Expenditure Proposals for 2012 and 2013 and Draft Budget Statement 2011 (P.157/2010): third amendment (P.157/2010 Amd.(3)) – amendment (P.157/2010 Amd.(3)Amd.) – comments.

STATES OF JERSEY

EXPENDITURE PROPOSALS FOR 2012 AND 2013 AND DRAFT BUDGET STATEMENT 2011 (P.157/2010): THIRD AMENDMENT (P.157/2010 Amd.(3)) – AMENDMENT

(P.157/2010 Amd.(3)Amd.) –

COMMENTS

Presented to the States on 7th December 2010 by the Council of Ministers

STATES GREFFE

2010   Price code: A  P.157 Amd.(3)Amd.Com.

COMMENTS

The Council of Ministers opposes this amendment as it is currently drafted.

This amendment proposes that if Deputy 's Green's amendment to exempt food and domestic energy from GST is approved by the States, all adjustments to the income tax system that had been designed to compensate for the introduction of GST in 2008 should be rolled back, in addition to the withdrawal of additional income support and GST bonus measures.

This  would  involve  reducing  the  income  tax  exemption  thresholds  to  recover 2 increases,  of  3.5%  and  2%  respectively,  in  2008  and  2009,  as  well  as  not implementing the 1.1% increase proposed in this Budget.

Summary

The Council of Ministers recommends that States members reject this amendment for the following reasons –

1. It  is not  considered  appropriate  to remove  income  tax reliefs  that  were introduced in earlier years.
2. The effect of this amendment would be to increase the tax liabilities of the middle 70% of earners in Jersey, including 1,500 individuals who do not currently pay any income tax.
3. The increase proposed for 2011 is not intended to compensate for the increase in GST, but to increase the exemption in line with earnings so that people do not suffer a real term reduction in their income.

Comment

GST was introduced in 2008. A range of measures were introduced at around the same time  which  were intended  to  shield the less  well-off from  its full  impact. These included the introduction of income support, the GST bonus, and the increase in income tax exemption thresholds.

Deputy Green accepts that if his proposal were approved by the States, it would be appropriate to adjust the level of income support and the GST bonus provided to reflect  the  lower  GST  payable  on  food  and  domestic  energy.  Senator  Ferguson believes that the third arm of the compensatory measures should also be removed.

In total, the States voted for the following measures to compensate the less well-off for the introduction of GST –

• Increased income tax thresholds by an extra 3.5% from 3% to 6.5% for 2008 in the 2008 Budget at a then cost of £4 million.
• Included  protection  from  GST  for  those  on  the  original  income  support scheme at a cost of £1.75 million.

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• An allowance for those households between the income support scheme and income tax system known as the GST bonus scheme at a cost of £0.4 million.
• The Le Fondré proposition P.138/2008 to further increase income support by £3 million, double the GST Bonus Scheme at a cost of a further £0.4 million, and provide an increase in income tax exemption thresholds from 3% to 5% in 2009 at a cost of £2.4 million.

In total, this equated to a total financial benefit from those on low to middle incomes of £12 million, twice the estimated cost of exempting fuel and food from GST in 2008.

Price and wage inflation since 2008 has increased the value of the adjustments to the income tax exemption thresholds to approximately £8.5 million.

Exemption thresholds

As previously noted, exemption thresholds have been adjusted twice to specifically compensate lower earners for the impact of the introduction of GST. The first of these was an increase of 3.5% in 2008, followed by an additional 2% in 2009. An increase of 1.1% is proposed by the Minister for Treasury and Resources for 2011, but this does not specifically relate to GST.

Reversing the 3.5% increase in 2008, the 2% in 2009 and the 1.1% proposed for 2011 would reduce the exemption thresholds as follows –

Individuals affected

This would have the effect of making 1,500 people pay tax who do not currently do so. It would increase the tax paid by 650 middle-earners who would fall out of the marginal 27% rate band and into the full 20 means 20 regime. The tax liabilities of the approximately 70% of taxpayers who currently pay tax at the marginal 27% rate would also increase.

As a matter of policy, it is not considered appropriate to remove an income tax relief that  had  been introduced in  an  earlier  year.  Reducing  the  income  tax  exemption thresholds in this manner would increase the tax bills of all but the very lowest and very highest earners in the Island.

Financial implications

The amendment would result in an additional £10 million of revenue for the States in 2012.

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