Recommendation 8: Qualifying Certificate Program
FROM: Economic Diversification Committee, Governor’s Council of Economic Advisers
TO: Governor Ralph DLG Torres and Chairman Jerry Tan
SUBJECT: Amendments to the Commonwealth Development Authority Qualifying Certificate Program
Paramount among governmental efforts to entice new industry development and cultivate the environment for general economic growth is a government’s unique ability to provide for tax abatement and reduction in the effort to promote development policy. Taxes, by and large, represent a cost to development, innovation, consumption, and operation, and while representing a necessary source of resources to promote overall public wellbeing, cannot be overlooked as a costs impediment to economic growth among private industry.
It should be noted that the CNMI as a destination for private investment presents significant risk to investors. The regular occurrence of natural disasters in recent years, the limitations on accessible and trained workforce, uncertainties pertaining the application of Federal laws and regulation all amount to a premium on developing in these islands. Yet, competitive advantages exist within the Commonwealth that are worth exploring, promoting and unlocking for the benefit of the public.
Across the United States, cities, counties, states, and regional economic development districts have increased efforts and catalyzed enthusiasm of the use and expansion of local economic development spending through the use of government tax incentives. Over the course of the last three decades, spending by governments across the United States on tax incentive programs has greatly expanded toward the goal of increasing economic activity across distressed and underdevelopment areas. It is in this growing utilization of tax incentives to draw in investment that has created a highly competitive environment between states and local governments to offer the most enticing opportunity for development, with each state maintaining at least one type of development incentive based on tax alleviation.
The CNMI’s resources to participate in this competitive national market for new American investment opportunities is limited and finds its strongest resources within the Investment Incentive Act of 2000, which, through subsequent amendment, provide for the Commonwealth Development Authority (CDA) to provide to private sector partners a Qualifying Certificate.
Presently in the CNMI, the Qualifying Certificate (QC) is intended to reduce business start-up and operating costs, geared toward industries the CNMI wished to incentivize to invest. The program grants tax relief through rebates and/or abatements of taxes to qualified investors.
Under the law, contained within 4 CMC § 50201 et seq., specific industries are targeted for qualification for the program. These industries include franchise restaurants, water parks, aquariums, cultural centers, theme parks, resort hotels and condominiums, golf courses, convention centers, dinner theaters, special events such as conventions and sporting events, CNMI based airlines and other aviation related activities, manufacturing or processing of high technology products, and internet related businesses and/or businesses engaged in internet commerce.
Qualified investors are eligible to receive up to 100% in rebates and/or abatements on CNMI taxes which include the business gross revenue tax, income taxes, capital gains taxes, excise taxes, developer infrastructure taxes, and alcoholic beverage taxes for a period of up to 25 years.
Current Status and Success of the Qualifying Certificate Program
Operating under the provisions of the Investment Incentive Act of 2000, there are presently two current beneficiaries of the QC program in the CNMI. However, the last application for a QC in the CNMI was in 2017, with only three total applicants in the last five years.
The Council believes that the Investment Incentive Act of 2000, served an important purpose during the period it was created, and has provided a number of successful outcomes for the economic development of the CNMI. However, the Council sees that there is need to update the program to keep current with changing dynamics in the competitive market for American investment and to provide greater resources to the CNMI’s development entity (CDA) to compete with competitors across the nation and provide a more streamlined and targeted effort to use present tools to encourage economic diversification.
Reconceptualizing the purpose of government subsidies
It is important to recognize that inclusion into a tax incentive program is a government subsidy for a particular private sector entity for a particular purpose. For this, thought must be given to conceptualizing what is the CNMI government subsidizing in the provision of tax rebates and/or abatements.
One viewpoint on this question is that the government is reducing a business’s costs therefor it is subsidizing their operations. The Council rejects this interpretation and instead sees tax incentives for the Commonwealth as subsidizing the competitiveness of our location to American investors with a world of options and competitors for their investments. Looking solely at the opportunity costs and relative rates versus the small island economy of the CNMI presents a range of complications that does not take to account the potential of the program. The CNMI must be more competitive for American investments and must be willing to provide a subsidy to encourage our competitiveness for the benefit of economic diversification objectives, positive externalities of increased diverse private sector developments, and the jobs and opportunities new industries can provide to the population. For the purposes of this recommendation, the Council sees the QC program as a strategic investment in our ability to compete globally.
The strengthening and subsidy toward the CNMI’s competitiveness in incentive packages, serves as a critical entry point for discussion with potential American investors, but does not solely constitute the entirety of the improvements that are necessary to encourage increased investment and diversification. These recommendations govern solely the process and application of the CNMI’s Qualifying Certificate program as a beginning step toward wider economic development reforms. Further considerations related to broader concepts and impediments to growth are contained in the section “Further Considerations” below.
Recommendations for Amendments to the Investment Incentive Act of 2000
1. Targeted Industries List
The Council recommends the removal of the list of qualifying target industries (or business activities) listed in 4 CMC § 50202 in its entirety. In lieu of a statutory list of industries, the Council recommends the granting of authority to the Commonwealth Development Authority to generate and publish a list of target industries that will be in place for at least a 5-year period, with allowances for additions and alterations. CDA in implementing this list of targeted industries should consider the use of North American Industry Classification System (NAICS) codes as classification included into targeted lists.
The Council notes that the list of approved industries contained in the Investment Incentive Act of 2000 is now 20 years old. In the two decades since inception, the global economy has changed and so too has the CNMI economy to a great degree. In envisioning the economic development opportunities of the next 20 years, the law and the QC program should be granted the opportunity to adapt and adjust to both the needs of the global economy and the economic development priorities of the people of the CNMI.
Similarly, the regular adjustments to targeted industries will allow CDA and the Commonwealth government to ensure that incentives do not create an uneven playing field among private sector operators. Should a number of industries develop in the CNMI within a targeted industry, through both incentives and natural investment, the ability to alter eligibility of that industry would ensure fairness in the economy and prevent unnecessary influence in the business environment.
Within this recommendation, further ability should be granted to CDA to delineate Economic Development Zones throughout the Commonwealth that can better target areas or islands in need of specific development in line with the development priorities of the Commonwealth’s municipalities and communities.
2. Minimum Capital Investment Requirements
The Council recommends the removal of the statutory provision on the minimum capital investment requirements contained in 4 CMC § 50203. This provision is in line with Recommendation 1. Should CDA be the authority to implement development priorities for the QC program, this dynamic adjustment to the eligible industries cannot be tied to statute. Further, the present minimum capital investment requirements place a consistent bar for investment that presumes industries will rely on capital investments to develop alternative industries. Should a business be willing to develop in the CNMI with minimal capital investment but offer worthwhile benefits toward job growth, domestic consumption, and/or the alleviation of import reliance, then that should be of consideration to the Commonwealth government.
In similar fashion to the generation of targeted industries on a five-year basis, CDA should incorporate the minimum capital investment requirements during the formulation and publication of its economic development priorities.
Further, the capital investment requirements under this amended structure would permit the bifurcation of requirements between investments in Saipan and those within Tinian and Rota, where the overall cost of development is much greater and a lower reliance on higher priced capital investments may warrant greater returns for the CNMI government.
3. Require completion bonds for capital investments granted Qualifying Certificate
The Commonwealth has an unfortunate history of largescale projects failing to reach completion, and developers engaging in large projects without engaging in the necessary due diligence review of the requirements for such an endeavor. The QC program has the capabilities of being structured so that investors are incentivized to obtain a completion guarantee should the project not have the capability of finishing.
The requirement for a completion bond to allow for this guarantee serves a dual purpose. Along with ensuring the completion or removal of a project development, it provides a level of due diligence for the CNMI on the capabilities of the investor as measured by their credit worthiness within the surety bond market.
The QC program should allow for tax rebates and/or abatements tiered by the credit worthiness of the investor seeking a large-scale construction project as a component of their investment, but allow for the cost of the bond to be covered under the rebate and/or abatement schedule.
4. Allow for CDA to negotiate and set fees for QC applications to cover due diligence reviews
Presently, under the current operation of the QC program, application fees are set by statute per targeted industry. With the removal of the statutorily set target industry listing, allowance should be provided to CDA to negotiate and set application fees per interested investor that will cover the cost of either an in-house due diligence review, or for the procurement of a third party to conduct a review of the applicant.
5. Permit a Pre-Application Process for Investors submitting interest in developing in the CNMI
The Council recommends the addition of a Pre-Application procedure in advance of formal submission of the application for a Qualifying Certificate. The Pre-Application Process is recommended to take the following form:
· In the formulation of the targeted industries list, the CDA will host a Pre-Application Consultation meeting with the Chairman of the CDA Board, the Governor, Secretary of Finance, Director of Revenue and Taxation, and, if applicable, the Secretary of Public Lands. In this meeting, the terms and bounds and strategy for negotiation CDA management officials will have in discussing terms and conditions of tax credits, abatements, and community contribution requirements for each targeted industry category.
· Interested investor seeking a Qualifying Certificate, will submit a statement of interest to the CDA, stating their proposed investment in the CNMI, economic impact estimates, employment estimates, and the location for proposed development.
· CDA will be granted authority to negotiate with the investor within the bounds set by the Pre-Application Consultation meeting, and if successful, permit the formal submission of the QC Application for review by the CDA Board of Directors.
· Should the investor be unable to accept the terms as bound by the Pre-Application Consultation Meeting, CDA will justify the alteration from the predetermined bounds for incentives and submit the reasoning for the alteration to the Governor upon recommendation from the Board pursuant to 4 CMC § 50205.
6. Allow for the development of the CNMI Strategic Investment Program
There exists, on occasion, the need for Government to take an active partnership in the development of industries that have the potential to greatly advance economic development priorities or policies. The development of alternative industries is one of the most difficult tasks of the CNMI government and attempts to strengthen economic resilience in previous decades has resulted in limited outcomes. These attempts, however, have not been without promise. American investors, seeking opportunities in the CNMI have showcased interest in large-scale positive investments, but have been turned away by regulatory disjunction among CNMI permitting agencies, regulatory hurdles, and a lack of coordination among government bodies.
Nonetheless, the CNMI has over the course of its history, stated in both law and proclamation, interest in specific industries that have constituted the CNMI’s economic development policy. The recommendation here is to formalize this policy and provide the ability for CDA to act upon development goals of the Commonwealth.
This requires the creation of a CNMI Strategic Investment Program within the Qualifying Certificate structure that will take the following form:
The Council recommends that the CNMI Government, coordinate with CDA to determine private sector economic development priorities that will achieve diversification objectives. A formal study will be performed by CDA to determine the requirements of developing such an industry, the permitting requirements necessary to see through development, and the potential locations within public lands that would be suitable for such development.
This report will then be brought to the Governor and the CNMI Legislature for review, and the Executive Branch will collaborate its departments and agencies toward pre-permitting a set piece of unused or blighted property for the Strategic Investment. Pre-permitting will be the determination of all permitting issues throughout the government’s existing permitting structure, to include Fish and Wildlife, BECQ, CRM, HPO, Zoning and Public Lands among others. If no permitting issues are present that would delay or halt development of a Strategic Investment, CDA will be permitted to package both QC incentives discussed in the Recommendation 3, the location, and the Pre-permitting certification to U.S. investors in the targeted industry classification. This will include off-island investor missions, participation in national business investment summits, and the hosting of investment summits in the CNMI.
The Council believes that the CNMI should be engaging in active efforts to entice American investors to establish business in our islands that align with the community’s goals and desires. It may be pointed out that in the duration of economic development efforts, the successful outcomes of development have been as a part of pro-active efforts on behalf of the government. CDA should be at the forefront of these efforts and be granted the authority and responsibility to collaborate toward the advancement of CNMI economic development policy.
Form of Amendments
The recommendations of the Council represent large-scale adjustments to the current law authorizing the Qualifying Certificate Program. As such, the Council recommends a collaborative effort among the Executive Branch, CDA, the Legislature, and the Governor’s Council of Economic Advisers in devising the statutory language to introduce and enact a new Incentive Act to replace the Investment Incentive Act of 2000.
In researching, deliberating, and crafting these proposals, the Council wishes to recognize that there are necessary considerations that affect the CNMI’s ability to compete for quality investments which should be assessed in future efforts.
Cohesive Government Planning Efforts
The development of goals, plans and strategies should find cohesion among the various agencies and departments of the CNMI government. A unified planning effort to encapsulate the long-term goals for the islands infrastructure, utilities, education, and health care system are all essential elements in creating an environment enticing to quality investment. A macro-picture of the CNMI’s goals and ongoing plans will better guide CDA in establishing the industries that will be targeted for increased investment in the CNMI.
Government Permitting and Ease of Business
The time and effort placed into obtaining the necessary permits to begin development of an investment represents a significant cost to potential investors. The CNMI’s present permitting structure is disjointed and in need of dramatic simplification. It should be noted that the current application of permitting and licensure in the CNMI is not up to the standards of communities throughout the United States.
Concurred by the Members of the Economic Diversification Committee
Governor’s Council of Economic Advisers
 Buss, T. F. (2001). The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature. Economic Development Quarterly, 15(1), 90–105. doi:10.1177/089124240101500108