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Witness Panel 1
The Honorable Donna Christensen
the Hon. Donna M. Christensen
on S. 1829
before the Senate Energy and natural Resources Committee
October 25, 2005
Thank you Mr. Chairman for the opportunity to make this statement in support of S. 1829 -- companion legislation to one I introduced in the House -- to repeal the 1936 law which governs the levying of property taxes in the Virgin Islands. Passage of this legislation is necessary to allow the Virgin Islands to fashion a local property tax law that takes into account the circumstances and realities of our community.
I want to also to especially thank you, Mr. Chairman, as well as Ranking Member Bingaman, for your willingness to respond to my request to introduce S. 1829 and to so quickly schedule it for a hearing.
Mr. Chairman this bill became necessary when, five years ago, some of my constituents filed a lawsuit in federal court alleging that the Virgin Islands government was violating federal law in the manner in which they were assessing the value of commercial properties in the territory.
The court then ruled that the 1936 federal statute was not repealed by the 1954 Organic Act, as we had all believed, and invalidated the current Virgin Islands property tax law.
Mr. Chairman, the Virgin Islands is the only jurisdiction in the country whose local property taxes are based on federal law. This anomaly in our system of government is unnecessary today because the Virgin Islands, although still a territory of the Unites States, has been exercising all the rights and responsibilities of government in a similar manner as the fifty states, at least since we began electing our own governors in 1970 and before that since 1954, when Congress passed our Revised Organic Act.
In invalidating our local property tax laws, the federal courts have removed the ability of the Virgin Islands government to provide insulation for Virgin Islands homeowners to protect them against the consequences of rapidly rising property values on their tax bills.
Moreover, the provisions that were struck down were similar to those used in other jurisdictions throughout the United States. The local property tax laws which were struck down provided a 10 percent cap on the increase in assessments for residential real estate in any assessment period, as well as certain exemptions from taxation, for homesteads, veterans, and farmland and exemptions offered as part of our economic incentive program.
Mr. Chairman, the 10 percent cap limiting any increase in residential assessments is modeled after similar statues in the United States and is essential to protect homeowners for soaring property values. Without a cap or similar provisions, if and individual or a family owns a modest dwelling that is surrounded by million dollar homes, the assessed value and thus the property taxes due will increase significantly.
This will have serious consequences for long-time property holders. We have limited land mass in the Virgin islands which makes real property a commodity that is in short supply.
Because the current trend in real estate is for prices to continue to climb exponentially, basing property taxes on actual prices will create a large number of instant paper millionaires who will never be able to see this new wealth unless the property is either mortgaged or sold.
This situation presents a very serious for many of my constituents, most acutely on the island of St. John because their property tax bills are already moving way beyond their reach.
Many of the areas on St. John have seen wealthy individuals purchasing properties and making improvements which have the effect of immediately and drastically increasing the value of their properties as well as the value of the properties surrounding them.
I must caution however, that the entire Virgin Islands would be impacted should the 1936 law continue to prevail.
In summary, it is important for the economic security as well as the social stability of the Territory, for the 1936 statue be repealed.
Thank you once again for bringing this important bill to the Committee in such expeditious fashion. I look forward to its speedy passage, and to returning to testify on an equally important piece of legislation which has already passed the House twice, one which would create a Chief Financial Office for the U.S. Virgin Islands
Mr. Nikolao PulaDirector of the Office of Insular AffairsU.S. Department of the Interior
NIKOLAO I. PULA
ACTING DEPUTY ASSISTANT SECRETARY OF THE INTERIOR FOR INSULAR AFFAIRS
SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES
S. 1829 – THE REPEAL OF VIRGIN ISLANDS PROPERTY TAX PROVISIONS
S. 1831 – NORTHERN MARIANA ISLANDS SUBMERGED LANDS AND SETTLEMENT OF CLAIMS ARISING PURSUANT TO THE NORTHERN MARIANA ISLANDS COVENANT
October 25, 2005
Mr. Chairman and Members of the Committee on Energy and Natural Resources, I am pleased to appear before you today to discuss S. 1829 and S. 1831. I am Nikolao Pula, Acting Deputy Assistant Secretary of the Interior for Insular Affairs.
S. 1829 would repeal sections 1 through 6 of the 1936 Organic Act of the Virgin Islands of the United States, which deal with property taxation in the territory. In 2003, the Fourth Circuit Court of Appeals held that the property tax provisions in the 1936 Organic Act, requiring market valuation, were still in effect despite enactment of the Revised Organic Act of 1954. This decision has had the effect of invalidating local Virgin Islands’ statutes that give property tax exemptions to residents such as veterans and seniors.
In a rapidly escalating real estate market, people on limited incomes, including many veterans and seniors, can be forced from their homes due to an inability to pay the increased levies. Adverse social consequences can follow.
For decades, the Department of the Interior has sponsored or backed measures that increase self-government for the territories. S. 1829 advances Virgin Islands citizens’ self-government, consistent with Departmental policy. Additionally, it is my understanding that there is no Federal regulation of property taxation in any other state or territory under the American flag.
S. 1829 would return control of the property tax to the Government of the Virgin Islands, and property taxes would be levied as they were prior to the Fourth Circuit’s decision. The Administration supports enactment of S. 1829.
S. 1831 deals with two subjects: submerged lands and the settlement of claims arising pursuant to the Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States of America.
Section 1 of S. 1831 would give the Commonwealth of the Northern Mariana Islands (CNMI) authority over its submerged lands from mean high tide seaward to three geographical miles distant from its coast lines.
It has been the position of the Federal Government that United States submerged lands around the Northern Mariana Islands did not transfer to the CNMI when the Covenant came into force. This position was validated in Ninth Circuit Court of Appeals opinion in the case of the Commonwealth of the Northern Mariana Islands v. the United States of America. One consequence of this decision is that CNMI law enforcement personnel lack jurisdiction in the territorial waters surrounding the islands of the CNMI without a grant from the Federal Government.
At present, the CNMI is the only United States territory that does not have title to the submerged lands in that portion of the United States territorial sea that is three miles distant from the coastlines of the CNMI’s islands. It is appropriate that the CNMI be given the same authority as her sister territories.
It should be noted that the language of section 1 is similar, but not identical, to the language of the 1974 territorial submerged lands act applicable to Guam, the Virgin Islands and American Samoa. The differences appear to be attributable to the fact that the CNMI provisions would be a later enactment. We assume that the intent of the bill is to give the CNMI the same benefits in its submerged lands as its sister territories enjoy in their submerged lands. If this is the case, it would be helpful, for those who will later interpret the statute, to include language in S. 1831 stating that, as a general rule, the submerged lands statute is intended to be applied in a consistent manner to each of the four territories, unless, of course, there is a specific and express exception for one of the territories.
The Administration, therefore, supports enactment of section 1 of S. 1831, provided that language is added regarding consistent interpretation.
Section 2 of S. 1831 would permit the Secretary of the Interior to settle claims of the CNMI arising pursuant to the CNMI Covenant. This authority would be activated by a request by the Governor of the CNMI.
On a number of occasions over the past quarter of a century, the Federal Government and the CNMI have sought accommodation on a variety issues and disputes through the formal process of appointing representatives provided for in section 902 of the Covenant. In addition to this formal process, and on a separate track, the CNMI has sought to have the Department of the Interior help resolve issues with other Federal agencies.
The Administration does not support the enactment of section 2 of S. 1831 because it does not believe that the creation of an additional formal mechanism with its attendant costs, as described in the bill, is necessary.
Although we were not specifically invited to speak with regard to the compact-related amendments in S. 1830, with your indulgence, I would like to raise one issue that is not considered in the bill.
The Compact of Free Association Amendments Act of 2003, contemplated the creation of separate trust funds for the peoples Republic of the Marshall Islands and the Federated States of Micronesia. It is anticipated that after the year 2023, the trust proceeds will be the source of substantial funds that will help sustain their respective governments. To aid in building corpus, both Compacts provide that their respective trust funds shall not be subject to Federal or state taxes. Another provision requires that the trust funds to be incorporated in the District of Columbia. Because the District of Columbia is neither a state nor the Federal government, the intended tax free status of the trust fund has been called into question.
The Administration, therefore, requests that the following new section be added to S. 1830:
Sec. __. CLARIFICATION OF TAX-FREE STATUS OF TRUST FUNDS. In the U.S.–RMI Compact, the U.S.-FSM Compact, and their respective trust fund subsidiary agreements, for the purposes of taxation by the United States or its subsidiary jurisdictions, the word “state” means “state, territory, or the District of Columbia”.
Such an amendment would insure that full effect will be given to the intended tax free status of the trust funds.
Lieutenant Governor Vargrave Richards
TESTIMONY OF VARGRAVE A. RICHARDS, LIEUTENANT GOVERNOR OF THE UNITED STATES VIRGIN ISLANDS BEFORE THE UNITED STATES SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES ON BILL S.1831
OCTOBER 25, 2005
ENERGY COMMITTEE HEARING ROOM SD366
Good morning Mr. Chairman and members of the Committee. My name is Vargrave Richards, and I am the Lieutenant Governor of the United States Virgin Islands.
Under Virgin Islands law, the Office of the Tax Assessor falls under the Office of the Lieutenant Governor. The Tax Assessor is charged with generating the real property tax bills for the Territory of the United States Virgin Islands. One of the bills before this Committee, S. 1829, addresses the real property tax of the Virgin Islands.
I am here to respectfully request that you adopt Bill S. 1829 which repeals sections 1401 through 1401e of Title 48 of the United States Code, which I will refer to as the “1936 Statute”. I strongly support the Bill for three reasons: One, a recent court ruling held that the 1936 Statute prohibits the Territory from setting its own real property tax policy; Two, the 69 year old statute, which was designed to assist the Virgin Islands, now hinders it from performing a basic governmental function; and Three, this is a purely local issue with no federal impact.
The reason I am here before you is a recent court ruling which has essentially revived a long forgotten federal statute governing the assessment of real property taxes in the Territory.
On June 28, 2004, the United States Court of Appeals for the Third Circuit issued an opinion affirming a decision of the United States District Court of the Virgin Islands in Berne Corp. v. Government of the Virgin Islands, 2004 WL 1443889 (3d Cir. Jun. 28, 2004).
The courts held that the 1936 Statute is still controlling in the Virgin Islands, and that it governs the basis for assessment for real property taxes in the Territory, preempting subsequent local laws in this area. Based on the 1936 Statute, the court ordered that all property subject to taxation be taxed on the basis of actual value and at the same rate. Under the ruling, to be valid, an exemption must grant a 100% percent exemption from taxation, cover the full tax year of the exemption period, and apply to all of the subject property.
The effect of the ruling is far reaching. It limits the Virgin Islands in performance of the basic government function of setting real property tax policy. Based on the ruling, a federal law precludes our local government from establishing partial tax exemptions for veterans, the elderly or farmers, and from using tax policy to encourage development through the creation of enterprise zones.
To my knowledge, no State or Territory has such restrictive provisions imposed upon it by Congress.
For example, under a local law enacted to encourage agriculture, farmland was 95% exempt from property taxation. Under the new court ruling, this exemption is no longer valid because it is not a 100% exemption.
Similarly, the general homestead exemption, and the specific homestead exemptions for veterans and the elderly, as well as Enterprise Zone tax exemptions, would only be valid if they were to provide a full exemption from taxation. Based on the court ruling, the Guaranteed Housing Rehabilitation Loan exemption is also invalid.
Another critical provision of Virgin Islands law is at stake as well. In order to protect homeowners in the Territory from losing their land due to inability to pay property tax increases resulting from a dramatic rise in property values due to outside investment, local law provides that no residential tax bill can increase more than 10% over the previous valuation. This crucial provision was also struck down by the courts.
The problem of rising land values is particularly acute on the Island of St. John, two thirds of which is National Park. Recent development has generated increased property values and therefore higher property taxes. Many Virgin Islanders fear losing land which has been in their family for generations because of the inability to pay increased property taxes. Since the days of emancipation, in our islands, land has been a precious commodity which has traditionally passed from generation to generation.
Unless Bill S. 1829 is adopted, the Virgin Islands will not have the ability to reinstitute the 10% cap, or to employ other appropriate tax policy measures to address the legitimate concerns of these Virgin Islanders desirous of preserving their land for their children.
Unless Bill S. 1829 is adopted, the Virgin Islands will not be able to set different tax rates for different uses of property. While state and local governments are free to set different tax rates for differing uses of property, such as residential, agricultural, commercial, income producing or charitable, the 1936 Statute prohibits our local government from doing the same.
In short, the 1936 Statute needs to be repealed in order to put us on par with other jurisdictions and enable us to set our own local tax policy.
The second reason the Bill should be adopted is that the 1936 Statute is an anachronism whose historical purpose is no longer served.
The Statute was adopted by Congress on May 26, 1936 to reform the real property tax system in the Virgin Islands which at the time was based upon the use to which property was put as opposed to its value. Cultivated or developed land was taxed at a higher rate. It was felt that this system was unfair to those who cultivated their land and the policy discouraged cultivation and also favored a few large land owners.
Today, the 1936 Statute as interpreted by the courts no longer assists the people of the Virgin Islands. To the contrary, it hampers our ability to make sensible tax policy.
A third reason to support the Bill is that this is a local issue with no impact on the federal treasury. The adoption of S. 1829 and the consequent repeal of the 1936 Statute will have absolutely no economic effect on the federal government. Like state and local property taxes, Virgin Islands real property taxes are imposed by the Territory and are payable to the Territory. This is a local matter. It is not a federal tax question.
In 1936, the Virgin Islands were closely administered by the federal Government. There has been a steady progression toward local autonomy in an effort to move from colonialism toward self governance. In 1954, Congress passed the Revised Organic Act which established a framework for Virgin Islands self-government. In 1970, Virgin Islanders elected their own Governor for the first time.
The old 1936 tax Statute severely impairs the ability of the Government of the Virgin Islands to set real property tax policy. The Virgin Islands legislature should be able to grant partial real estate tax exemptions to encourage farming, economic development, and the creation of homesteads, and to provide tax relief for veterans, the elderly and the disabled.
The provisions of the old 1936 Statute that might have been viewed as necessary by Washington in 1936, now bind the hands of the Virgin Islands Government and prevent it from enacting socially and economically beneficial legislation. While it is the Government’s position that the 1936 Statute was repealed by the Revised Organic Act of 1954, the court ruling provided otherwise, making an express Congressional repeal necessary to achieve the goal of self-government for the Territory.
I would like to thank the Honorable Congresswoman Donna M. Christiansen for sponsoring the legislation.
Senators, I respectfully request that you adopt Bill S. 1829 and repeal the old and outdated 1936 federal Statute. I thank you for your time and attention to a matter of great importance to the people of the Virgin Islands.