A Guam-based tax expert said the Department of Revenue and Taxation's projected $70 million revenue shortfall, as a result of the recently enacted federal tax reform, could be lower or higher.
Joe Arnett, senior adviser at Deloitte and Touche LLP, presented an overview of how Guam's tax landscape could change in the coming years. He spoke at a meeting of the Rotary Club of Northern Guam at the Hilton Guam Resort & Spa yesterday.
He said the $70 million estimate would have to be tempered by the fact that there is a lack of current Guam-based economic data to accurately make these projections.
$70M shortfall 'a good guess'
"I think that is a good guess," he said. "It could be higher than that, maybe lower, but it probably is in that range somewhere."
According to Arnett, the new code was the most comprehensive tax-law revision since the 1986 tax reform. Individual taxpayers could benefit from higher child tax credits and the near-doubling of deductions before taxes kick in.
The standard deduction essentially doubles to $12,000 for single tax filers and $24,000 for married tax filers filing jointly. The elimination of personal exemptions, however, can balance this out.
The tax credit increases from $1,000 per qualified child, to $2,000, with $1,400 subject to a tax refund if taxpayers qualify.
"Based upon the size of the reductions, both individuals and business, I think (the government) needs to be planning for reductions in revenues," Arnett said after the meeting.
Department of Revenue and Taxation Director John Camacho has previously stated between $40 million and $70 million in the government of Guam's annual collection of corporate taxes alone could disappear with the proposed revisions to the federal tax code, based on initial estimates.
At the national level, Arnett said the tax law is expected to generate about $1.5 trillion in deficit over the next 10 years.
"This has revamped business structures. For the first time in my memory ... tax rates have been lowered to this degree, across the board for individuals themselves, certain types of business income and, in the end, corporations," Arnett said, describing the changes that will be implemented from the 2018 tax cycle onward.
However, Arnett said the law has some ambiguous provisions and that it might take years for the U.S. Department of the Treasury to clarify these items.
Mixed benefits for businesses
Certain types of businesses may not be able to take advantage of new tax rates proposed for pass-through income by the recently signed federal tax reform, he said.
Arnett said services that have to do with health insurance, accounting, architecture, science, performing arts, consulting, athletics, national and brokerage may not be able to take advantage of the 20 percent deduction.
According to Arnett, the legislation gives qualified business owners a new 20 percent deduction on business income through 2025.
This is separate from another provision that cuts the U.S. corporate income tax rate to 21 percent.
Arnett also outlined other provisions of the new tax law.
According to Arnett, the law has a permanent increase in charitable-giving deduction from 50 percent to 60 percent, which has no sunset provision. In general, the new tax code has a 2025 sunset provision.
Personal exemptions have also been repealed by the new tax law.
"These personal exemptions have been repealed going forward, partly to recoup some of the income that they lost from giving a lower rate," Arnett said.
The new code has a permanent repeal for alimony payments, for agreements executed after Dec. 31, 2018, according to Arnett.
It also temporarily lowers the floor for medical-expense deduction, effective for 2017 and 2018.
"Temporarily, they have lowered the medical deduction floor. As you may recall, medical expenses are only deductible to the extent that they exceed 10 percent of the adjusted gross income. That floor has been lowered to 7 1/2 percent through the next couple of years," Arnett said.
The law also suspends deductions for most personal casualty losses, tax preparation, unreimbursed business expenses, expenses for the collection of income and moving expenses, Arnett said, referencing a presentation on the "2017 Tax Reconciliation Bill" by the Deloitte Tax Policy Group.