. For the entire budget year 2012/13, government forecasted that it would collect total revenue of $649.45 million, incur $567.2 in operating expenses and record an overall net surplus of $82 million. That means government will have to effect a nearly $130 million turnaround in the last half of the current fiscal year.
Cayman’s total debt in December 2012 stood at $586 million, which was approximately $13 million less than in July 2012. Government expects to pay down the debt to $573 million by the end of the budget year.
To offset the rising costs, former Premier McKeeva Bush proposed some $90 million in new revenue measures; most of which have been approved in legislation. However, whether that $90 million will actually be achieved within the current budget year is not yet known.
Recent requests to the United Kingdom government had Premier O’Connor-Connolly asking UK officials to release some $30 million in funding from the country’s Environmental Protection Fund; a reserve fund which – under normal circumstances – would require a special vote of the Legislative Assembly to use. The premier has not said why the government believes these funds need to be released.
What would it earn?
According to the most recent estimates of average earnings within the Cayman Islands, the median per capita income here ranges somewhere between $43,000 and $44,000 per year.
Taking the high-end of that in a calculation based on workforce size for 2011 [the latest numbers available], a 10 per cent tax on payroll for 35,267 Caymanian and non-Caymanian workers would earn just more than $140 million each year if the same 10 per cent of earnings was subtracted from everyone, no matter what they made.
However, there are some statistical data to show that such an across-the-board payroll tax scenario would end up disproportionately affecting Caymanians.
According to 2011 figures, there were 19,298 non-Caymanians in the workforce, compared to 15,969 Caymanians. On the face of it, that would seem to show non-Caymanians might bear a greater portion of the payroll tax if it were to be imposed.
Income levels revealed by the 2011 labour force study from the Economics and Statistics Office show that non-Caymanians generally tend to occupy the lower-end of the pay scale, while Caymanians were more often in the middle-class tier; meaning they might end up paying more dollar-for-dollar.
According to the economics office information, some 10,658 non-Caymanians earned $2,399 or less per month while 5,231 Caymanians earned at that level.
In salary ranges between $2,400 and $7,199 per month, statistics for 2011 showed that 5,701 non-Caymanians earned at those levels while 8,452 Caymanians earned that amount per month.
At the higher-end range – $7,200 per month and above – there were 1,081 Caymanians who said they earned at that level and 1,498 non-Caymanians who said they made that much.
A 10 per cent payroll tax could have a significant effect on household incomes, as demonstrated in the figure found elsewhere on this page.
For an individual with $50,000-a-year income subtracting for mortgage, utilities, pension, food and other monthly costs, a $417-per-month deduction would represent nearly a one-third reduction in discretionary income, according to calculations completed by the Caymanian Compass [see chart].
Who would collect?
The Cayman Islands Chamber of Commerce has taken a position adamantly opposed to the advent of any direct taxation, but when it comes to a payroll tax, Chamber President Chris Duggan said the payroll option is probably the worst of the worst.
“Our view is that government should address costs prior to looking at any new revenue enhancement measures,” Mr. Duggan said. “Spending has been out of control and there’s been an absence of cost control. That may be mitigated by revenue measures in [government’s] mind, which makes Cayman uncompetitive in a sense.”
However, with the payroll tax an additional “double-hit” would occur, according to Mr. Duggan, because employers are already paying annual fees for any foreign employee’s work permits.
In addition, there is currently no bureaucratic mechanism that exists in Cayman to collect a payroll tax from all employers, Mr. Duggan said. If some sort of internal revenue service is to be formed, there are lingering questions around what that might cost.
“One of our main concerns when the former premier was talking about the community enhancement fee was, well, if it does get put in it’s going to cost just as much to collect as there is money raised from it,” Mr. Duggan said. “There is absolutely no mechanism in place to collect it.”
Worst-case scenario, Mr. Duggan said, the Chamber would probably opt for a tax on property before a payroll levy.
“If we have no other choice but for government to introduce a direct tax, then the most logical tax to introduce would be a property tax,” Mr. Duggan said. “We have a very up-to-date Lands and Survey system where it would be very easy to put in a mechanism whereby any form of property tax can be collected without great expense.”
In any case, any new form of tax – particularly direct tax – is the last thing the Cayman Islands needs right now, he said, adding: “Everyone says Cayman is tax free but the reality is … we’ve got a huge amount of indirect taxes. Those indirect taxes should be sufficient revenues for the government.”
Civil service costs
A wholesale restructuring of the Cayman Islands civil service, in some ways similar to an exercise that was recommended in a 2010 consultant report to government, is now under way.
However, it is being undertaken partly to “make room” for two new government ministries created under the 2009 Constitution Order – a move by some estimates that will cost $10 million more a year to implement.
The management of the Cayman Islands civil service has noted that the “rationalisation exercise” will involve all of its ministries, portfolios, departments, statutory authorities and government companies.
“There are 13 ministries and portfolios, over 70 departments and sections, 25 statutory authorities and government companies and numerous boards, committees and commissions,” according to the minutes from a 21 January civil service chief officers meeting. “Some functions and responsibilities of these entities may be duplicated, obsolete, misplaced or require st
ructural adjustments to better serve the needs of the country.”
A report was expected to be complete this April detailing the civil service’s new organisational structure, including the addition of the new government ministries. The rationalisation review was set to assist Governor Duncan Taylor in allocating responsibilities for the new government following the May general election.
The Cayman Islands civil service has been working for quite some time on downsizing. Deputy Governor Franz Manderson has previously announced plans to cut civil service staff by some 360 positions within the next five years. There is also a “pay freeze” in effect for all members of the civil service that was announced last August.
The Cayman Islands civil service and government-elected members have previously rejected calls made for across-the-board, 8 to 10 per cent salary reductions. However, the government has already taken steps to reduce the number of civil servants within core government.
New fees ‘inevitable’Former Premier Bush’s government introduced a number of revenue proposals and sent a budget to the United Kingdom in August last year that included a wide array of smaller fees instead.
Those proposals now include increases to fees within the financial services industry, such as fund director fees, master fund registration fee and increased work permit fees. New revenue measures also include higher tourism accommodation and departure taxes, as well as a uniform stamp duty of 7.5 per cent on land and property transfers for bot Caymanians and non-Caymanians with exemptions for first-time Caymanian buyers. Most of the new fees have already taken effect as part of the 2012/13 government budget.
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