Editorial | Measuring tax expenditures

According to the recent reports on tax expenditures tabled in the House of Representatives, government expenditure in this area reached J$46.6 billion in 2023. The significance of this needs to be better understood, and the policy behind it explained.

The narrative about Jamaica’s incredible fiscal turnaround, as measured in reducing debt to GDP – from over 140 per cent in 2012-2013 to below 70 per cent in 2024-2025 – is usually framed around debt reduction operations, revenue packages, transfers from the National Housing Trust (NHT), along with better management of public enterprises. The issue that is rarely spoken about is that of tax expenditure reform which has saved the taxpayers billions.

Tax expenditure is revenue the Government chooses not to collect because the minister of finance uses the enormous powers that reside in the office to grant special treatment – exemptions, reduced rates, credits, deductions, waivers, or holidays – to whomever he or she wishes. Up to 2010 there was little check on the exercise of this authority, which was often utilised quite liberally. The Ministry of Finance publishes an annual Tax Expenditure Statement precisely because these are not trivial matters. But they hardly generate much discussion, or interest, because many view the rent-seeking behaviour embedded in tax expenditures in a positive light. Special interests see lobbying the minister of finance for special favours as a right.

If the Government charges a general consumption tax (GCT) of 15 per cent, but applies a lower rate to a sector, the difference is revenue forgone. If corporate income tax is 25 per cent, but a firm pays less because of an incentive regime, the gap, that is, the difference between the official tax rate and the amount not paid, is a public transfer.

INSUFFICIENT SPENDING

In economic terms, this is often inefficient spending through the tax code. Over the years, it alarmed many in the international financial institutions, as well as local public officials, who pushed very hard for reform, with some success.

These choices made under tax expenditure have real consequences. It is very important therefore that legislators, in the upcoming budget discussions and debate, pay attention to this important aspect of public policy.

Apart from reducing fairness, transparency and equity, which are important governance issues, tax expenditures quite often narrow the tax base. When this happens, it forces the Government to either increase rates elsewhere, borrow more, or reduce spending in vital areas like health, education or security. It is quite probable that the J$11.4 billion withdrawal annually from the NHT to fund the Budget could be reduced substantially if the amounts given as tax expenditure were less.

Moreover, tax expenditures often alter incentives in the economy. They can redirect capital towards activities that are subsidised rather than those that are most productive. When incentives are poorly aligned with productivity upgrading and technology adoption, they encourage rent-seeking rather than innovation and building resilience.

The official Tax Expenditure Statements indicate total estimated revenue forgone rose by over 40 per cent between 2021 and 2023, amounting to some J$117.8 billion:

• J$32.6 billion in 2021

• J$38.6 billion in 2022

• J$46.6 billion in 2023

Some of the increase reflects economic growth and inflation – a larger tax base means larger nominal exemptions. But it also reflects the structural features of Jamaica’s tax system, including reduced GCT rates and exemptions for some sectors, and category of goods, and various import duty waivers.

Even conservatively measured, these sums are equivalent to roughly one per cent to one and a half per cent of GDP in recent years. Without the tax expenditure reforms since 2010 this figure would be much higher.

TAX REFORM

Since the fiscal crisis of the late 2000s, and under IMF-supported programmes, the Government embarked on major tax reform in this area to: reduce exemptions and distortions; eliminate ministerial discretion in granting incentives; and standardise the incentives regime. There have been significant gains.

The Omnibus Incentive Legislation, effective January 1, 2014, replaced a patchwork of sector-specific laws with a more rules-based framework. Corporate income tax rates were harmonised for most sectors. Discretionary waivers were sharply curtailed, with strict caps imposed.

The Gleaner calls attention to this area of public policy not because we think all incentives should be abolished. Jamaica competes for capital in a global market. What we advocate is for beneficiaries, particularly large ones, to meet measurable targets – exports, training, local linkages, productivity upgrades – with claw backs if commitments are not met. The goal of the tax reforms must be to build a stronger and more forward-looking economy.

Tax expenditure issues should be given more focus, as a tool for growth and development, in the upcoming Budget Debate as Jamaica seeks to rebuild stronger after Hurricane Melissa.