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Hotel tax breaks deserve close scrutiny

Sound investment or pouring money away: Karim Alibhai, founder of Gencom, which owns Fairmont Southampton, pours rum at the grand roof-wetting ceremony to mark the completion of $25 million of improvements at Rosewood Tucker’s Point, Gencom’s other Bermuda property, in 2018. He was joined by David Burt, the Premier, right, and Paul Telford, managing director of Rosewood (File photograph by Akil Simmons)

The Government underlined the urgency of securing tax incentives for the Fairmont Southampton Resort by recalling the House of Assembly two weeks early to table the enabling legislation.

There is a danger of haste making waste in this instance, because many aspects of the Government’s deal with Gencom, the owners of the property, are unknown.

That puts MPs in an impossible position since they cannot know how much of the deal they are being asked to vote on. This is precisely the danger Curtis Dickinson, the former finance minister who resigned over the deal, warned against.

Most glaringly, it is still not known if the Government will be guaranteeing some of the debt which Gencom is taking on. While it seems that the tax breaks are connected to a guarantee, there is no full clarity on this.

Nor is it yet clear how much potential tax revenue is being foregone through the incentives. The Government has told The Royal Gazette that it has done the calculations, but it is not prepared to share them until the House of Assembly debate. If the Government wanted a properly informed debate, it would release the figures now.

Nonetheless, even the vaguest estimate suggests that the cost to Government will be in the tens of millions of dollars over the life of the incentives - the land tax relief alone will be at least $6 million over ten years.

Nor does this relief indicate what benefits Gencom may get for the additional real estate development it intends to do after the hotel renovations, or how the Special Development Order granted to the hotel in 2009 may now be extended. This should be included in any debate so the country completely understands how Gencom will benefit.

Furthermore, David Burt, as Premier and finance minister, and Vance Campbell the very new tourism minister, must also say whether these same incentives will be granted to other hotel developers, and indeed to existing hotel operators.

There is no doubt that they will be queueing up with their hands out now. Mr Campbell has only said any approaches will be considered.

MPs should also debate the whole purpose of tax incentives, and the validity of effectively subsidising an entire industry.

Bermuda’s history is replete with industries that have come and gone. Propping up tourism might prove to be as nonsensical as subsidising the construction of wooden sailing ships today, or exporting Bermuda onions.

At some point, economic purists would argue, industries that cannot survive on their own need to be taken off life support.

When Mr Burt came into office in 2017, he was rightly focused on diversifying the economy as a means of moving Bermuda away from tourism, or at least not being in a situation where problems in one industry could cripple the economy.

But the slow development of fintech, which was promoted as a panacea for Bermuda’s economic ills, coupled with the hammer blow of the Covid-19 pandemic, evidently prompted a rethink. Tourism’s importance as an employer was made very clear.

But the questions are still worth asking. How important is tourism to Bermuda’s overall economic health? How far should the Government go in supporting the industry if it cannot generate a reasonable rate of return without incentives?

Based on Mr Burt’s previous statements, the Government does believe that the industry must be supported. But this raises two separate questions.

The first is whether this support should come through tax incentives like those in the Tourism Incentives Act or if there is a better industry-wide approach.

Would it not make more sense to simply lower the tax burden on the industry as a whole, or even the Country as a whole, rather than give specific tax breaks for individual projects?

This would end the unfairness of successful industries like international business subsidising unsuccessful ones like hotels or retail.

The Tourism Investment Act, and the Fairmont Southampton bill itself, also gives Customs duty breaks for the materials being used on the project.

But Customs duties are a drag on the whole economy and everyone who pays the full duty on imports is subsidising the hotel sector now.

Secondly, now that the Fairmont Southampton is being given this break, it has to be expected that all other hotels will seek the same benefits, and can validly argue that they are being disadvantaged. Mr Burt has intimated that changes to the Tourism Investment Act can be expected.

But that does not answer the question of whether Bermuda should not instead taxes on tourism as a while to make the industry more competitive. Indeed, by waiving occupancy taxes for the Fairmont Southampton, the Government is not in fact reducing that hotel’s tax burden because that tax is paid by the guests.

It merely passes through the hotel. So this simply lowers the overall cost of a room, a benefit denied other hotels.

Why not just reduce the occupancy tax for all and make Bermuda tourism generally more competitive?

Even if is accepted that tax incentives are necessary, and that the Fairmont Southampton cannot wait for the kind of thoroughgoing tax reform which broad based reductions would require, Mr Burt and Mr Campbell still need to explain how the tax revenues being lost will be offset.

The first argument will of course be that a closed hotel does not generate any tax revenues, so the work that will be generated at the hotel through the renovation and through its reopening is better than nothing.

This may be so but it also presupposes that no one else would buy the hotel, or that Gencom would simply leave it closed and let its investment waste away.

The second, broader reason, is that hotels generate jobs, employ thousands of Bermudians with a range of skills and that international business - far and away the main driver of the economy - needs hotels, restaurants and conference facilities to be successful.

This is true as well. But it sets a dangerous precedent for the future. It means in effect that Bermuda is devoting resources to a waning industry when it would make more sense to invest in parts of the economy with strong growth prospects.

This is not a new problem for governments or companies. Many great brands no longer exist because they failed to embrace change and tried to continue with what had worked in the past. But it takes courage and a willingness to accept some short term pain.

And of course targeted and well thought out tax incentives have turned out to be boons for some countries and regions, bringing investment and jobs which would otherwise have gone elsewhere and helping new industries to grow to the point where they can compete on their own.

But such strategies have been carefully thought through and rigorously tested. The fear is that the Gencom tax incentives are being done in a hurry and with inadequate scrutiny.

These fears are amplified when it is likely that the Government’s 30 MPs will wave this bill without a second thought. The public deserves more than that.

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Published April 26, 2022 at 8:00 am (Updated April 25, 2022 at 5:33 pm)

Hotel tax breaks deserve close scrutiny

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