Northern Mariana Islands: Garment and Tourist Industries Play a Dominant
Role in the Commonwealth's Economy (Chapter Report, 02/14/2000,
GAO/RCED/GGD-00-79).
The Commonwealth of the Northern Mariana Islands is a U.S. territory
with commonwealth status in the western Pacific. The covenant
establishing the Commonwealth of the Northern Mariana Islands places
them under U.S. sovereignty and grants U.S. citizenship to people born
there, but pledges self-government for local affairs. The Islands
control their own immigration policy and set their own minimum wage,
which, at $3.05 per hour, is substantially below the minimum wage in the
United States. Businesses in the Islands, particularly in the garment
and tourist industries, employ many foreign workers who have work
permits that do not lead to citizenship. This report answers the
following questions: What has been the impact of the garment and tourist
industries and the use of foreign workers on the economy of the Mariana
Islands? How do the revenue-raising efforts of the Mariana Islands and
the payments that they receive from the U.S. Treasury compare with those
of other U.S. territories and freely associated states? How do the taxes
and fees paid by the garment industry in the Mariana Islands, expressed
as a percentage of gross receipts, compare with the taxes and fees paid
by the garment industry in the United States?
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED/GGD-00-79
TITLE: Northern Mariana Islands: Garment and Tourist Industries
Play a Dominant Role in the Commonwealth's Economy
DATE: 02/14/2000
SUBJECT: International economic relations
Clothing industry
Comparative analysis
Territories and possessions
Economic analysis
Labor supply
Alien labor
Taxes
Economic growth
Exporting
IDENTIFIER: Northern Mariana Islands
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GAO/RCED/GGD-00-79
Report to Congressional Committees
February 2000
NORTHERN MARIANA ISLANDS
Garment and Tourist Industries Play a Dominant Role in the Commonwealth's
Economy
*****************
*****************
GAO/RCED/GGD-00-79
Letter 3
Executive Summary
6
Chapter 1 Introduction
16
Chapter 2 The Impact of the Garment and Tourist Industries
on the CNMI Economy
33
Chapter 3 The CNMI Government's Revenue-Raising Effort
50
Appendixes
Appendix I: CNMI Taxes and Tax Revenue
60
Appendix II: The Potential Shifting of Garment Industry Tax Burdens
64
Appendix III: Comments From the Commonwealth of the Northern Mariana
Islands and Our Evaluation
66
Appendix IV: Comments From the Department of the Interior and Our
Evaluation
73
Appendix V: GAO Contacts and Staff Acknowledgments
88
Table 1: Percentage of Revenue From Local Sources and Federal
Transfers and Grants in Relation to Total General Revenue for
the CNMI and Other Outlying Areas, Fiscal Years 1994 Through 199751
Table 2: Revenue From Local Sources as a Percentage of GDP for
the CNMI and Other Outlying Areas, Fiscal Years 1994 Through 199754
Table 3: Taxes and Fees Paid by the CNMI Garment Industry as a Percentage
of Its Gross Receipts, Fiscal Years 1993 Through
1998 55
Table 4: Taxes and Fees Paid by the U.S. Garment Industry as
a Percentage of Its Gross Receipts, 1991 Through 199656
Table 5: Taxes Collected in the CNMI, Fiscal Years 1994 Through
1997 62
Table 6: Sources and Types of Revenue Collected in the CNMI,
Fiscal Years 1994 Through 1997 62
Figure 1: Map of the Pacific Showing the Northern Mariana Islands18
Figure 2: Population Growth on Saipan, CNMI, 1980 to 199921
Figure 3: Rate of Change in Selected Economic Variables for the
CNMI and Guam, 1982 Through 1997 23
Figure 4: Average Hourly Wages on Saipan, CNMI, 1980 to 199924
Figure 5: Average Hourly Wages in Selected Occupations, by Place
of Birth, 1999 25
Figure 6: CNMI Visitor Arrivals and Spending, 1980 to 199935
Figure 7: Saipan Employment and Local Labor Force, 1980 to 199940
Figure 8: Distribution of Local and Foreign Workers by
Occupation and Place of Birth, 1999 41
Figure 9: Income Distribution for Saipan Households, 1980 and 199943
ACIR Advisory Commission on Intergovernmental Relations
CNMI Commonwealth of the Northern Mariana Islands
FSM Federated States of Micronesia
GAO General Accounting Office
GDP Gross domestic product
IMF International Monetary Fund
OMB Office of Management and Budget
RTS Representative Tax System
WTO World Trade Organization
Resources, Community, and
Economic Development Division
B-284271
February 14, 2000
The Honorable Slade Gorton
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Subcommittee on Interior and Related Agencies
Committee on Appropriations
United States Senate
The Honorable Ralph Regula
Chairman
The Honorable Norm Dicks
Ranking Minority Member
Subcommittee on Interior and Related Agencies
Committee on Appropriations
House of Representatives
As directed in Conference Report 105-825, we are reporting on the state of
the economy of the Commonwealth of the Northern Mariana Islands and its
revenue-raising efforts. More specifically, the report discusses the
impact of the garment and tourist industries and foreign workers on the
Commonwealth's economy. It also discusses how the revenue-raising efforts
of the Commonwealth compare with those of other U.S. territories and
Freely Associated States and how the taxes and fees paid by the
Commonwealth's garment industry compare with those paid by the garment
industry in the United States.
We will send copies of this report to the Honorable Bruce Babbit,
Secretary of the Interior; Ferdinand Aranza, Director, Office of Insular
Affairs; and the Honorable Pedro P. Tenorio, Governor, Commonwealth of the
Northern Mariana Islands.
Please contact me at (202) 512-3841 if you or your staff have any
questions. Additional contacts and key contributors to this report are
listed in appendix V.
*****************
*****************
Barry T. Hill
Associate Director, Energy,
Resources, and Science Issues
EXECUTIVE SUMMARY
=================
Purpose
The Commonwealth of the Northern Mariana Islands (CNMI) is a U.S.
territory with commonwealth status in the western Pacific. The Covenant
establishing the CNMI places it under U.S. sovereignty and provides for
U.S. citizenship for people born there, yet pledges self-government for
local affairs. The Covenant also allows the CNMI to control its own
immigration policy and to set its own minimum wage, which, at $3.05 per
hour, is substantially below the minimum wage in the United States of
$5.15 per hour (the CNMI is currently reviewing its minimum wage rate).
Businesses in the CNMI, particularly in the garment and tourist
industries, employ many foreign workers who have work permits that do not
lead to citizenship. To obtain more information on the economy of the
CNMI, the Congress directed GAO in the conference report accompanying the
Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999
to complete analyses and reports concerning the CNMI. Following
discussions with the offices of the responsible congressional committees,
GAO has addressed the following questions:
1.What has been the impact of the garment and tourist industries and
the use of foreign workers on the economy of the CNMI?
2.How do the revenue-raising efforts of the CNMI and the payments that
the CNMI receives from the U.S. Treasury compare with those of
other U.S. territories and Freely Associated States?/Footnote1/
3.How do the taxes and fees paid by the garment industry in the CNMI,
expressed as a percentage of gross receipts, compare with the taxes
and fees paid by the garment industry in the United States?
As agreed with the offices of the Subcommittees on Interior and Related
Agencies of the House and Senate Committees on Appropriations, GAO did not
assess the issue of compliance with labor and worker safety laws in the
CNMI in this report. Nor did GAO assess the sociological and political
ramifications of the presence in the CNMI of a large population of
noncitizens. While GAO gathered information on the effects of the current
minimum wage and immigration policies in the CNMI on the garment and
tourist industries, it did not assess whether changes are needed in those
policies.
Background
The Northern Mariana Islands are a group of 14 islands in the Pacific
Ocean, lying just north of Guam. They are located about 3,200 miles west
of Honolulu, 5,500 miles west of Los Angeles, and 1,500 miles south of
Tokyo. The United States took control of the Northern Mariana Islands from
Japan during the latter part of World War II. In 1947, the U.S. Congress
approved the Trusteeship Agreement that made the United States responsible
to the United Nations for the administration of the islands. Accordingly,
the United States was obligated to promote the political, economic,
social, and educational advancement of the Islands' inhabitants leading to
self-government or independence. For about the next 15 years, the Northern
Mariana Islands had little economic development. Except for some U.S.
military activity on the Islands, the economy consisted of subsistence
farming and fishing, small-scale manufacturing, and trading. Later, the
Northern Mariana Islands sought self-government and permanent ties to the
United States. Over time, the Islands negotiated different political
arrangements with the United States. In March 1976, the President signed
Public Law 94-241, which formed a Covenant to Establish a Commonwealth in
Political Union With the United States of America. A basic objective of
the Covenant was to encourage economic growth and a standard of living in
the CNMI comparable to that in the United States.
The CNMI has used its authority to control its own immigration policy to
bring in foreign workers, mostly from China and the Philippines-under
temporary, but renewable, work permits that do not lead to citizenship-and
to allow the entry of foreign business owners and their families. In large
part because of the influx of these foreign workers and entrepreneurs, the
population of the CNMI has grown rapidly, increasing from about 16,800 in
1980 to 79,000 in 1999./Footnote2/ On Saipan-the island that is the
capital of the CNMI and its main population center-foreign workers and
other non-U.S. citizens
constitute about 58 percent of the population at present./Footnote3/
Businesses in the CNMI can also sell some goods to buyers in the United
States duty-free and are not subject to import quotas for goods sold to
the United States. In particular, as long as certain conditions are met,
garments manufactured in the CNMI can be sold to buyers in the United
States without incurring import tariffs, and there is no quota on imports
of garments to the United States from the CNMI. In addition, these
garments can bear labels identifying them as having been made in the
United States. These features give garment manufacturers in the CNMI
greater access to the U.S. market than is available to garment
manufacturers from outside the United States. The garment industry has
grown rapidly in the CNMI and is, along with the tourist industry, one of
the two largest sectors of the economy. Nearly all garments manufactured
in the CNMI are exported to the United States. Median household income for
the largest indigenous group of people in the CNMI (the Chamorros) rose
from about $8,900 in 1980 to $30,700 in 1999./Footnote4/ The CNMI
government relies on revenue derived locally (taxes, fees, charges, etc.)
and on payments from the U.S. Treasury. The Covenant allowed the CNMI to
establish its own tax and fee structure. Garment manufacturers in the CNMI
presently pay the government a user fee equal to 3.7 percent of the gross
value of their exports to the United States and a tax of up to 5 percent
on the gross receipts from sales they make in the CNMI. They also pay fees
to the government for each nonresident they employ. In contrast, garment
manufacturers in the United States typically pay income taxes (sometimes
state and local, as well as federal) and property taxes. They may also pay
sales taxes.
Results in Brief
The garment and tourist industries contribute directly to the CNMI economy
by creating jobs and producing goods and services for export. They also
contribute indirectly to the economy through purchases of local goods and
services and with taxes and fees paid to the government. The garment and
tourist industries account-directly or indirectly-for about
80 percent of the employment in the CNMI and for over 90 percent of the
economy's exports, according to an October 1999 economic study of the CNMI
prepared under the direction of the Northern Marianas College with funding
from the Department of the Interior that GAO reviewed and found
reasonable. These industries also contribute to the government's total
revenue. For example, in 1998, the garment industry directly contributed
about $52 million, or 22 percent, of the government's $234 million budget.
In 1997-the latest date for which data on visitor expenditures are
available-the tourist industry contributed at least $34 million, or
14 percent, of that year's budget of $248 million. The garment and tourist
industries and the workers that they employ also require government
spending for services and infrastructure, but GAO questions the conclusion
of a January 1999 study commissioned by the Department of the Interior
that this spending exceeds the industries' revenue contributions.
The garment and tourist industries are dependent on foreign workers for
much of their workforce because the labor pool of local residents, even
including those currently unemployed, is insufficient to support an
economy of the size and scope that exists in the CNMI. For example, on
Saipan-the most populated island in the CNMI and its business center-the
current labor force of local residents contains only about 12,800 people,
including U.S. citizens not born in the CNMI and non-U.S. citizens from
the Freely Associated States who have the right of residency and
employment in the CNMI. However, the economy of Saipan employs about
43,700 people. All sectors of the economy, including the government
sector, hire foreign workers. In addition, foreigners own and operate
businesses in the CNMI. The economy of the CNMI is vulnerable to outside
events because of its heavy reliance on only two industries, which may be
affected by changes in Asian economic conditions, legislation in the
United States, or international trade agreements. For example, changes
that reduced or eliminated the advantages of manufacturing garments in the
CNMI might cause some or all of the CNMI garment industry to relocate to
other countries, causing job losses among local residents and revenue
losses to the CNMI government.
The CNMI is more self-sufficient fiscally than other outlying areas, such
as Guam, Puerto Rico, the U.S. Virgin Islands, and the Freely Associated
States. Between 1994 and 1997, about 87 percent of the CNMI government's
general revenue came from local sources rather than from payments from the
U.S. Treasury. The ratio of locally derived government revenue to gross
domestic product (GDP) in the CNMI is also higher than that of most other
outlying areas and is larger than the comparable ratio for all levels of
government in the United States.
Using data on the major taxes and fees, GAO found that for the period 1993
through 1998, the taxes and fees paid by the businesses in the CNMI
garment industry represented about 5.0 percent of their gross receipts,
while for the period 1991 through 1996, the taxes and fees paid by the
businesses in the U.S. garment industry represented about 3.3 percent of
their gross receipts. However, the owners of those businesses may not
ultimately bear the full economic burden of the taxes and fees that they
pay. Some of the burden may be shifted to consumers, workers, and
investors in other industries, but the extent of this shifting is unknown.
Principal Findings
The Garment and Tourist Industries Are the Driving Forces of the CNMI
Economy
---------------------------------------------------------------------------
The economy of the CNMI relies on the garment and tourist sectors for most
of its employment, exports, and production. Both industries contribute
directly to the economy by generating employment and bringing in revenue
from outside the CNMI via exports. For example, in 1999, the garment
industry directly employed about 16,000 workers, including
13,500 foreign workers and 2,500 local residents. The tourist industry, in
1995, directly employed about 9,600 workers, including 6,900 foreign
workers and 2,700 local residents. According to an October 1999 economic
study that GAO reviewed and found reasonable, these two industries
produced about 96 percent of the CNMI's exports and were responsible for
about 85 percent of the CNMI's total economic activity./Footnote5/
The rapid growth of the CNMI's garment and tourist industries during the
past two decades has contributed to the development of other businesses
and the growth of the government sector. These industries are linked to
the rest of the economy through the purchases of goods and services from
other industries, tax revenue paid to the government, and workers'
spending. In addition, these industries and their workers create a need
for increased government spending. A January 1999 study commissioned by
the Department of the Interior concluded that the garment and tourist
industries and the workers they employ require government spending for
services and infrastructure that exceeds what they contribute in
revenue./Footnote6/ However, because that study had a number of
methodological weaknesses (in particular, understating the contributions
made by the garment and tourist industries to the economy and overstating
the industries' impact on government spending), GAO believes that this
conclusion is questionable.
Currently, the CNMI's tourist industry is in a slump caused by the Asian
economic crisis of 1998 and 1999. The number of visitors to the CNMI
declined by more than 30 percent between 1997 and 1999, which has caused
some businesses to close and others to lay off workers. In contrast, the
garment industry, which sells primarily to the U.S. market, has grown
since 1997, partially insulating the economy of the CNMI from the Asian
downturn. Nonetheless, the economy is worse off today than it was in 1997,
and government revenue was about $32 million lower in 1999 than in 1997, a
reduction of about 13 percent.
The labor pool of local residents, even including those currently
unemployed, is insufficient to provide labor for the CNMI economy. In
1999, the total size of the resident workforce on Saipan was only about
12,800,/Footnote7/ while the economy of Saipan employed about 43,700. As a
result, both the garment and tourist industries are heavily dependent on
foreign workers. For example, in 1999, foreign workers constituted about
84 percent of the garment industry's workforce of 16,000. All sectors,
including the government, employ foreign workers because they require
workers with skills not available in sufficient supply among the resident
workforce. Foreigners also contribute entrepreneurial skills and capital
to start businesses, and many businesses in the CNMI are owned by non-U.S.
citizens.
Because of its reliance on only two large industries and on foreign
workers, the economy of the CNMI is vulnerable to events that affect these
industries or the terms under which foreign workers may enter and work in
the CNMI. A tourist industry revival, which would have a positive effect
on the overall economy, depends on continued improvement in the economies
of Asian countries. If changes in international trade agreements or
legislative action reduced or eliminated the tariff, quota, and labeling
advantages of manufacturing garments in the CNMI, some or all of the CNMI
garment industry might relocate to countries with lower wages./Footnote8/
Such relocation could cause local residents to lose their jobs and the
CNMI government to lose tax revenue. Major changes in the availability of
foreign workers or in their terms of employment would also have a large
impact on the economy because of the importance of foreign workers in all
sectors./Footnote9/
The CNMI Is More Self-Sufficient Fiscally Than Other Outlying Areas
--------------------------------------------------------------------
In recent years, the government of the CNMI has relied for its revenue on
local sources-taxes, licenses, fees, and other charges-to a greater extent
than have other outlying areas, such as Guam, Puerto Rico, the U.S. Virgin
Islands, and the Freely Associated States. Between 1994 and 1997, the CNMI
government obtained about 87 percent of its general revenue from local
sources, while payments from the U.S. Treasury accounted for about 13
percent. During this period, other outlying areas obtained more of their
general revenue from federal contributions and less from local sources.
Taxes were the predominant source of the CNMI's local revenue during this
period, accounting for about 70 percent of local revenue. The largest
source of tax revenue in the CNMI was the business gross receipts tax,
which accounted for about 37 percent of total tax revenue.
GAO estimated that the CNMI's ratio of government revenue derived locally
to GDP was between 29 and 45 percent in the period 1994 through 1997,
which was higher than the ratio for most other outlying areas. This ratio,
which expresses the fraction of the overall level of economic activity or
taxable capacity used to finance the government sector, is often used to
measure a country's tax effort. GAO provided range estimates for this
ratio for the CNMI and other outlying areas because the GDP data necessary
for more precise estimates were unavailable. The ratio of local revenue to
GDP in the CNMI was also higher than that for the United States (federal,
state, and local governments combined), which was 28 percent in 1996.
Data Suggest That the Garment Industry in the CNMI Pays a Higher Share of
Its Gross Receipts as Taxes and Fees Than the Garment Industry in the
United States
---------------------------------------------------------------------------
Available data suggest that the taxes and fees paid by the garment
industry in the CNMI represent a higher share of the industry's gross
receipts than do the taxes and fees paid by the garment industry in the
United States./Footnote10/ GAO used data on the major taxes and fees paid
and found that from 1993 through 1998, the taxes and fees paid by the
garment industry in the CNMI represented about 5.0 percent of its gross
receipts, while from 1991 through 1996,/Footnote11/ the taxes and fees
paid by the garment industry in the United States represented about 3.3
percent of its gross receipts.
While remaining legally responsible for paying a tax or fee, garment
manufacturers, like other businesses subject to taxation, may be able to
shift some or all of the burden of a tax or fee to other groups in the
economy. Such shifts would occur through changes in the prices of their
products or the prices that they pay to acquire labor or materials used to
make garments. The unavailability of data on supply and demand conditions
in specific markets, such as the markets for garments and garment industry
labor in the United States and the CNMI, prevented GAO from estimating the
ability of the garment industry in the CNMI to shift its tax burden
compared with the ability of the garment industry in the United States to
do the same.
Agency Comments and GAO's Evaluation
GAO provided copies of a draft of this report to the Governor of the CNMI
and the Department of the Interior for their review and comment. The CNMI
did not provide an overall assessment; however, it made several
suggestions for including additional information. In particular, it
suggested that GAO (1) add information showing that the percentage of the
total workforce employed by the CNMI government is smaller than in Guam or
the United States; (2) state that additional nonwage benefits, such as
health care, given to foreign workers tend to hold down their wages, while
the wages of local workers tend to be higher to compensate for the lack of
such benefits; and (3) attribute the high unemployment rate among U.S.
citizens in the CNMI and a similarly high rate in Guam to the recent
economic recession in Asia. GAO believes that comparing the total
workforce of the CNMI to that of Guam and the United States would be
misleading because the CNMI workforce includes a large proportion of
foreign workers who temporarily reside in the CNMI and are primarily
employed in the private sector. Guam and the United States do not have
similar proportions of foreign workers to total workforce. GAO also
believes that there are insufficient data on the actual value of benefits,
such as health care, received by all workers or on deductions to foreign
workers' wages to be able to asses the net value of these benefits.
Furthermore, GAO does not believe that there is enough information about
the actual nature and causes of unemployment in the CNMI to attribute the
unemployment to the economic recession in Asia.
The Department of the Interior stated that while GAO's report accurately
depicts the dominant role of the garment and tourist industries in the
CNMI's economy, the economic analysis underlying the report is flawed
because it did not evaluate the effect of these dominant industries and
their alien employees on the residents who are U.S. citizens and the
economic development of the CNMI. GAO disagrees that the economic analysis
in the report is flawed. Contrary to the Department's assertion, the
report evaluates the impact of the garment and tourist industries and the
use of foreign workers on the CNMI economy and finds that the local
resident population--most of whom are U.S. citizens-have benefited from
the economic growth and development in the past 20 years because incomes
and employment opportunities have increased with economic growth. The
growth in the economy has been driven by the growth of the garment and
tourist industries and the use of foreign workers. The Department also
believes that the report gives an erroneous impression that an economy
based on two dominant industries and foreign labor is beneficial in the
long run. GAO's report does not give this impression. While clearly laying
out the benefits provided to date, GAO's report clearly states that the
CNMI's reliance on the garment and tourist industries and on foreign
workers makes it vulnerable to outside events that impact either industry
or the economy's access to foreign workers. Therefore, GAO agrees with the
Department that the future development of the CNMI economy is a concern.
The Department questioned the validity of GAO's comparison of the CNMI's
revenue-raising efforts with those of other outlying areas. In particular,
the Department questioned the inclusion of the Freely Associated States
among the outlying areas and GAO's method for calculating revenues from
local sources and federal transfers for Guam and the CNMI. Although the
Freely Associated States are sovereign nations, GAO believes that they
should be included because they receive federal funds, they have a shared
history with the CNMI, and their citizens have the right of residency in
the CNMI. The Department stated that revenue collected by the CNMI
government from the user fee that the garment industry pays on garments
exported to the United States should be considered federal transfers
rather than local revenue. GAO disagrees because nothing required the CNMI
to impose a user fee on garment exports. Instead, the decision to apply
the user fee was an autonomous act of the government of the CNMI,
independent of the exemption from U.S. tariffs. Therefore, it is
appropriate to include the revenue received from the user fee as local
revenue when evaluating the revenue-raising effort of the CNMI.
The Department further asserted that the taxes and fees actually borne by
the garment industry in the CNMI may be quite small because the user fee
is shifted to other groups. GAO did not address this issue because data
limitations prevent a reliable estimate of the extent to which specific
economic groups actually bear the burden of these taxes. The Department
also said that the employer's share of Social Security taxes, which GAO
included in calculating the taxes and fees paid by the garment industry in
the CNMI, should not be included. GAO disagrees because these taxes are
included for U.S. garment manufacturers; hence, it is appropriate to
include them for the CNMI industry as well.
More detailed discussion of the comments from the CNMI and the Department
of the Interior are included at the end of chapters 2 and
3. These agencies also provided clarification on several technical points
that have been included in the report as appropriate. The full text of the
comments and GAO's responses are included in appendix III for the CNMI and
appendix IV for the Department of the Interior.
--------------------------------------
/Footnote1/-^The Republic of the Marshall Islands, the Federated States of
Micronesia, and the Republic of Palau, former components of the Trust
Territory of the Pacific Islands, are sovereign nations that have
compacts of association with the United States and are generally called
the Freely Associated States. The Freely Associated States and the other
U.S. territories (the Commonwealth of Puerto Rico, the U.S. Virgin
Islands, American Samoa, and Guam) are sometimes referred to
collectively as outlying areas, a term that GAO uses in this report.
/Footnote2/-^The 1999 figure of 79,000 is an estimate based on census
figures in 1995 and the growth rate of the population between 1990 and
1995. According to the CNMI Governor's Office, immigration data, school
enrollment, hospital records, nonrenewals of business licenses, and
other sources all indicate that there are fewer people.
/Footnote3/-^Saipan is the CNMI's commercial and government center and
accounts for about 90 percent of the population of the CNMI. Some of the
non-U.S. citizens on Saipan are citizens of the Freely Associated States
and are considered local residents in this report. According to the
CNMI, in 1999, 1,495 of the non-U.S. citizens were the immediate
relations of U.S. citizens.
/Footnote4/-^GAO did not calculate the change in income in constant, or
inflation-adjusted, dollars because it was unable to find a consumer
price index for the CNMI that went back to 1980. Even if such an index
had been available, there would have been problems with using it because
the types of goods and services purchased in the CNMI--the consumer's so-
called market basket--changed so much over this period. Therefore,
measuring the change in the price level of a fixed market basket of
goods and services would not have accurately measured the change in the
cost of living.
/Footnote5/-^An Economic Study for the Commonwealth of the Northern
Mariana Islands, Business Development Center, Northern Marianas College,
with funding provided by the Office of Insular Affairs, U.S. Department
of the Interior, Oct. 1999.
/Footnote6/-^CNMI Fiscal Impact Report: The Impact of Non-Residents on the
Economy and Public Infrastructure of the Commonwealth of the Northern
Mariana Islands, prepared for the Office of Insular Affairs, U.S.
Department of the Interior, by Robert W. Rudolph and James C. Nicholas,
Jan. 1999.
/Footnote7/-^This group includes, in addition to U.S. citizens born in the
CNMI, U.S. citizens from Guam and elsewhere (including the U.S.
mainland) and those non-U.S. citizens born in the Freely Associated
States who have the right of residency and employment in the CNMI.
/Footnote8/-^These advantages include tariff-free and quota-free access to
the U.S. market and the ability to identify the garments as having been
made in the United States. Even if tariffs and quotas were completely
eliminated, the additional advantage that garments manufactured in the
CNMI can bear labels identifying them as having been made in the United
States would remain.
/Footnote9/-^Two bills introduced into the 106th Congress, H.R. 730 and S.
1052, could make it harder for foreign workers to work in the CNMI.
/Footnote10/-^Although some tax data were unavailable, the unmeasured
taxes and fees that CNMI and U.S. garment manufacturers may have paid
are likely to be small relative to the measured taxes and fees.
Therefore, even if GAO had been able to include these data, the finding
that garment manufacturers in the CNMI pay taxes and fees that represent
a higher percentage of gross receipts than do garment manufacturers in
the United States would not likely have changed.
/Footnote11/-^Because of processing and publishing lags, no published data
beyond 1996 are yet available.
INTRODUCTION
============
The Covenant establishing the Commonwealth of the Northern Mariana Islands
(CNMI), a U.S. territory in the western Pacific, gave the CNMI authority
to establish its own immigration and minimum wage policies. The CNMI has
used this authority (1) to allow many foreign workers, primarily from the
Philippines and China, to enter and work in the CNMI and (2) to establish
a minimum wage, currently $3.05 per hour, that is substantially below the
minimum wage in the United States of $5.15 per hour. The foreign workers
are employed throughout the economy but work primarily in the garment and
tourist industries, which are the two largest industries in the CNMI. The
garment industry in the CNMI has grown rapidly since commonwealth status
was obtained because garments exported from there to the United States are
exempt from U.S. textile quotas and import tariffs or duties. In addition,
the garments can be sold with labels identifying them as having been made
in the United States. The tourist industry also grew rapidly until 1997
but has declined since then because of the downturn in the economies of
Asian countries.
Some Members of the Congress and others have expressed concern that the
garment industry in particular and its foreign workers may have a negative
fiscal impact on the CNMI government. Specifically, they have suggested
that the costs of providing infrastructure to support the garment industry
and of providing government services, such as health care and education,
for the industry's workers and their dependents may exceed the increased
government revenue the industry generates. Conversely, others have
expressed the view that the garment and tourist industries and the use of
foreign workers have contributed substantially to the growth of the CNMI
economy. Specifically, they believe that the revenue generated from these
industries has contributed significantly to maintaining an economy that is
self-sufficient and not as dependent on federal subsidies as are the
economies of other outlying areas./Footnote1/ However, there is
uncertainty about whether the revenue-raising efforts of the CNMI,
particularly the level of taxes and fees paid by the garment industry, are
sufficient to meet local needs, necessitating the expenditure of federal
funds to subsidize the CNMI economy. Furthermore, there are additional
concerns about the appropriateness of using foreign workers to manufacture
garments in the CNMI that are sold in the United States with a label
identifying them as having been made in the United States and about
possible violations of existing labor and worker safety laws. These
include nonpayment of overtime pay rates for working beyond 40 hours per
week and providing workers' housing that does not meet minimum safety and
health standards.
Historical Background on the Relationship Between the United States and
the Northern Mariana Islands
The Northern Mariana Islands are a group of 14 islands in the Pacific
Ocean, lying just north of Guam (see fig. 1). The Islands are located
about 3,200 miles west of Honolulu, 5,500 miles west of Los Angeles, 1,500
miles south of Tokyo, and 1,400 miles east of Manila.
Figure****Helvetica:x11****1: Map of the Pacific Showing the Northern
Mariana
Islands
*****************
*****************
The United States took control of the Northern Mariana Islands from Japan
after heavy fighting during the latter part of World War II. In July 1947,
the U.S. Congress approved by joint resolution the Trusteeship Agreement
for the former Japanese Mandated Islands,/Footnote2/ making the United
States responsible to the United Nations for the administration of the
Northern Marianas and other island groups, such as the Marshall Islands.
This agreement established the United Nations Trust Territory of the
Pacific Islands, with the Northern Mariana Islands constituting one of the
districts of the Trust Territory. Under this agreement, the United States
was obligated to promote the political, economic, social, and educational
advancement of the Islands' inhabitants. In the 1950s and early 1960s, the
Northern Marianas were isolated from outsiders except U.S. military
personnel. The Americans built roads, power stations, sewerage and water
systems, hospitals, and schools, but the isolation kept substantial
economic development from occurring. Apart from the military activity, the
economy of the Northern Marianas consisted of subsistence farming and
fishing, small-scale manufacturing, and trading.
Subsequently, the Northern Marianas sought a future political status that
provided self-government and permanent ties to the United States. Hence,
the Northern Marianas began negotiating differing political arrangements
with the United States. As a result of these negotiations, in March 1976,
President Ford signed a joint resolution of the Congress approving the
Covenant to Establish a Commonwealth of the Northern Mariana Islands in
Political Union With the United States of America (P.L. 94-241).
The first elected government took office in the Northern Marianas in
January 1978, although the Islands remained a part of the Trust Territory
of the Pacific Islands under the jurisdiction of the Secretary of the
Interior./Footnote3/ However, by Presidential Proclamation of November 3,
1986, and as a result of a valid act of self-determination pursuant to
section 1002 of the Covenant, the Northern Mariana Islands ceased to be
bound by the United Nations Trusteeship Agreement of 1947. Accordingly,
the Northern Mariana Islands became a commonwealth in political union and
under the sovereignty of the United States. The Office of Insular Affairs
within the Department of the Interior is responsible for assisting the
CNMI in achieving its political, economic, and social goals.
Key Provisions of the Covenant Affect Wages, Exports, Immigration, and Taxes
---------------------------------------------------------------------------
The Covenant establishes a unique political relationship between the CNMI
and the United States. It places the CNMI under U.S. sovereignty and
provides for U.S. citizenship for people born in the CNMI, yet pledges
self-government for local affairs. A basic objective of the Covenant is to
encourage economic growth and a standard of living comparable with that in
the United States. Accordingly, the Covenant provides several economic
incentives. Included among them are that (1) the CNMI controls its minimum
wage because the U.S. minimum wage was considered too high for the
developing Islands' economy and (2) businesses in the CNMI receive
favorable treatment for certain exports to the United States. All such
exported articles are exempt from federal excise taxes, and articles that
are made in the CNMI that do not contain foreign substances valued at more
than 70 percent of the articles' worth are exempt from U.S. textile quotas
and from U.S. customs duties. In addition, articles made in the CNMI are
entitled to bear labels identifying them as having been made in the United
States. These features give garment manufacturers in the CNMI greater
access to the U.S. market than is available to garment manufacturers in
many other nations.
The Covenant also provides that the CNMI controls its own immigration.
This provision was included because local representatives were concerned
that existing U.S. immigration laws would permit excessive immigration to
the Islands from neighboring Asian countries under terms that would allow
these immigrants to become U.S. citizens, which would permanently
overwhelm the local culture. In addition, local representatives recognized
that the native labor pool of the Northern Marianas was too small and did
not have all the skills needed to support economic development. Therefore,
once established, the CNMI developed an immigration policy that allows and
encourages foreigners to work in the CNMI under temporary, but renewable,
work permits that do not lead to U.S. citizenship./Footnote4/ Many
foreigners have entered the CNMI to work or to open and operate
businesses. In fact, as a direct result of the policy decision to restrict
immigration but permit a large growth in noncitizen residents, the growth
rate of the population of foreign workers and other non-U.S. citizens has
outpaced that of the population of U.S. citizens, and at present,
noncitizens outnumber citizens. About 79,000 people reside in the CNMI,
approximately 90 percent of whom live on Saipan, which is the major
business center and the capital of the CNMI. Currently, about 72,000
people live on Saipan and about 42,000, or 58 percent, of them are not
U.S. citizens. Figure 2 shows the rapid rate of population growth on
Saipan by citizenship status from 1980 to 1999./Footnote5/
Figure****Helvetica:x11****2: Population Growth on Saipan, CNMI, 1980
to 1999
*****************
*****************
Source: "Recent Trends in Population, Labor Force, Employment,
Unemployment and Wages: Commonwealth of the Northern Mariana Islands, 1973
to 1999," draft 1, CNMI Department of Commerce, July 1999.
The CNMI government relies on revenue derived locally (taxes, fees,
charges, etc.) and on payments from the U.S. Treasury. The Covenant allows
the CNMI to establish its own tax and fee structure. As a result,
important differences exist in the taxation of business income between the
CNMI and the United States. In particular, garment manufacturers in the
CNMI are required to pay a user fee to the CNMI government equal to
3.7 percent of the gross value of their exports to the United States and a
tax of up to 5 percent on the gross receipts from sales they make in the
CNMI. They are also required to pay a fee to the government for each
nonresident they employ. In contrast, garment manufacturers in the United
States are required to pay income taxes (sometimes state and local as well
as federal), property taxes and sometimes sales taxes.
The Economy Has Grown Rapidly Since 1980
----------------------------------------
Since 1980, the rate of growth of the CNMI economy has been large by any
measure. Employment, total payroll, the number of businesses, and total
receipts in the private sector have all grown rapidly. Figure 3 shows the
percentage growth of several economic variables for the CNMI and
Guam./Footnote6/ The figure shows that the CNMI economy has been expanding
and that for the variables measured, the rate of growth has been greater
than in Guam.
Figure****Helvetica:x11****3: Rate of Change in Selected Economic
Variables for the CNMI and Guam, 1982
Through 1997
*****************
*****************
Sources: "1997 Economic Census of Outlying Areas: Construction Industries,
Manufacturers, Wholesale Trade, Retail Trade, and Service Industries,
Northern Mariana Islands" and "1997 Economic Census of Outlying Areas:
Construction Industries, Manufacturers, Wholesale Trade, Retail Trade, and
Service Industries, Guam," U.S. Department of Commerce, Economics and
Statistics Administration, Bureau of the Census.
The wages and incomes of local residents and foreign workers have
generally risen over the period from 1980 to 1999, with more rapid growth
occurring in the 1980s. Figure 4 shows the nominal wages for local and
foreign workers in the CNMI during that period./Footnote7/ The wages of
local workers in 1980 were close to the wages of foreign workers, but
local workers' wages grew faster over the period up to 1999.
Figure****Helvetica:x11****4: Average Hourly Wages on Saipan, CNMI,
1980 to 1999
*****************
*****************
Source: "Recent Trends in Population, Labor Force, Employment,
Unemployment and Wages: Commonwealth of the Northern Mariana Islands, 1973
to 1999," draft 1, CNMI Department of Commerce, July 1999.
Many foreign and local resident workers currently earn more than the
CNMI's minimum wage. Figure 5 shows average wages in 1999 for selected
occupations by place of birth of the worker. This figure also shows that
the difference between wages earned by those born in the CNMI and those
born in Asia is more pronounced in some occupations than in others.
Specifically, a greater percentage difference exists between local and
foreign workers' wages in less skilled occupations-such as the service
industries and operators, fabricators, and laborer-than in more skilled
positions-such as managerial and professional or technical, sales, and
administrative positions.
Figure****Helvetica:x11****5: Average Hourly Wages in Selected
Occupations, by Place of Birth,
1999
*****************
*****************
Source: "Recent Trends in Population, Labor Force, Employment,
Unemployment and Wages: Commonwealth of the Northern Mariana Islands, 1973
to 1999," draft 1, CNMI Department of Commerce, July 1999.
The Use of Foreign Workers and Other Issues Are Controversial
-------------------------------------------------------------
Substantial controversy surrounds the use of foreign workers to
manufacture garments in the CNMI that are then exported to the United
States and sold with a label identifying them as having been made in the
United States. One area of controversy concerns the appropriateness of
allowing garments to be sold in the United States with a "Made in the
U.S.A." or similar label when the workers are mostly noncitizens and many
are paid less than the U.S. minimum wage. Interested parties in the United
States have argued in favor of legislation that would make the immigration
and minimum wage policies of the CNMI equivalent to those of the United
States if such labeling is to remain. Other parties have stated that such
changes, particularly restrictions on the use of foreign workers, would
have a serious negative impact on the economy of the CNMI.
Concerns have also been raised about possible violations of existing labor
and worker safety laws and, in general, about the exploitation of foreign
workers. In the early 1990s, the U.S. Department of Labor cited a number
of garment factories in the CNMI for violations of federal wage and labor
laws./Footnote8/ In addition, the U.S. Department of Labor's Occupational
Safety and Health Administration began to cite businesses in the CNMI for
providing foreign workers with living quarters that did not meet minimum
safety and health standards. Stories in the print and broadcast media have
alleged many concerns, including substandard working and living
conditions; labor law violations, such as nonpayment of overtime pay rates
for working beyond 40 hours per week; leaving workers stranded and without
any means to feed themselves or to return to their countries of origin;
and forced prostitution.
These concerns have led to several lawsuits. Three class action lawsuits
were filed on behalf of garment workers in the CNMI in February 1999. Two
of the lawsuits were filed in California: one in state court and the other
in federal court. The defendants in these suits include many leading
American retailers and brand name garment manufacturers. The plaintiffs
allege in the state case that the defendants trafficked in "hot goods"
made in violation of California's business practices and engaged in
misleading advertising by not adhering to their codes of conduct. In the
federal case, the plaintiffs allege violations of the Racketeer Influenced
and Corrupt Organizations Act and international human rights law. Nine
defendant companies have settled the federal lawsuit with the plaintiffs,
but other defendants remain./Footnote9/ Those companies that reached
settlement agreed to establish a fund to finance an independent monitor of
working conditions in garment factories in the CNMI, to make payments to
workers, to create a public education campaign, and to pay attorneys'
fees. The third lawsuit was filed in federal court in the CNMI. In that
lawsuit, the plaintiffs allege violations of wage and hour laws, including
the minimum wage law of the CNMI, by various garment manufacturers in the
CNMI. In addition to those lawsuits, the federal government filed two
civil rights lawsuits against one of Saipan's largest garment
manufacturers for discriminating against pregnant workers because the
company refused to allow them to collect their benefits and for attempting
to fire a worker for trying to organize a union.
The CNMI Department of Labor and Immigration believes that working
conditions in the garment industry have improved in recent years because
of the enhanced law enforcement by the Department and pressure from buyers
in the United States. In addition, the Philippines maintains a consulate
in the CNMI to assist its citizens who work there. This assistance
includes reviewing employment contracts to make sure that they comply with
existing laws. Also, supporters of the current status under which the CNMI
has the authority to set its own wage and immigration policies point out
that foreign workers in the CNMI generally receive higher wages and more
protection than workers in other developing countries, where businesses
are not subject to the Fair Labor Standards Act and the Occupational
Safety and Health Act.
The Department of the Interior has raised the concern that children born
in the CNMI to mothers who are not U.S. citizens will create substantial
costs for local and federal governments until they reach working age.
According to data provided by the Department, the percentage of babies
born to
non-U.S. citizens has been rising since 1985--about 26 percent of all
births in the CNMI in 1985 were to mothers who were not U.S. citizens,
compared with about 51 percent of the births in 1998. A significant number
of these births were to mothers from the Marshall Islands, the Federated
States of Micronesia, and Palau--births to mothers from these countries
accounted for about 14 percent of all births in the years 1990 through
1993./Footnote10/
Objectives, Scope, and Methodology
To provide information on some of the issues surrounding the CNMI, the
conference report accompanying the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999 mandated that we complete analyses
and reports concerning the CNMI. The conference report was not specific on
what these analyses should address. Through subsequent discussions with
the offices of the Subcommittees on Interior and Related Agencies of the
House and Senate Committees on Appropriations, we agreed to address the
following questions: (1) What has been the impact of the garment and
tourist industries and the use of foreign workers on the economy of the
CNMI? (2) How do the revenue-raising efforts of the CNMI and the payments
that the CNMI receives from the
U.S. Treasury compare with those of other U.S. territories and Freely
Associated States? (3) How do the taxes and fees paid by the garment
industry in the CNMI, expressed as a percentage of gross receipts, compare
with the taxes and fees paid by the garment industry in the United States?
In this report, we address the first question in chapter 2 and the second
and third questions in chapter 3.
To determine the impact that the garment and tourist industries and
foreign workers had on the economy of the CNMI, we collected and reviewed
studies and data from a variety of sources and met with many CNMI and U.S.
government officials and knowledgeable individuals in the private sector.
These studies were conducted by a variety of entities, including the
Office of Insular Affairs, Department of the Interior; the Hay Group, a
management consulting company; the Bank of Hawaii; the Business
Development Center of the Northern Marianas College; and the Congressional
Research Service. We obtained data on a wide variety of economic variables
from Census reports, agencies of the CNMI government, and the studies
mentioned above. In general, we did not express data on economic variables
in the CNMI in constant dollars, even when showing changes over time,
because we were unable to find an index of consumer prices for the CNMI
that went back to 1980. Even if we had been able to find an index, there
would have been problems using it because of major changes in the types of
goods and services purchased in the CNMI during this period. Where
appropriate, we noted the impact of using an index of price change for the
United States in measuring changes over time. However, we did not
emphasize those results because of considerable uncertainty about whether
such a measure is a good proxy for a measure of cost of living changes in
the CNMI.
We discussed the impact of the garment and tourist industries and foreign
workers with government officials and individuals in the private sector,
both in Washington, D.C., and while visiting the CNMI. The CNMI government
officials we met with included the Lieutenant Governor; the CNMI Resident
Representative to the United States; the Secretaries of Commerce, Labor
and Immigration, and Finance; the Special Assistant for Management and
Budget and the Special Advisor for Finance and Budget, Office of the
Governor; the Executive Director of the Commonwealth Ports Authority; the
President of Northern Marianas College; and the Managing Director,
Marianas Visitors Authority. We also discussed with these officials (1)
how the current minimum wage and immigration policies affect the garment
and tourist industries and (2) how and to what extent the CNMI government
employs the resident and foreign workforce. We also met with officials
from the U.S. Department of the Interior's Office of Insular Affairs, both
in Washington and the CNMI, and with the Philippine Consul in the CNMI. To
gain a private sector perspective, we met with several CNMI Chamber of
Commerce officials, owners of businesses in the CNMI, the manager of a
major resort hotel on Saipan, the Executive Director of the Employers
Council, the Executive Director of the Saipan Garment Manufacturers
Association, the chief legal counsel and a vice president of a major
garment manufacturer, several lawyers, and real estate brokers with
substantial knowledge of the CNMI.
To determine how the revenue-raising efforts of the CNMI and the payments
that the CNMI receives from the U.S. Treasury compare with those of other
U.S. territories and Freely Associated States, we obtained data on these
outlying areas and on their governments' general revenues, including
revenue from local sources and payments from the U.S. Treasury. We used
general rather than total revenue as the basis for comparison because the
seven outlying areas included in our comparisons all collect the types of
revenue included in general revenue: taxes, fees, charges for services,
miscellaneous revenue, and payments from the U.S. Treasury./Footnote11/ We
obtained revenue data from the General Purpose Financial Statements from
the outlying areas for fiscal years 1994 through 1997./Footnote12/ We
recategorized these data using the Bureau of the Census's classification
guidelines for government revenue to compare these areas' revenue-raising
efforts./Footnote13/ Using the guidelines, we compiled total revenue,
general revenue, locally derived revenue, and payments from the U.S.
Treasury for each outlying area by aggregating the revenue from different
financial accounting funds. As agreed with the staff of the relevant
congressional committees, in measuring federal transfers and grants to the
outlying areas, we limited the scope of our comparison to
intergovernmental transfers and grants. We did not include federal
payments directly to individuals residing in the outlying areas, federal
payments for services rendered, in-kind assistance, or the non-imposition
of the federal income tax on residents of the U.S. territories.
To express locally derived revenue as a percentage of gross domestic
product (GDP), we obtained GDP estimates for the outlying areas from
various organizations, including the Central Intelligence Agency, the
United Nations, the World Bank, the International Monetary Fund, the Asian
Development Bank, the Bureau of the Census, the Bank of Hawaii, and the
areas' governments. We discussed the limitations of the GDP data with
knowledgeable individuals. The economic data available for the outlying
areas are limited, making it difficult to make precise estimates of GDP
for those areas. Various organizations have made different estimates of
GDP for the same area and year. We used all the published estimates that
we found because we had no basis to determine which were superior.
To determine how the taxes and fees paid by the garment industry in the
CNMI, expressed as a percentage of gross receipts, compare with taxes and
fees paid by the garment industry in the United States, we identified and
aggregated the taxes paid by the two industries and divided them by the
industries' gross receipts. For the CNMI, we obtained data on taxes paid
and gross receipts earned from 1992 through 1998 from the CNMI Department
of Finance. We estimated the employer's share of the Social Security taxes
that the garment industry was required to pay directly to the federal
government by applying the appropriate tax rates to wage and salary data
provided by the CNMI Department of Finance. The data we obtained were
sufficiently detailed to permit us to exclude the wages and salaries that
were exempt from these taxes. For the United States, we obtained these
data for 1991 through 1996 from published Internal Revenue
Service documents./Footnote14/ Because of processing and publishing lags,
no published data beyond 1996 are yet available.
We discussed with knowledgeable individuals the limitations of the garment
industry tax data available to us and the limitations of using the ratio
of taxes paid as a percentage of gross receipts for comparing the tax
burdens borne by the CNMI and U.S. garment industries. Data on taxes paid
are unavailable for a few of the taxes paid by garment manufacturers in
each jurisdiction. In addition, taxes paid can be a misleading indicator
of tax burden when taxes levied on business are actually borne by other
groups such as consumers or workers. The unavailability of data on supply
and demand conditions in specific markets, such as the markets for
garments and garment industry labor in the United States and the CNMI,
prevented us from estimating the ability of the garment industry in the
CNMI to shift its tax burden compared with the ability of the garment
industry in the United States to do the same. However, taxes paid as a
percentage of gross receipts was the best proxy for tax burden available
to us. We did not have sufficient data from either tax returns or
financial statements for CNMI garment manufacturers to estimate net
economic income. Thus, we could not measure net economic income, or the
ability to pay taxes, for this industry.
We conducted our review from February 1999 through February 2000 in
accordance with generally accepted government auditing standards. In
conducting our work, we did not independently verify or test the
reliability of the data provided by the CNMI government or of the data
obtained from other sources. However, we compared data from different
sources for consistency and relied on the best data available.
Furthermore, in agreement with the offices of the responsible
subcommittees, we did not assess whether the Covenant should be changed to
eliminate the CNMI's authority to control its own immigration and minimum
wage policies or whether the labor and immigration policies, and the
manner in which they are implemented, have contributed to labor abuses or
poor housing conditions of foreign workers in the CNMI. Nor did we assess
the sociological and political ramifications of the presence in the CNMI
of a large population of noncitizens. We are currently reviewing the
system used by the government to track immigration into and out of the CNMI.
--------------------------------------
/Footnote1/-^In this report, we use the term outlying areas to include, in
addition to the CNMI, American Samoa, Guam, the Commonwealth of Puerto
Rico, the U.S. Virgin Islands, and the Freely Associated States (the
Republic of the Marshall Islands, the Federated States of Micronesia,
and the Republic of Palau). The Freely Associated States are former
components of the Trust Territory of the Pacific Islands that are now
sovereign nations with compacts of association with the United States.
American Samoa is omitted from the comparisons in this report because no
current data for locally derived government revenues are available for
that territory.
/Footnote2/-^Japan had a mandate from the League of Nations to exercise
authority over these islands.
/Footnote3/-^This jurisdiction is pursuant to Executive Order 11021, May
1962.
/Footnote4/-^Not all noncitizens are foreign workers brought in under the
CNMI's worker permit system. Some come from the Federated States of
Micronesia, the Republic of the Marshall Islands, and the Republic of
Palau. Citizens of these countries have the right of residency and
employment in the CNMI. Other noncitizens are business owners and their
families who are allowed to stay in the CNMI as long as they remain in
business and meet certain requirements.
/Footnote5/-^We have used Saipan rather than the entire CNMI for this
figure because data for population by citizenship status of the other
islands are not available after 1995.
/Footnote6/-^We used Guam for a comparison because of its geographical
proximity to the CNMI and because both have large tourist industries and
long-standing relationships with the United States. We could not
calculate the change in income in constant dollars because we were
unable to find a consumer price index for the CNMI that went back to
1980. Even had we done so, there are many problems with using such an
index when the types of goods being consumed are changing. In an economy
that has grown as rapidly as the CNMI's has since 1980, it is likely
that the types of goods people routinely purchase-their so-called market
basket-would be very different today than they were 20 years ago.
Therefore, measuring the change in the price level of a fixed market
basket of goods would not accurately measure the change in the cost of
living.
/Footnote7/-^We did not calculate the change in income in constant, or
inflation-adjusted, dollars because we were unable to find a consumer
price index for the CNMI that went back to 1980. Furthermore, the
finding that the wages of local workers rose faster than foreign
workers' wages from 1980 through 1999 would be the same whether we
adjusted for price level changes or not.
/Footnote8/-^All aspects of the federal Fair Labor Standards Act, except
for the minimum wage provision, apply in the CNMI.
/Footnote9/-^For the remaining defendants, the case has been moved to
Hawaii.
/Footnote10/-^As discussed in this report, citizens of these countries
have the right of residence in the CNMI, independent of their employment
status, and so are considered to be local residents rather than foreign
workers.
/Footnote11/-^Not all areas collect all types of total revenue, such as
utility, insurance trust, and liquor store revenue.
/Footnote12/-^The financial statements were audited by independent
auditors in accordance with the requirements of OMB Circular A-133,
revised June 4, 1997, which requires, pursuant to the Single Audit Act
of 1984 (P.L. 98-502), that state and local governments that expend
federal aid undergo independent audits of their financial activities.
(Circular A-133 rescinds Circular A-128, issued Apr. 12, 1985.)
/Footnote13/-^The governments of these areas differ in size, activities,
organization, financial structures, and reporting systems. Census has
developed a set of standardized concepts and definitions, including
revenue classification guidelines, to describe government financial
activities in a meaningful and comparable fashion. In particular, the
guidelines eliminate the difficulties caused by different governments
giving the same revenue collection activity different names.
/Footnote14/-^See Statistics of Income: Corporation Source Books, Internal
Revenue Service, 1991, 1993, and 1995 editions; and Statistics of
Income: Corporation Income Tax Returns, Internal Revenue Service, 1992,
1994, and 1996 editions. The data used were for "apparel and other
textile products manufacturing" by "active corporations with and without
net income in that year." The Internal Revenue Service classifies a
business as garment manufacturing when this activity accounts for the
largest percentage of its total receipts. Statistics for the garment
manufacturing industry may be either understated by amounts reported by
corporations whose principal activity lies elsewhere or overstated by
amounts reported by corporations classified as being in the garment
industry but having substantial operations in other industries.
According to the CNMI Governor's Office, Guam also has about 13 percent
unemployment, and they attribute this to the drop-off of tourism caused by
the Asian economic recession. However, the Department of the Interior
expressed the opinion that the high rate of unemployment among U.S.
citizens in the CNMI is the result of the growth of the economy based on
alien labor. We did not determine the causes for the high rate of
unemployment among U.S. citizens. However, it should be pointed out that
the unemployment rate among U.S. citizens has been high since at least
1990 in spite of the fact that the economy has grown and added many jobs
for both local residents and foreign workers over the past
The data provided by the Department of the Interior also show that the
birth rates for
THE IMPACT OF THE GARMENT AND TOURIST INDUSTRIES ON THE CNMI ECONOMY
====================================================================
The garment and tourist industries contribute directly to the CNMI economy
through the creation of jobs and the production of goods and services for
export and indirectly through purchases of local goods and services from
other industries and by taxes and fees paid to the government. With
respect to the related fiscal impact of these industries on the budget of
the CNMI government, the garment and tourist industries and the workers
that they employ require government spending for services and
infrastructure. For a variety of reasons, however, we believe that the
conclusion of a January 1999 study commissioned by the Department of the
Interior that this spending exceeds the contributions that these
industries make to the revenue of the CNMI government is questionable. The
garment and tourist industries are dependent on foreign workers because
the labor pool of local residents is insufficient to support an economy of
the size and scope that exists in the CNMI. In fact, all sectors of the
economy, including the government sector, employ foreign workers. The
local resident population of the CNMI has benefited, economically, in the
form of higher incomes and better employment opportunities, from the
growth of the garment and tourist industries and from the presence of
foreign workers. In spite of its rapid growth and development, the CNMI's
economy is fragile because of its reliance on only two industries for the
bulk of its private sector employment.
The Garment and Tourist Industries Drive Economic Growth and Development
The garment and tourist industries are the source of most of the economic
activity in the CNMI. Both have grown rapidly during the past two decades,
and their growth has caused the development of other businesses and
contributed to the growth of the government sector. According to an
October 1999 economic study of the CNMI, which we reviewed and found
reasonable, the garment and tourist industries, in 1995, accounted-
directly or indirectly-for about 80 percent of the employment in the CNMI,
about
96 percent of the economy's exports, and about 85 percent of the total
production of goods and services in the economy./Footnote1/
Garment Industry Has Grown Rapidly
----------------------------------
The garment industry has grown rapidly since its origin in the CNMI in
1983 to 34 businesses in 1999. Since 1983, the garment industry has added
about 16,000 jobs, employing about 13,500 foreign and 2,500 local resident
workers, most of these on Saipan. Given that there were about
32,700 foreign and 11,000 local resident workers employed in the entire
Saipan economy in 1999, the garment industry employed approximately
41 and 23 percent of all these workers, respectively. The garment
industry, which sells its products almost exclusively to buyers in the
United States, also generates a large part of the economy's exports. For
example, starting at zero garment exports in 1982, exports to the United
States had grown to about $273 million in 1994 and, by 1998, had reached
approximately
$1 billion.
Tourist Industry Peaked in 1997
-------------------------------
The tourist industry was already established in 1980, with about
117,000 visitors who spent about $61 million in the CNMI in that year. The
industry grew slowly until 1984 and then more rapidly until it peaked in
1997 with 727,000 visitors spending about $585 million. The tourist
industry employed about 9,600 workers in 1995--the latest date for which
data are available. Of these employees, approximately 6,900 were foreign
and
2,700 were local residents. Given that there were about 24,300 foreign and
11,600 local resident workers employed in the CNMI economy in 1995, the
tourist industry employed approximately 28 and 23 percent of the foreign
and local resident workers, respectively.
Over the Last 2 Years, the Garment Industry Has Grown, but Tourism Is Down
---------------------------------------------------------------------------
Since 1997, the garment industry has continued its strong growth, but the
tourist industry is in a slump. The Asian economic crisis of 1998 and 1999
caused a reduction of over 200,000 tourists-about a 30-percent reduction
in the number of visitors coming to the CNMI from 1997 levels. Figure 6
shows the growth of visitor arrivals and spending from 1980 to 1997 and
the subsequent drop in tourism. In contrast with the drop in tourism, the
garment industry's exports increased by about 30 percent between 1997 and
1998 and were projected to increase by another 9 percent in 1999. The
growth in garment production, according to the CNMI, has mitigated the
impact of the CNMI's current economic downturn caused by the recession in
Japan and other Asian countries.
Figure****Helvetica:x11****6: CNMI Visitor Arrivals and Spending, 1980
to 1999
*****************
*****************
Note: Data were unavailable for visitor expenditures in 1998 and 1999.
Sources: "1998 Commonwealth of the Northern Mariana Islands Statistical
Yearbook," Central Statistics Division, Department of Commerce, and the
Marianas Visitors Authority.
Although the continued growth of the garment industry has helped, the
CNMI's overall economy is in many ways worse off today than it was
2 years ago. Government revenue is down from its high of $248 million in
1997 to a projected $216 million in 1999, a reduction of about 13 percent,
and business gross revenue fell by 14 percent, from $2.6 billion to
$2.2 billion from 1997 to 1998. Some CNMI businesses have closed and
others have laid off staff. The unemployment rate among U.S. citizens on
Saipan is about 13 percent./Footnote2/
Garment and Tourist Industries Affect Other Sectors of the Economy
------------------------------------------------------------------
The garment and tourist industries are linked to the rest of the economy
through the purchases of goods and services from other industries, tax
revenue paid to the government, and workers' spending. For example, when
hotels buy food from local farmers, they indirectly support farming
employment. Similarly, employers rent housing for their foreign workers
from local owners of real estate, and these rentals add revenue to the
local economy. Tax revenue also supports government employment and pays
for government services. To illustrate, in fiscal year 1993, the garment
industry paid about $13 million directly in taxes and fees, amounting to
slightly less than 10 percent of the government's total revenue of about
$139 million that year. By fiscal year 1998, the taxes and fees paid by
the garment industry had grown to about $52 million and accounted,
directly, for slightly more than 22 percent of the $234 million in total
general fund revenue. In 1997-the latest date for which visitor
expenditure data are available-the tourist industry directly contributed
at least $34 million in business gross receipts taxes and hotel taxes and
an unknown amount of excise and personal income taxes./Footnote3/ The
tourist industry's taxes accounted for at least 14 percent of that year's
general fund revenue of $248 million.
Although foreign workers in the garment and tourist industries send much
of their earnings back to their countries of origin, the remainder is
spent on local goods and services, further stimulating economic activity
and employment. For example, according to the CNMI Chamber of Commerce,
China and the Philippines are the two most common destinations for
long-distance telephone calls from the CNMI because of workers from these
countries calling home. Therefore, the local telephone company's revenue
is affected by changes in the number of foreign workers employed in the
CNMI, which in turn can affect other CNMI businesses. According to the
owner of a local business that sells services to the telephone company,
the reduction in foreign workers employed in the tourist industry over the
last 2 years triggered by the decline in visitors to the CNMI has reduced
the telephone company's revenue. She said that this has resulted in the
telephone company's reducing its purchases from her business.
Another effect of the garment and tourist industries comes in the form of
lower shipping costs for imported goods. The high volume of goods imported
into the CNMI to support the garment and tourist industries and the
exports of garments to the United States increases the total ship traffic
into and out of the CNMI. Higher traffic leads to greater port revenue and
also has the effect of making it cheaper to ship consumer goods to the
CNMI. Some container ships bringing consumer goods from the United States
leave the CNMI carrying finished garments. Without the ability to carry
cargo back from the CNMI, shippers would have to charge more to bring
goods to the CNMI.
The Department of the Interior's Study Is Critical of the Garment and
Tourist Industries, but Its Conclusion Is Questionable
According to a Department of the Interior's study released in January
1999, the garment and tourist industries and the foreign workers they
employ have a negative fiscal impact on the CNMI economy./Footnote4/ The
Interior study concludes that the garment and tourist industries and their
workers require more spending for government services and infrastructure
than the revenue they contribute to the government. The services and
infrastructure include education, health care, public utilities, waste
treatment and disposal facilities, roads, airports, and port facilities.
We believe that the Interior study is methodologically flawed because it
understates the contributions made by the garment and tourist industries
to the CNMI economy and overstates the impact of these industries and
their workers on the need for government services and infrastructure.
While these industries and their workers result in a need for increased
government spending, the Interior study understates the contributions to
government revenue made by the two industries because it does not
adequately account for the revenue resulting from the linkages between the
garment and tourist industries on one hand and the rest of the economy on
the other. These linkages need to be taken into account-as is done in an
analysis in a more recent economic study/Footnote5/-because most of the
production and employment in the economy is attributable to the garment
and tourist industries and, consequently, so is much of the government
revenue.
Similarly, the Interior study overstates the impact of these industries
and their workers on government spending by not fully taking into account
that foreign workers, on average, use fewer government services than do
residents. Of the services they do use, their impact on government
spending is likely to be lower than that of the local resident population.
For example, while Asian and other nonlocal people accounted for over
52 percent of the total population of the CNMI in 1995, they accounted for
less than 13 percent of the students enrolled in CNMI schools in the 1995-
96 school year. In contrast, Chamorros, the largest indigenous group of
people in the CNMI, made up about 24 percent of the population in 1995 but
accounted for about 58 percent of school enrollment in the 1995-96 school
year. Similarly, in fiscal year 1996, Filipino households accounted for
over 16 percent of all CNMI households but received less than 8 percent of
Nutritional Assistance Program benefits. Moreover, in 1999, about
79 percent of all non-U.S. citizens on Saipan were between 20 and 45 years
of age compared with about 31 percent of U.S. citizens in that age range.
As a result, non-U.S. citizens are likely to use fewer medical services
and have a smaller impact on the provision of government health services
and on other services associated with the elderly than the local resident
population. Finally, the birth rate is much lower for non-U.S. citizens
than for U.S. citizens. For example, according to data provided us by the
Department of the Interior, in 1998, the number of children born in the
CNMI to mothers who were not U.S. citizens was about 33 per 1,000 women
between the ages of 15 and 44 compared with about 117 children born per
1,000 mothers in that age group who were U.S. citizens. While the children
of non-U.S. citizens will no doubt impose some costs on local and federal
governments until they reach working age, their impact per capita on
government expenditures is likely to be smaller than that of the children
of local residents./Footnote6/
The CNMI Economy Is Dependent on Foreign Workers
The economy of the CNMI could not have grown to its current size and
complexity without access to imported labor. To illustrate this point, the
total number of local residents in the Saipan workforce in 1999 was about
12,800, including about 11,000 employed and 1,800 unemployed people. This
number includes-along with those U.S. citizens born in the CNMI-U.S.
citizens from Guam and elsewhere and those non-U.S. citizens born in the
Federated States of Micronesia, the Marshall Islands, and Palau, who have
the right of residency and employment in the CNMI. Between 4,000 and 4,900
local residents were employed in government positions, between 6,100 and
7,000 worked in the private sector, and about 1,800 were unemployed. In
contrast, the size of the workforce in the garment industry alone was
about 16,000 in 1999, and total employment was about 43,700. Figure 7
shows the total labor force of local residents and the total number of
employed people on Saipan from 1980 to 1999. The gap between total
employment and the local labor force has grown over time as the economy
has grown and the gap has been filled with foreign labor.
Figure****Helvetica:x11****7: Saipan Employment and Local Labor Force,
1980 to 1999
*****************
*****************
Source: "Recent Trends in Population, Labor Force, Employment,
Unemployment and Wages: Commonwealth of the Northern Mariana Islands, 1973
to 1999," draft 1, CNMI Department of Commerce, July 1999.
In addition to an insufficient number of local resident workers, crucial
skills are also in short supply. Representatives of the private and
government sectors told us that foreign workers are employed in all
sectors of the economy because they bring skills to the CNMI that are
simply not available among the local residents. The government sector-
which primarily employs U.S. citizens born in the CNMI-hires some foreign
workers, for example, as teachers and nurses, because the government
cannot find sufficient qualified local residents. While most Chinese
workers are employed in the garment industry as machine operators,
assemblers, and inspectors, workers from the Philippines are widely
distributed across occupations and contribute managerial and professional
skills as well as taking less skilled positions. Figure 8 shows the
distribution of workers by selected occupations for those born in the
CNMI, China, and the Philippines in 1999. This figure shows that
employment for the 6,092 workers born in the CNMI is most heavily
concentrated in skilled and managerial positions. It also shows that the
16,739 Filipino workers hold a wide range of jobs, while the 12,797
Chinese workers are mostly employed as operators, fabricators, and laborers.
Figure****Helvetica:x11****8: Distribution of Local and Foreign Workers
by Occupation and Place of Birth,
1999
*****************
*****************
Source: "Recent Trends in Population, Labor Force, Employment,
Unemployment and Wages: Commonwealth of the Northern Mariana Islands, 1973
to 1999," draft 1, CNMI Department of Commerce, July 1999.
In addition to providing labor services, foreigners own and operate many
businesses in the CNMI. In 1992, for example, about 42 percent of the
1,266 businesses in the CNMI were owned by non-U.S. citizens. Foreigners
own many types of businesses in the CNMI, from small family-run shops to
large garment factories and hotels.
Local Residents Have Benefited From Economic Growth
Much of the increase in local residents' wages since 1980 can be
attributed to the CNMI's general economic growth, which has been driven by
the garment and tourist industries and by access to foreign workers. Local
residents have enjoyed greater employment opportunities, both within the
government and in the private sector. For example, on Saipan, the number
of jobs held by U.S. citizens grew faster than the population of U.S.
citizens between 1980 and 1999-employment increased by about 183 percent,
while the population increased by 169 percent. Over the same period, labor
participation rates for U.S. citizens on Saipan increased from about
58 percent in 1980 to 68 percent in 1999. In addition to wage income, some
local residents have earned income by leasing their land to garment and
tourist businesses. Others have enjoyed increased opportunities to operate
their own businesses-the number of U.S. citizens on Saipan who were
self-employed rose from 80 (or 2.5 percent of those employed) in 1980 to
451 (or 5 percent of those employed) in 1999. Increased tax and fee
revenue from the garment and tourist industries and their employees has
enabled the government to expand employment and pay higher wages and
salaries, actions that have primarily benefited those born in the CNMI who
hold most of these government jobs. However, a smaller proportion of U.S.
citizens rely on the government for employment now than in 1980-in 1980,
about 53 percent of employed U.S. citizens worked for the government,
while in 1999, 44 percent were government workers. Median income for
Chamorro households-the largest ethnic group among the local residents-
increased from about $8,900 in 1980 to $30,700 in 1999, in nominal terms
with more rapid growth occurring in the 1980s than in the
1990s./Footnote7/ The distribution of income in the CNMI has also changed
as the economy has grown. In 1980, household and family incomes on Saipan
were heavily concentrated in the three lowest income categories, with over
55 percent of all households earning less than $10,000. By 1999, incomes
were more evenly distributed among all income categories, and far fewer
households were in the lower income brackets. Figure 9 shows the
distribution of income for Saipan households in 1980 and 1999 and
illustrates the more even distribution across income categories in 1999.
Figure****Helvetica:x11****9: Income Distribution for Saipan
Households, 1980 and
1999
*****************
*****************
Source: "Recent Trends in Population, Labor Force, Employment,
Unemployment and Wages: Commonwealth of the Northern Mariana Islands, 1973
to 1999," draft 1, CNMI Department of Commerce, July 1999.
The Heavy Dependence on Two Industries Makes the CNMI Economy Vulnerable
to Outside Events
Because of its reliance on only two large industries and on foreign
workers, the economy of the CNMI is vulnerable to events that affect these
industries or the terms under which foreign workers may enter and work in
the CNMI. These events include changes in economic conditions in Asia,
possible changes in international trade agreements, and potential
legislation.
The downturn in the CNMI economy since 1997 due to the reduction in
tourism illustrates the importance of economic conditions outside of the
CNMI, particularly in Asia. A revival of the tourist industry depends on
an improvement in the economies of Asian countries. Because of the
linkages to the rest of the economy and the size of the tourist industry
relative to the overall CNMI economy, a revival of the tourist industry
would have positive effects throughout the economy.
The future of the garment industry in the CNMI could be influenced by
changes in international agreements or legislation that may reduce or
eliminate the advantages of manufacturing garments in the CNMI. Currently,
garment manufacturers in the CNMI can sell their products to buyers in the
United States without import tariffs, these imports are not subject to
quotas, and they can bear labels identifying them as having been made in
the United States. These features give the garment manufacturers in the
CNMI greater access to the U.S. market than is available to the garment
manufacturers in many other nations who face import duties, or tariffs,
and quotas. However, the 1994 Uruguay Round Agreement on Textiles and
Clothing calls for World Trade Organization (WTO) members to eliminate
quotas by 2005. Additionally, under this Agreement, the United States
agreed to slightly reduce its tariff on imported garments. Therefore, one
advantage that the CNMI has over locations in WTO countries is scheduled
to end in a few years. The CNMI would continue to have an advantage
relative to other WTO members because its garment exports to the United
States are not subject to tariff. However, although wages in the garment
industry in the CNMI are typically lower than they are in the United
States, they are higher than in some WTO member countries. So, whether
garment production will leave the CNMI for other WTO members in 2005 and
beyond will depend on whether the value of the benefits received from the
tariff-free status and the identification of products as having been made
in the United States offsets the higher wages paid in the CNMI. If some or
all of the CNMI garment industry relocates, this will cause job losses
among local residents and revenue losses for the CNMI government.
Whether China becomes a member of the WTO may also affect the garment
industry in the CNMI. Currently, because China is not a member of the WTO,
the 1994 agreement to eliminate quotas by 2005 does not apply to the quota
limiting the export of Chinese garments to the United States. Many garment
factories in the CNMI are owned by Chinese companies. Production from
these factories has been concentrated in the garment categories for which
China has traditionally filled its quota. China is now negotiating for
entrance into the WTO./Footnote8/ If China becomes a member, depending on
the terms of its admission, the quota on garments imported from China
might also be eliminated by 2005. If so, the garment industry in the CNMI
might be more likely to shrink.
Legislation currently being considered by the Congress could affect the
garment industry in the CNMI by giving garment manufacturers in countries
in sub-Saharan Africa access to the U.S. market on the same terms as
garment manufacturers in the CNMI (except for the identification of their
products as being made in the United States). If this legislation becomes
law, the future competitiveness of the garment industry in the CNMI will
depend on the relative differences in productivity; quality; and cost of
materials, labor, and shipping between the CNMI and potential competitors
in Africa./Footnote9/
Finally, the high dependence of the CNMI's entire economy on foreign
workers puts it at risk if its access to these workers is disrupted. The
right of the CNMI to define its own immigration policy and minimum wage
can be revoked or modified by the Congress. Two bills introduced in the
106th Congress, H.R. 730 and S. 1052, could make it harder for foreigners
to work in the CNMI. Since the CNMI is dependent on foreign workers for
most of its labor force, major changes in the availability of these
workers or in their terms of employment would have a large impact on the
overall economy.
In testimony before the House Committee on Resources on September 16,
1999, the Governor of the CNMI acknowledged that the CNMI's economic
downturn was caused by its tourist industry's reliance on Asian economies.
The Governor also discussed other potential effects on the economy that
might result from a decline in the garment industry. For example, the
Governor stated that a drastic drop in government revenue would occur in
fiscal year 2004 if quotas and tariffs applied to garments produced
elsewhere and exported to the United States are removed, causing the CNMI
garment manufacturers to leave or reduce their production. He said that
the loss of the garment industry not only would reduce general revenue but
would also affect the revenue of the Commonwealth Ports Authority derived
from garment-related shipments. In addition, without a source of
replacement revenue, the loss of the revenue from the garment industry
would leave the Ports Authority unable to meet its payments on its long-
term bond debt. The loss of the outbound cargo from the garment industry
would also mean higher shipping costs for the entire CNMI. The Governor
also said that the Commonwealth Utilities Corporation would lose its
revenue from the garment industry, which accounts for about
one-fifth of its total revenue.
The Governor stated that the government of the CNMI has implemented
austerity measures in an attempt to deal with the decline in government
revenues resulting from the downturn in tourism. In January 1998, the
Governor imposed restrictions on expenditures for personnel, professional
services, travel, communications, leased vehicles, and the general
procurement of goods and services. These measures have reduced government
expenditures by about $52 million. In addition, over 1,000 government
positions have been eliminated through attrition and by leaving vacant
positions unfilled, and some government offices have implemented a
reduction in work hours. However, the Governor recognized that further
reductions in government expenditures present major difficulties.
According to the Governor, the CNMI is faced with the problem of providing
full government services to three islands-in the form of police,
utilities, air and sea ports, education, health, and roads-despite a
declining economy and without Compact Impact Aid from the federal
government. The Governor concluded that if it is to maintain its
self-sufficiency, the CNMI must diversify its economy.
Agency Comments and Our Evaluation
Both the CNMI and the Department of the Interior raised concerns about
this chapter. While the CNMI did not provide an overall assessment of the
report, it suggested that we add additional language in several places.
The CNMI suggested that we include information showing that the percentage
of the total workforce employed by the CNMI government is smaller than in
Guam or the United States. We believe that comparing the total workforce
of the CNMI with that of Guam and the United States would be misleading
because the CNMI workforce includes a large proportion of foreign workers,
who temporarily reside in the CNMI and are primarily employed in the
private sector. Guam and the United States do not have similar proportions
of foreign workers to total workforce. The CNMI suggested that our report
should state that additional non-wage benefits given to foreign workers
tend to hold down their money wages, while the wages of local workers tend
to be higher to compensate for the lack of such benefits. However, we
believe that there are insufficient data on the actual value of benefits
received by all workers or for deductions to foreign workers' wages to
accurately assess the net value of these benefits. The CNMI government
further suggested that we attribute the high unemployment rate among U.S.
citizens in the CNMI and a similarly high rate in Guam to the recent
economic recession in Asia. Our report does not attempt to determine the
cause of unemployment in the CNMI, and we do not believe that there is
enough information about the actual nature and causes of unemployment in
the CNMI to do so. In addition, the CNMI government said that we should
note in the report that the people of the Freely Associated States who
come to live and work in the CNMI place a heavy burden on the government
and increase its deficit problem. Our report does not address the issue of
the government deficit, and we do not believe that there are sufficient
data or a reasonable methodology available to determine how particular
groups in the economy affect the CNMI's budget deficit.
The Department of the Interior stated that while our report accurately
depicts the dominant role of the garment and tourist industries in the
CNMI economy, the economic analysis underlying the report is flawed
because it did not evaluate the effect of these dominant industries and
their alien employees on the residents who are U.S. citizens and on the
economic development of the CNMI. We disagree that the economic analysis
in the report is flawed. Contrary to the Department's assertion, the
report evaluates the impact of the garment and tourist industries and the
use of foreign workers on the economy and finds that the CNMI's local
resident population--most of whom are U.S. citizens-has benefited from the
economic growth and development in the past 20 years because incomes and
employment opportunities have increased with economic growth. The growth
in the economy has been driven by the growth of the garment and tourist
industries and the use of foreign workers. The Department also stated that
the report gives an erroneous impression that an economy based on two
dominant industries and foreign labor is beneficial in the long run. Our
report does not give this impression. While clearly laying out the
benefits provided to date, our report clearly states that the CNMI's
reliance on the garment and tourist industries and on foreign workers
makes it vulnerable to outside events that have an impact on either
industry or the economy's access to foreign workers. Therefore, we agree
with the Department that the future development of the CNMI economy is a
concern.
The Department stated that the report answers its objectives narrowly,
without reference to the economic, legal, and regulatory context in which
the CNMI economy operates. It stated further that the report contains data
and observations that are out of context, incorrectly categorized, and
misleading. We disagree with this assessment. The report describes in
detail the historical, economic, legal, and regulatory context in which
the CNMI economy operates and, in our view, presents an objective
description of controversial issues. In addition, the report uses data and
information from a wide range of sources and presents the results in a
balanced,
fact-based, and objective manner. The Department also stated that the
report does not evaluate the effect of the development and dominance of
the garment and tourist industries on the CNMI's population of U.S.
citizens and further stated that training and employment of local workers
has fallen behind. We disagree with this assessment. While we did not
specifically examine the issue of training, the report explains in detail
how local residents, most of whom are U.S. citizens, have benefited from
economic growth. For example, we point out that the number of jobs held by
U.S. citizens has grown faster than the population of U.S. citizens, while
labor participation rates increased for U.S. citizens in the period
between 1980 and 1999. The report distinguishes between local and foreign
residents and workers in the CNMI whenever the data were available to do
so.
The Department questioned how much the CNMI economy's growth has
contributed to the long-term well being of the CNMI's citizens. It stated
that employment of residents has grown little, while the number of foreign
workers has doubled since 1995. We do not agree that private sector
employment for local workers has grown little since 1995. For example,
according to data from the CNMI Department of Commerce, private sector
employment of U.S. citizens increased by about 24 percent between 1995 and
1999 on Saipan, while total employment of U.S. citizens, including
employment in the government sector, rose by about 22 percent. The
employment of non-U.S. citizens increased by about 43 percent over the
same period, but this includes about a 27-percent increase in employment
of people born in the Freely Associated States and therefore considered
local residents of the CNMI. The Saipan economy added about 2,100 jobs for
local residents, including about 1,650 jobs for U.S. citizens and 450 jobs
for workers born in Micronesia. During the same period, the economy added
about 10,000 new jobs for foreign workers.
The Department stated that under the WTO agreement, the U.S. garment
quotas will cease on January 1, 2005, and the artificial advantage enjoyed
by the CNMI will come to an end. It concluded that our report ignores the
danger of relying on an industry that is scheduled to cease abruptly in
5 years. We disagree that the garment industry will necessarily cease in
5 years' time. The advantages that the CNMI garment industry has over many
of its international competitors are three-fold: (1) Garment makers in the
CNMI can sell their products to buyers in the United States without import
tariffs. (2) The imports are not subject to quotas. (3) The products can
bear labels identifying them as being made in the United States. Even if
quotas are eliminated as scheduled, the tariff and labeling advantages
will remain largely intact, and at this point, it is not possible to
determine whether the garment industry will remain viable in whole or in
part.
--------------------------------------
/Footnote1/-^An Economic Study for the Commonwealth of the Northern
Mariana Islands, Business Development Center, Northern Marianas College,
Oct. 1999. This study was sponsored by a grant from the Office of
Insular Affairs of the Department of the Interior.
/Footnote2/-^10 years.
/Footnote3/-^The estimate for the tourist industry's contribution to the
government's revenue is low because it reflects only hotel and business
gross receipts taxes on visitor expenditures, leaving out other
important tax sources such as excise taxes or personal income taxes paid
by employees or employers. Furthermore, the figures for both industries
underestimate their total contribution because they do not include tax
revenue generated by other sectors as a result of their economic
transactions with the garment and tourist industries. For example, the
CNMI Finance Department estimates that the garment industry was
indirectly responsible for an additional $24 million, or 10 percent, of
government's general fund revenue in 1998 that was paid by other
industries doing business with the garment industry.
/Footnote4/-^CNMI Fiscal Impact Report: The Impact of Non-Residents on the
Economy and Public Infrastructure of the Commonwealth of the Northern
Mariana Islands, prepared for the Office of Insular Affairs, U.S.
Department of the Interior, by Robert W. Rudolph and James C. Nicholas,
Jan. 1999.
/Footnote5/-^An Economic Study for the Commonwealth of the Northern
Mariana Islands, prepared for the Business Development Center, Northern
Marianas College, with funding provided by the Office of Insular
Affairs, U.S. Department of the Interior, Oct. 1999.
/Footnote6/-^non-U.S. and U.S citizens alike have fallen from 1990 to 1998-
-the rates for the two groups fell by about 35 and 31 percent,
respectively. If this trend continues, the per capita fiscal impact of
the children born to non-U.S. citizens in the CNMI will become even
smaller.
/Footnote7/-^We could not calculate the change in income in constant
dollars because we were unable to find a consumer price index for the
CNMI that went back to 1980. Even had we done so, there are many
problems with using such an index when the types of goods being consumed
are changing. In an economy that has grown as rapidly as the CNMI's has
since 1980, it is likely that the types of goods people routinely
purchase-their so-called market basket-would be very different today
than they were 20 years ago. Therefore, measuring the change in the
price level of a fixed market basket of goods would not accurately
measure the change in the cost of living. To put the nominal change in
incomes into some perspective, we have calculated the change in constant
U.S. dollars, using the U.S. GDP deflator. In this case, the change in
median household income for Chamorro households in 1999 dollars was from
about $17,000 in 1980 to $30,700 in 1999.
/Footnote8/-^Recently, the United States announced its support for the
admission of China to the WTO.
/Footnote9/-^The House of Representatives and the Senate each passed bills
in 1999 that would, if enacted, liberalize trade with African nations. A
conference committee will meet in 2000 to reconcile differences between
the bills.
THE CNMI GOVERNMENT'S REVENUE-RAISING EFFORT
============================================
The CNMI is more self-sufficient fiscally than other outlying areas. In
the years 1994 through 1997, the CNMI government collected about 87
percent of its general revenue from local sources and relied on payments
from the U.S. Treasury for about 13 percent. The portion of its budget
funded from local sources is higher than that of the other outlying areas.
For 1994 through 1997, we estimate that the CNMI's ratio of government
revenue derived locally to GDP was between 29 and 45 percent, depending on
which published estimate for GDP we used. This estimate is higher than
estimates of that ratio for most other outlying areas. It is also higher
than the comparable percentage for the United States for all levels of
government combined-28 percent in 1996.
Available data suggest that the taxes and fees paid by the garment
industry in the CNMI as a share of gross receipts are higher than those
paid by the garment industry in the United States./Footnote1/ For the
period 1993 through 1998, the taxes and fees paid by the CNMI garment
industry for which data were available represented about 5.0 percent of
the industry's gross receipts. In comparison, for the period 1991 through
1996 (the latest year for which data were available), the taxes paid by
the U.S. garment industry represented about 3.3 percent of gross receipts.
However, the owners of businesses in the garment industry in the CNMI and
the United States may not bear the full economic burden of the various
taxes and fees that they pay to their respective governments. Garment
manufacturers may be able to shift some or all of the burden of these
taxes to consumers, workers, and to investors in other industries. The
extent of this shifting is unknown.
The CNMI Is More Self-Sufficient Fiscally Than Other Outlying Areas
The CNMI is less dependent on federal transfers and grants to meet its
budgetary needs than other outlying areas. Table 1 shows that locally
derived revenue as a percentage of general revenue for the CNMI was
higher than that of the other areas and that transfers and grants from the
federal government were lower than those of the other areas./Footnote2/
Table****Helvetica:x11****1: Percentage of Revenue From Local Sources
and Federal Transfers and Grants in
Relation to Total General Revenue for the
CNMI and Other Outlying Areas, Fiscal
Years 1994 Through 1997
(Table notes on next page from Previous Page)
--------------------------------------------------------------------------
| Dollars in millions : : : : |
|------------------------------------------------------------------------|
| Outlying area/revenue : 1994 : 1995 : 1996 : 1997 |
|------------------------------------------------------------------------|
| CNMI |
|------------------------------------------------------------------------|
| General revenue : $221.8 : $284.5 : $305.9 : $326.7 |
|------------------------------------------------------------------------|
| Revenue from local sources : 86.1% : 86.3% : 86.6% : 88.1% |
|------------------------------------------------------------------------|
| Revenue from federal : 13.9% : 13.7% : 13.4% : 11.9% |
| transfers and grants : : : : |
|------------------------------------------------------------------------|
| Guam : : : : |
|------------------------------------------------------------------------|
| General revenue : $807.2 : $813.3 : $880.3 : $876.7 |
|------------------------------------------------------------------------|
| Revenue from local sources : 79.5% : 82.6% : 83.5% : 83.6% |
|------------------------------------------------------------------------|
| Revenue from federal : 20.5% : 17.4% : 16.5% : 16.4% |
| transfers and grants : : : : |
|------------------------------------------------------------------------|
| Marshall Islands |
|------------------------------------------------------------------------|
| General revenue : $103.0 : $121.5 : $126.2 : $112.4 |
|------------------------------------------------------------------------|
| Revenue from local sources : 47.7% : 49.8% : 44.0% : 39.1% |
|------------------------------------------------------------------------|
| Revenue from federal : 52.3% : 50.2% : 56.0% : 60.9% |
| transfers and grants^a : : : : |
|------------------------------------------------------------------------|
| Palau : : : : |
|------------------------------------------------------------------------|
| General revenue : $46.9 : $239.7 : $75.7 : $93.3 |
|------------------------------------------------------------------------|
| Revenue from local sources : 34.1% : 12.5% : 50.9% : 59.3% |
|------------------------------------------------------------------------|
| Revenue from federal : 65.9% : 87.5%^b : 49.1% : 40.7% |
| transfers and grants : : : : |
|------------------------------------------------------------------------|
| Puerto Rico : : : : |
|------------------------------------------------------------------------|
| General revenue : $9,588.2: $10,563.8: $13,174 : $12,151 |
| : : : .6 : .9 |
|------------------------------------------------------------------------|
| Revenue from local sources : 72.7% : 74.1% : 79.8% : 74.4% |
|------------------------------------------------------------------------|
| Revenue from federal : 27.3% : 25.9% : 20.2% : 25.6% |
| transfers and grants : : : : |
|------------------------------------------------------------------------|
| U.S. Virgin Islands |
|------------------------------------------------------------------------|
| General revenue : $669.5 : $694.1 : ^c : ^c |
|------------------------------------------------------------------------|
| Revenue from local sources : 81.0% : 83.6% : ^c : ^c |
|------------------------------------------------------------------------|
| Revenue from federal : 19.0% : 16.4% : ^c : ^c |
| transfers and grants : : : : |
--------------------------------------------------------------------------
Note: Revenues of institutions of higher education were not included
because complete data were not available.
aInterest income earned on funds in the Marshall Islands' Nuclear Claims
Trust Fund and Tribunal is included.
bPalau received a large lump sum payment in 1995 under its Compact of
Association with the United States.
cData not available.
Sources: General Purpose Financial Statements and Independent Auditors'
Reports, Commonwealth of the Northern Mariana Islands, fiscal 1994 through
1997. Public School System, Report on the Audit of Financial Statements in
Accordance with OMB Circular A-128, Commonwealth of the Northern Mariana
Islands, fiscal 1994 through 1996. General Purpose Financial Statements,
Additional Information and Independent Auditors' Reports, Government of
Guam, fiscal 1994 through 1997. Independent Auditors' Reports, General
Purpose Financial Statements and Additional Information, National
Government, Federated States of Micronesia, fiscal 1995 through 1997. (The
fiscal 1994 report was not available; data for that year are from the
fiscal 1995 report.) General Purpose Financial Statements and Independent
Auditors' Reports, Republic of Palau, National Government, fiscal 1994,
1995, and 1997. (The fiscal 1996 report was not available; data for that
year are from the fiscal 1997 report.) General Purpose Financial
Statements and Independent Auditors' Reports, Republic of the Marshall
Islands, fiscal 1995 through 1997. (The fiscal 1994 report was not
available; data for that year are from the fiscal 1995 report.)
Comprehensive Annual Financial Reports, Commonwealth of Puerto Rico,
fiscal 1994 through 1997. Single Audit Reports, Government of the U.S.
Virgin Islands, fiscal 1994 through 1995. U.S. Department of the Interior.
Types of federal assistance vary among the outlying areas. In our
compilation of federal transfers and grants to these areas, we include all
types of direct government-to-government assistance. These include
(1) capital project funding and other subsidies and grants for the
outlying areas, including funding for the CNMI under its Covenant in
Political Union With the United States; (2) compact of association funding
for the Freely Associated States; (3) federal income taxes that U.S.
federal employees in Guam pay to the U.S. government that are then
remitted to Guam;
(4) excise taxes collected under the internal revenue laws of the United
States on certain products produced in the Virgin Islands and exported to
the United States (primarily rum) that are then remitted to the Virgin
Islands; and (5) excise taxes on shipments of alcoholic beverages and
other taxes on shipments of tobacco products from Puerto Rico to the U.S.
mainland that are then remitted to Puerto Rico./Footnote3/ We did not
include federal payments directly to individuals residing in the outlying
areas,
federal payments for services rendered, in-kind assistance, or the non-
imposition of the federal income tax on residents of the U.S.
territories./Footnote4/
As table 1 above indicated, between 1994 and 1997, the CNMI government's
percentage of general revenue derived from local sources was about
87 percent, while its percentage derived from the federal government was
about 13 percent. The CNMI's revenue from local sources during the period
from 1994 through 1997 came predominantly from the taxes it collected. As
shown in table 5 in appendix I, in 1997, 70 percent of the CNMI's locally
derived revenue came from taxes, while 30 percent came from licenses,
fees, other charges, and miscellaneous general revenue. The largest source
of tax revenue was the business gross receipts tax, which accounted for
about 37 percent of all tax revenue. Wages and salary and income taxes
accounted for 23 percent, while excise taxes and the customs certification
user fee each accounted for 14 percent of tax revenue in 1997.
Table 2 shows that from 1994 through 1997, the revenue collection of the
CNMI relative to the size of its economy was comparable to or slightly
greater than that of most of the other outlying areas. We estimate that
locally derived revenue as a percentage of GDP (which is commonly used to
compare the revenue-raising effort, or tax effort, among
countries/Footnote5/) ranged from 29 to 45 percent in the CNMI, higher
than the combined ratio for all levels of government in the United States,
which was 28 percent in 1996./Footnote6/ The percentages in table 2 are
given as ranges if more than one estimate of GDP was available. The
percentages reflect the highest and lowest estimates from all the
organizations that estimated GDP for a given
area and year./Footnote7/ For the CNMI for 1997, the only estimate of GDP
available (made by an expert in the U.S. Bureau of the Census) is a range
rather than a point estimate. He provided a range estimate because the
data necessary for a more precise estimate were unavailable./Footnote8/
Table****Helvetica:x11****2: Revenue From Local Sources as a Percentage
of GDP for the CNMI and Other Outlying
Areas, Fiscal Years 1994 Through 1997
---------------------------------------------------------------------------
| Year : CNMI : Guam : Federate : Marshal : Palau : Puert : U.S. |
| : : : d : l : : o Rico: Virgi |
| : : : States : Islands : : : n |
| : : : of : : : : Islan |
| : : : Micrones : : : : ds |
| : : : iaa : : : : |
|-------------------------------------------------------------------------|
| 1994 : 36% : 21% : 26-33% : 51-65% : 16-20% : 16-26%: 45% |
|-------------------------------------------------------------------------|
| 1995 : 31-45 : 22 : 28-35 : 57-64 : 25-28 : 17-26 : ^b |
|-------------------------------------------------------------------------|
| 1996 : 41 : 24-25 : 28-37 : 52-57 : 26-32 : 21-33 : ^b |
|-------------------------------------------------------------------------|
| 1997 : 29-34 : 23 : 35 : 45 : 35 : 19-27 : ^b |
---------------------------------------------------------------------------
Note: If there was more than one estimate of GDP, a range of percentages
was provided.
aPercentages for the Federated States of Micronesia (FSM) may be slightly
overstated because of a small amount of double counting when aggregating
local source revenue for the FSM's national government and its four state
governments.
bNo estimate of GDP was available.
Sources: For GDP, the Central Intelligence Agency, United Nations, World
Bank, International Monetary Fund (IMF), Asian Development Bank, Bank of
Hawaii, Bureau of the Census, and the areas' governments. For outlying
areas' revenues, the general purpose financial statements and independent
auditors' reports for 1994 through 1997. Also, Report on the Audit of
Financial Statements in Accordance with OMB Circular A-133, Chuuk State
Government, Federated States of Micronesia, fiscal 1994 through 1997;
Report on the Audit of Financial Statements in Accordance with OMB
Circular A-133, State of Kosrae, Federated States of Micronesia, fiscal
1994 through 1997; Report on the Audit of Financial Statements in
Accordance with OMB Circular A-133, State of Pohnpei, Federated States of
Micronesia, fiscal 1994 through 1997; Report on the Audit of Financial
Statements in Accordance with OMB Circular A-133, State of Yap, Federated
States of Micronesia, fiscal 1994 through 1997.
Available Data Suggest That Garment Industry Taxes Are Higher in the CNMI
Than in the United States, but the Burden of These Taxes Is Uncertain
The available data suggest that garment manufacturers in the CNMI pay
taxes and fees that represent a higher percentage of the industry's gross
receipts than do the taxes and fees paid by garment manufacturers in the
United States. Although these data are incomplete for the garment industry
in both the CNMI and the United States, the data represent a large enough
share of all taxes and fees paid that additional data would be unlikely to
change the results. However, uncertainty remains about which economic
groups actually bear the burden of these taxes and fees because
manufacturers may be able to shift some of the burden to others.
On average, CNMI garment manufacturers paid taxes and fees equal to about
5.0 percent of their gross receipts between 1993 and 1998. By comparison,
U.S. garment manufacturers on average paid taxes and fees equal to about
3.3 percent of their gross receipts between 1991 and 1996 (the latest
period for which data are available). See tables 3 and 4.
Table****Helvetica:x11****3: Taxes and Fees Paid by the CNMI Garment
Industry as a Percentage of Its Gross
Receipts, Fiscal Years 1993 Through 1998
(Table notes on next page from Previous Page)
---------------------------------------------------------------------------
| Dollars in millions : : : : : : |
|-------------------------------------------------------------------------|
| : 1993 : 1994 : 1995 : 1996 : 1997 : 1998 |
|-------------------------------------------------------------------------|
| Taxes |
|-------------------------------------------------------------------------|
| User feea : $8.907: $9.576: $13.8 : $17.9 : $27.6 : $36.8 |
| : : : 97 : 81 : 53 : 46 |
|-------------------------------------------------------------------------|
| Employer's share of : 3.611 : 4.399 : 5.002 : 6.330 : 9.873 : 11.037 |
| Social Security taxesb : : : : : : |
|-------------------------------------------------------------------------|
| Nonresident worker fee : 0.693 : 0.797 : 1.705 : 1.902 : 2.406 : 3.575 |
|-------------------------------------------------------------------------|
| Corporate income tax : 0.060 : 0.025 : 0.000 : 0.000 : 0.372 : 0.218 |
|-------------------------------------------------------------------------|
| Business gross : 0.044 : 0.049 : 0.011 : 0.572 : 0.360 : 0.500 |
| receipts tax : : : : : : |
|-------------------------------------------------------------------------|
| Total taxes : $13.3 : $14.8 : $20.6 : $26.7 : $40.6 : $52.1 |
| : 15 : 46 : 15 : 85 : 64 : 76 |
|-------------------------------------------------------------------------|
| Gross receiptsc : $297 : $319 : $397 : $514 : $790 : $1,039 |
|-------------------------------------------------------------------------|
| Taxes as percentage : 4.5% : 4.7% : 5.2% : 5.2% : 5.1% : 5.0% |
| of gross receipts : : : : : : |
---------------------------------------------------------------------------
Note: Excise taxes paid on the garment industry's purchases, such as on
construction materials, are not included in the total.
aThe customs certification user fee was 3.0% of the value of exports to
the United States in 1993-94; 3.5% from Oct. 1, 1994, to July 9, 1998; and
3.7% beginning July 10, 1998. Any inconsistency between user fees
collected, the user fee rate, and gross receipts is caused by lags in
reporting gross receipts.
bThe employer's share of Social Security taxes paid directly to the
federal government was estimated based on wage and salary data provided by
the CNMI Department of Finance.
cGross receipts figures have been rounded to the nearest million.
Sources: CNMI August 1999 Financial and Economic Information Sheets:
Highlights; also, data provided by the CNMI Department of Finance.
Table****Helvetica:x11****4: Taxes and Fees Paid by the U.S. Garment
Industry as a Percentage of Its Gross
Receipts, 1991 Through 1996
---------------------------------------------------------------------------
| Dollars in : : : : : : |
| millions : : : : : : |
|-------------------------------------------------------------------------|
| : 1991 : 1992 : 1993 : 1994 : 1995 : 1996 |
|-------------------------------------------------------------------------|
| Taxes |
|-------------------------------------------------------------------------|
| Federal : $737 : $846 : $915 : $978 : $985 : $900 |
| income taxa : : : : : : |
|-------------------------------------------------------------------------|
| Other taxesb : 1,495 : 1,771 : 1,751 : 1,763 : 1,717 : 1,810 |
|-------------------------------------------------------------------------|
| Total taxes : $2,232 : $2,617 : $2,666 : $2,741 : $2,702 : $2,710 |
|-------------------------------------------------------------------------|
| Gross receipts : $71,573: $77,332: $76,367: $80,248: $82,523: $83,384 |
|-------------------------------------------------------------------------|
| Taxes as : 3.1% : 3.4% : 3.5% : 3.4% : 3.3% : 3.3% |
| percentage of : : : : : : |
| gross receipts : : : : : : |
---------------------------------------------------------------------------
Note: Data are for all active U.S. garment industry corporations. Data are
for corporation accounting periods ending between July of the stated year
through June of the following year.
aFederal income tax paid, after all credits except the foreign tax credit.
bTaxes reported as deductions on corporate income tax returns. Included
among the deductible taxes are ordinary state or local taxes paid or
accrued during the year; Social Security and payroll taxes; unemployment
insurance taxes; excise taxes, import and tariff duties; business,
license, and privilege taxes; the environmental tax; and income and profit
taxes paid to foreign countries unless claimed as a credit against income
tax. Data may not include all taxes paid because some U.S. corporations
include sales, excise, and related taxes that were part of the sales
prices of their products in the cost of goods sold, rather than as part of
a separate deduction for taxes paid.
Sources: Statistics of Income: Corporation Source Books, Internal Revenue
Service, 1991, p. 49; 1993, p. 50; 1995, pp. 50, 529; Statistics of
Income: Corporation Income Tax Returns, Internal Revenue Service, 1992, p.
58; 1994, p. 64; 1996, pp. 62, 199-200.
We cannot precisely compare the taxes and fees paid by garment
manufacturers in the United States and the CNMI because data on taxes
directly paid by those manufacturers are incomplete. For example, when
paying corporate income tax, some U.S. corporations include the sales,
excise, and related taxes that were part of the sales price of their
products in the cost of goods sold, rather than as part of a separate
deduction for taxes paid. These taxes may not be included in the
statistics we have for
taxes paid./Footnote9/ These missing taxes might be paid by those
manufacturers that (1) operate their own retail outlets in jurisdictions
in which retailers are responsible for paying sales taxes and (2) account
for their tax deduction in the manner just described. However, we believe
that these missing tax payments represent a small share of the total tax
payments made by the U.S. garment industry.
We do not have data on the excise taxes that CNMI garment manufacturers
paid on their purchases of inputs such as construction materials. However,
any excise taxes paid by the CNMI garment manufacturers would increase
their taxes paid relative to taxes paid by U.S. garment manufacturers.
Therefore, more complete data would be likely to continue to show that
garment manufacturers in the CNMI paid taxes and fees that represent a
larger share of their gross receipts than do the taxes and fees paid by
garment manufacturers in the United States.
The ratios of the taxes and fees paid to the industry's gross receipts
provide some perspective on the amount of revenue that the CNMI and U.S.
governments are collecting through taxes directly imposed on the garment
industry, controlling for the size of the industry in each location, but
the ratios do not provide a very clear picture of the relative tax
burdens. Determining whether garment manufacturers in either the CNMI or
the United States bear a greater tax burden requires knowing what
proportion of the taxes paid is shifted to other parties and then
comparing the taxes actually borne by manufacturers in each location to
some measure of the industry's ability to pay. We do not know what share
of the reported taxes is actually borne by the industry owners. Moreover,
we do not have an accurate measure of either group of garment
manufacturers' ability to pay taxes. The preferred measure of the ability
to pay would be net economic income. Prior studies comparing corporate tax
burdens have used net income, as reported on income tax returns or in
financial statements, as a proxy for net economic income. However, we did
not have sufficient data from either tax returns or financial statements
for CNMI garment manufacturers to estimate net economic income. The only
measure available that gives even a rough sense of manufacturers' ability
to pay is gross receipts. The limitation of this measure is that two
businesses with the same gross receipts can have much different profit
margins and, therefore, much different net incomes.
There is uncertainty about which economic groups actually bear the burden
of the taxes paid by the U.S. and CNMI garment industries. While remaining
legally responsible for paying a tax or fee, garment manufacturers, like
other businesses subject to taxation, may be able to shift some or all of
the burden of a tax or fee to other groups in the economy. Such shifts
would occur through changes in the prices of their products or the prices
that they pay to acquire labor or materials used to make garments. (See
app. II for further discussion.) The unavailability of data on supply and
demand conditions in specific markets, such as the markets for garment and
garment industry labor in the United States and the CNMI, prevented us
from estimating the ability of the garment industry in the CNMI to shift
its tax burden compared with the ability of the garment industry in the
United States to do the same.
Agency Comments and Our Evaluation
The Department of the Interior raised several concerns about the data
presented in this chapter. The Department questioned our inclusion of the
Freely Associated States in our comparison of the fiscal self-sufficiency
of the outlying areas, including the CNMI. We disagree with the
Department's comment. The CNMI and the Freely Associated States have a
shared history, maintain an ongoing economic and social relationship, and
receive federal funds. These factors, along with congressional interest,
make the comparison between the CNMI and the Freely Associated States
relevant.
The Department suggested that taxes the U.S. government collects from
federal employees living in Guam and remits to the Guam government, which
we classified as federal transfers, should be considered as local revenue.
We do not agree that federal income taxes paid by U.S. federal employees
in Guam should be considered local revenues rather than federal transfers
in making a fair comparison of the self-sufficiency of Guam and the CNMI.
We classified federal income taxes paid by federal employees in Guam and
then remitted to the government of Guam as federal transfers because this
remittance is legislatively required. The CNMI has not sought similar
treatment for wages and salaries paid to federal employees in the CNMI
primarily because the amounts are very small. (For example, total wages
and salaries paid to federal employees in the CNMI in 1997 were about $1.9
million compared with $359.2 million in Guam.)
The Department said that the CNMI's user fee on garment exports to the
United States should not be counted as a local revenue source but should
be considered a federal transfer resulting from the absence of import
tariffs on garments exported to the United States. We disagree. Nothing
required the CNMI to impose a user fee on garment exports. Instead, the
decision to apply the user fee was an autonomous act of the government of
the CNMI, independent of the exemption from U.S. tariffs. Therefore, it is
appropriate to include the revenue received from the user fee as local
revenue when evaluating the revenue-raising effort of the CNMI.
The Department said that the taxes and fees actually borne by the CNMI
garment industry are quite small. The Department also said that we should
have identified which groups bear the burden of taxes. We did not address
this question because data limitations prevent a reliable estimate of the
extent to which specific economic groups actually bear the burden of these
taxes. As agreed with the offices of the responsible congressional
subcommittees, we compared the taxes and fees paid by the garment industry
in the CNMI with those paid by the U.S. garment industry.
The Department said that we should exclude nonresident worker fees from
our compilation of taxes and fees paid by CNMI garment manufacturers. We
disagree. The fee is paid to the CNMI government by garment manufacturers
who hire foreign workers and is correctly included in the total taxes and
fees paid by the CNMI garment industry.
--------------------------------------
/Footnote1/-^Data were available for most, but not all, of the taxes and
fees that the CNMI and U.S. garment industries are responsible for
paying. The ratio of industry tax payments to gross receipts for the
CNMI industry would likely continue to be higher than that for the U.S.
industry if more complete data had been available because the unmeasured
taxes and fees paid are likely to be small relative to the measured
taxes and fees.
/Footnote2/-^We could not precisely determine the Federated States of
Micronesia's (FSM) general revenue from federal transfers and grants
because data were not available that would allow us to distinguish
between transfers and grants to the national government of the FSM
versus to the four FSM state governments. However, on the basis of the
available data, the combined governments of the FSM are dependent for
more than 50 percent of their general revenue on federal transfers and
grants.
/Footnote3/-^According to the CNMI, Guam has a significant U.S. military
presence that provides additional revenue to the Guam government, which
is something that the CNMI does not enjoy. For example, total wages and
salaries paid to federal employees in 1997 were about $1.9 million in
the CNMI compared with $359.2 million in Guam.
/Footnote4/-^If the federal income tax were imposed, many residents of the
U.S. territories could receive payments from the federal government
because of the earned income tax credit.
/Footnote5/-^There are more sophisticated methods of comparing the revenue
efforts of different jurisdictions. One method is the Representative Tax
System (RTS), devised by the U.S. Advisory Commission on
Intergovernmental Relations (ACIR) to measure the hypothetical abilities
of U.S. state and local governments to raise revenue. The RTS measures
revenue-raising ability by estimating the tax yield that would result
from applying a standard, representative set of tax base definitions and
tax rates in each jurisdiction. (See RTS 1991: State Revenue Capacity
and Effort, ACIR, M-187, Sept. 1993, pp. 3, 6.) However, methods such as
this require a considerable amount of detailed economic data, for
example, data on tax bases in each jurisdiction. These data were not
available for the CNMI and the other outlying areas.
/Footnote6/-^Because of processing and publishing lags, no published data
beyond 1996 are yet available.
/Footnote7/-^The economic data available for the outlying areas are
limited, making it difficult to make precise estimates of GDP for those
areas. Various organizations have made different estimates of GDP for
the same area and year. We used all the published estimates that we
found because we had no basis to determine which estimates were superior.
/Footnote8/-^See Marc Rubin, "National Income Accounts in the Northern
Mariana Islands," Eurasia Bulletin, summer 1999, pp. 13-14.
/Footnote9/-^See Statistics of Income: 1996 Corporation Income Tax
Returns, Internal Revenue Service, p. 200.
CNMI TAXES AND TAX REVENUE
==========================
Taxes on Business
The Commonwealth of the Northern Mariana Islands' income tax system is
largely based on the U.S. Internal Revenue Code. For example, the Northern
Marianas Territorial Income Tax is calculated in essentially the same
manner as the U.S. income tax, with a corporate tax for those businesses
that are corporations and a tax on personal income for businesses that are
partnerships, family-owned, or special types of corporations./Footnote1/
The income tax base, deductions, and rates are the same under the CNMI
income tax and under the U.S. Internal Revenue Code, except that the CNMI
imposes tax on a few of the deductions and credits allowed under the
Internal Revenue Code. Under its Covenant to Establish a Commonwealth in
Political Union With the United States of America, the CNMI is authorized
to rebate to taxpayers 100 percent of the income tax it collects on income
sourced within the CNMI./Footnote2/ Rebate rates are identical for
corporate and personal income. Rebate rates are graduated and currently
range from 50 to 90 percent of the "rebate base." The rebate base is the
total income tax paid on CNMI-source income minus allowed nonrefundable
credits.
In addition to the income tax, the Covenant permits the CNMI to impose
other taxes on businesses. These taxes include the business gross receipts
tax and the customs certification user fee. Both are levied on gross
receipts, the first on business receipts except those from the sale of
exported goods and the second on the sale of goods exported to the United
States. These local taxes may be used as nonrefundable credits against the
income tax, provided the taxpayer has not used the local tax as an income
tax deduction. Because these other taxes may be used as credits against
the income tax, CNMI taxpayers pay only the greater of the local tax or
the income tax, but not both.
The business gross receipts tax and the user fee both have gross business
revenue as their base and are calculated with no deductions. The rate for
the business gross receipts tax is graduated and currently ranges from
0 (on revenue of up to $5,000 per year) to 5 percent (on $750,001 or
more). Garments that are manufactured for export to the United States are
exempt from the business gross receipts tax but are instead subject to the
user fee. The user fee currently is 3.7 percent of the merchandise's gross
value if the CNMI must certify for the country of origin.
The CNMI imposes a general excise tax at various rates depending on the
item for the privilege of first selling, using, manufacturing, leasing, or
renting goods, merchandise, resources, or commodities in the CNMI for a
business purpose or for personal use exceeding specified limits.
Generally, the excise tax is imposed on luxury items. In addition, the
CNMI imposes a nonresident worker fee on businesses that hire nonresidents
as employees. The CNMI does not tax either real or personal property, and
CNMI-produced goods exported to the United States generally are exempt
from U.S. customs duties.
Tax Revenue
Table 5 shows the taxes collected by the CNMI government between 1994 and
1997. Table 6 shows the other types of revenue in addition to taxes that
the CNMI government collected during that same period. The presentation of
the CNMI government's revenue follows the U.S. Bureau of the Census's
classification guidelines for the definitions of total revenue, general
revenue, and local source revenue.
Table****Helvetica:x11****5: Taxes Collected in the CNMI, Fiscal Years
1994 Through 1997
-------------------------------------------------------------------------
| Dollars in millions |
|-----------------------------------------------------------------------|
| Tax : 1994 : 1995 : 1996 : 1997 |
|-----------------------------------------------------------------------|
| Business gross receipts tax : $57.6 : $59.1 : $67.2 : $74.6 |
|-----------------------------------------------------------------------|
| Wages and salary, and income taxes : 31.0 : 47.4 : 56.3 : 46.6 |
|-----------------------------------------------------------------------|
| Excise taxa : 18.3 : 26.8 : 25.0 : 29.2 |
|-----------------------------------------------------------------------|
| Customs certification user fee : 9.6 : 13.9 : 18.0 : 27.7 |
|-----------------------------------------------------------------------|
| Fuel tax : 6.0 : 6.5 : 7.5 : 4.9 |
|-----------------------------------------------------------------------|
| Beverage container tax : 1.8 : 3.5 : 4.1 : 4.0 |
|-----------------------------------------------------------------------|
| Hotel room occupancy tax : 7.8 : 8.7 : 9.9 : 10.8 |
|-----------------------------------------------------------------------|
| Developers' tax : 0.4 : 0.7 : 0.6 : 1.0 |
|-----------------------------------------------------------------------|
| Other taxes : 2.9 : 3.1 : 2.9 : 3.2 |
|-----------------------------------------------------------------------|
| Total : $135.4: $169.7 : $191.5: $202.0 |
-------------------------------------------------------------------------
aData on excise taxes and customs certification user fees, reported
separately, are from "Financial and Economic Information Sheets:
Highlights," CNMI Department of Finance, Aug. 1999.
Sources: General Purpose Financial Statements and Independent Auditors'
Reports, Commonwealth of the Northern Mariana Islands, fiscal 1994 through
1997.
Table****Helvetica:x11****6: Sources and Types of Revenue Collected in
the CNMI, Fiscal Years 1994 Through 1997
(Table notes on next page from Previous Page)
-------------------------------------------------------------------------
| Dollars in millions : : : : |
|-----------------------------------------------------------------------|
| Revenue source : 1994 : 1995 : 1996 : 1997 |
|-----------------------------------------------------------------------|
| General revenue : : : : |
|-----------------------------------------------------------------------|
| Revenue from federal transfers and : $30.9 : $39.0 : $40.9 : $38.9 |
| grants : : : : |
|-----------------------------------------------------------------------|
| Revenue from local sources : : : : |
|-----------------------------------------------------------------------|
| Taxes : 135.4 : 169.7 : 191.5 : 202.0 |
|-----------------------------------------------------------------------|
| Licenses, fees, other charges, and : 55.5 : 75.8 : 73.5 : 85.8 |
| miscellaneous general revenue : : : : |
|-----------------------------------------------------------------------|
| Subtotal, revenue from local sources : $190.9: $245.5: $265.0: $287.8 |
|-----------------------------------------------------------------------|
| Subtotal, general revenue : $221.8: $284.5: $305.9: $326.7 |
|-----------------------------------------------------------------------|
| Utility charges : 48.1 : ^a : 54.3 : 60.2 |
|-----------------------------------------------------------------------|
| Insurance trust revenue : 0.1b : 43.4c : 61.2 : 99.1 |
|-----------------------------------------------------------------------|
| Total : $270.0: $327.9: $421.4: $486.0 |
-------------------------------------------------------------------------
Note: Revenues of the Northern Marianas College were not included because
complete data were not available.
aNot available.
bMost components not available.
cSome components not available.
Sources: General Purpose Financial Statements and Independent Auditors'
Reports, Commonwealth of the Northern Mariana Islands, fiscal 1994 through
1997; Public School System, Report on the Audit of Financial Statements in
Accordance with OMB Circular A-128, Commonwealth of the Northern Mariana
Islands, fiscal 1994 through 1996; U.S. Department of the Interior.
--------------------------------------
/Footnote1/-^The CNMI has not actually codified the Internal Revenue
Code's provisions that are applicable in the Islands. Instead, the CNMI
incorporated by reference the applicable provisions into its local
statute and applies the Internal Revenue Code in a "mirror" fashion.
That is, the CNMI utilizes the applicable Code provision by substituting
nomenclature. For example, any reference in the Code to the "United
States" would have "CNMI" substituted.
/Footnote2/-^The rebate system evolved in part because the United States
wanted the CNMI to acquire, implement, and become adjusted to an
established and effective tax structure. Thus, the United States
required the CNMI to adopt the U.S. income tax laws. However, at the
same time, it permitted the CNMI to rebate all income taxes collected to
meet local policy goals.
THE POTENTIAL SHIFTING OF GARMENT INDUSTRY TAX BURDENS
======================================================
Economists recognize that the businesses or individuals that are legally
responsible for paying taxes that governments impose may be able to shift
some or all of their tax burden to others. Data limitations, however,
often prevent a reliable estimate of the extent of this shifting. As a
result, there is uncertainty about which economic groups actually bear the
burden of the taxes paid by the CNMI and U.S. garment industries. Tables 3
and 4 in chapter 3 show the amounts of various taxes and fees that
corporations in those industries were legally responsible for paying.
However, these amounts may not represent the actual burden that the taxes
and fees imposed on the shareholders of those corporations. The taxes may
have altered the prices that the garment manufacturers charged for their
final products or paid for their labor and other production inputs. Such
price changes would have resulted in the shifting of some of the tax
burden to other groups in the economy, such as consumers, workers, or the
suppliers of other inputs. Conversely, the shareholders of garment
manufacturers may bear some of the burden of taxes that other groups are
legally responsible for paying. For example, in some situations, garment
factory workers may be able to shift some of their taxes back to
manufacturers in the form of higher wages. Which groups bear the burden of
the taxes on garment manufacturing differs by type of tax and depends on
conditions of demand and supply for inputs (such as labor and cloth) and
outputs (garments). We do not have enough data on the supply and demand
conditions in the CNMI and U.S. markets for garments, garment workers'
labor, and so on to estimate which groups bear the burdens of the taxes
imposed.
For some taxes assessed in the United States and the CNMI, there is a
consensus among economists about whether businesses or other groups bear
the burden. For example, economists generally believe that retail sales
taxes are borne by consumers. Excise taxes also usually are assumed to be
borne by consumers of the taxed products. Although excise tax revenue is
collected from producers, manufacturers, or importers, the economic burden
of the tax generally is passed on through higher prices to consumers.
Although payroll taxes are collected from employers, they generally are
assumed to be borne by workers, being passed back through lower wages.
Similarly, the nonresident worker fee is likely to be passed back to labor
through lower wages.
Gross receipts taxes are levied on the total receipts of a business, with
no deductions permitted. In the long run, a gross receipts tax may act
like a sales tax in that it may raise the prices of consumer goods.
However, in the
short run, a gross receipts tax may be borne by producers./Footnote1/ In
that case, the tax will be absorbed by a business's shareholders in the
form of lower returns on their investment and by its workers in the form
of lower wages.
There is no consensus among economists on which groups bear the tax on
corporate net income. The burden may be borne by or shared by owners of
the corporation, by owners of production inputs such as labor and land, or
by consumers of the output produced. Some economists maintain that taxes
on corporate net income have no effect on output, output price, or input
prices but are reflected in lower profits, net of tax, and thus are borne
by the corporation's owners, especially in the short run. There are many
reasons, however, for believing that the corporate income tax can be
shifted at least partly to labor inputs or to capital in general in the
long run. Empirical research has been inconclusive about the extent, if
any, to which shifting occurs.
--------------------------------------
/Footnote1/-^Producers in different industries would face different
amounts of burden, depending on the degree of vertical integration in
their industry.
COMMENTS FROM THE COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS AND OUR
EVALUATION
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GAO Comments
The following are our comments on the Commonwealth of the Northern Mariana
Islands' letter dated January 25, 2000. The Commonwealth provided
clarifications and technical points that were incorporated into the report
as appropriate.
1. We added the suggested caveat about the 1999 population figure (see
footnote 2, executive summary) and added that some of the non-U.S.
citizens are from the Freely Associated States or are immediate relatives
of U.S. citizens (see footnote 3, executive summary).
2. While we do not dispute the figures the Governor's Office provides, we
believe the comparison between the percentages of workers employed by the
private sectors in Guam and the United States with the percentage employed
by the private sector in the CNMI could be misleading because the CNMI
workforce includes a large proportion of foreign workers who temporarily
reside in the CNMI and are primarily employed in the private sector. Guam
and the United States do not have similar proportions of foreign workers
in their total workforces. While the percentage of total workers employed
by the CNMI government may be relatively low, the percentage of the U.S.
citizen population employed by the government is much higher.
3. The January 1999 study is correctly identified.
4. We added some suggested language regarding the large U.S. military
presence in Guam. See footnote 3, chapter 3.
5. We do not think there is empirical support for the claim that mandated
additional benefits to foreign workers hold down their wages or that the
lack of similar benefits cause local wages to rise. While foreign workers
do often receive these additional benefits, it is also the case that
employers can legally deduct some money from these workers' wages. We
believe there are insufficient data on the actual value of benefits
received by all workers or on the deductions to foreign workers' wages to
assess the net value of these benefits.
6. The context of the discussion pertains to a controversy over garments
that are labeled as "Made in the U.S.A." and not over those labeled as
"Made in the Commonwealth of the Northern Mariana Islands."
7. The issue concerns violations of federal wage and labor laws regardless
of who has the enforcement responsibility.
8. The report properly attributes the source of the information to the
print and broadcast media.
9. The report does not attempt to explain the rate of unemployment among
local residents or U.S. citizens in the CNMI because we do not believe
there is enough information about the causes of unemployment in the CNMI
to do so. We have added the views of the CNMI and the Department of the
Interior on this issue to the report (see footnote 2, chapter 2). The
number of unemployed local residents that we cite in the report as 1,800
includes about 1,400 unemployed U.S. citizens and about 400 permanent
residents of Saipan who are not U.S. citizens.
10. The discussion in this section is designed simply to show that the
CNMI's population of local residents is insufficient to supply enough
labor for an economy of the size and scope of the CNMI's. The report does
not measure the fiscal impacts of particular groups.
11. The number of unemployed local residents that we cite in the report as
1,800 includes about 1,400 unemployed U.S. citizens and about 400
permanent residents of Saipan who are not U.S. citizens.
12. The report describes the potential outcome if China were to become a
member of the WTO. The impact on the garment industry does not necessarily
depend on how many Chinese- or U.S.-owned garment factories there are in
the CNMI.
13. This report does not specifically address the causes of the
government's deficit. We discuss the relative size of federal spending on
wages and salaries in Guam and the CNMI in footnote 3, chapter 3.
14. We have added text to chapter 2 noting the concerns of the CNMI that
it is faced with the problem of providing government services for three
islands despite a declining economy and without receiving Compact Impact
Aid.
COMMENTS FROM THE DEPARTMENT OF THE INTERIOR AND OUR EVALUATION
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GAO's Comments
The following are our comments on the Department of the Interior's letter
dated February 1, 2000. The Department provided clarifications and
technical points that were incorporated into the report as appropriate.
1. We do not agree that the report answers these questions narrowly or
without reference to economic, legal, and regulatory context. We also do
not agree that the data and observations in the report are taken out of
context, incorrectly categorized, and misleading. The report describes in
detail the historical, economic, legal, and regulatory context in which
the CNMI economy currently operates. Specifically, it explains the context
in which the garment industry in the CNMI has come into being along with
the use of foreign workers. It also enumerates a number of concerns
expressed by some about violations of existing labor and worker safety
laws and the fiscal impact of the garment industry on the government of
the CNMI. In addition, it discusses the relationship between the United
States and the Northern Mariana Islands, both before and after the
Commonwealth was formed. In this context, the report discusses key
provisions of the Covenant establishing the CNMI that affect wages,
exports, immigration, and taxes. The report also presents an objective
description of the controversies surrounding the use of foreign workers
and the garment industry. Furthermore, the report uses data and
information from a wide range of sources and presents the results in a
balanced, fact-based, and objective manner.
2. We disagree. The report provides more than a simple description of the
CNMI's major industries and does not ignore the effect of the industries'
development on the population. The report explains how local residents,
most of whom are U.S. citizens, have benefited from economic growth. We
define local residents as the combination of U.S. citizens and citizens of
the Freely Associated States of the Republic of the Marshall Islands, the
Federated States of Micronesia, and the Republic of Palau because citizens
of the Freely Associated States have the legal right of residency in the
CNMI. Whenever data were available to do so, we make the distinction
between local residents and foreign workers. In other cases we distinguish
between U.S. and non-U.S. citizens. For example, figure 2 distinguishes
between U.S. and non-U.S. citizens in the population, figures 4 and 5 show
average wages of workers born in the CNMI and workers born in Asia, figure
7 isolates local residents as a component of the total labor force, and
figure 8 shows the occupations of workers and distinguishes between those
born in the CNMI, the Philippines, and China.
3. We disagree that our definition and interpretation of the data generate
distorted and inaccurate comparisons. Although the data we used to answer
the questions on the CNMI's revenue-raising effort and the comparative
taxation of the garment industries of the CNMI and the United States have
limitations, we discussed these limitations with the offices of the
responsible congressional subcommittees and described them in various
places throughout the report. We used the best sources of data available
to address the questions that we were asked, and we believe that the
comparisons we present, with the accompanying caveats, are as accurate as
possible.
4. We agree that the report does not address the question of the
appropriateness of the CNMI economy in the context of traditional American
values and laws. It was beyond the scope of our objectives to address
potential alternatives to the CNMI's current economy. We do not agree with
the Department's statement that the foundations of economic growth,
including employment of local residents, have fallen behind. For example,
we point out that the number of jobs held by U.S. citizens has grown
faster than the population of U.S. citizens, while labor participation
rates increased for U.S. citizens in the period between 1980 and 1999. In
addition, a larger proportion of U.S. citizens became self-employed over
that period. Finally, a bigger proportion of U.S. citizens work in the
private sector now than in 1980, despite the rapid growth in government
employment.
We agree that the high rate of unemployment among U.S. citizens is an area
for concern as is the CNMI's budget deficit. However, we disagree that the
garment and tourist industries or the foreign workers are the causes of
these problems. We found no data that support the claim that unemployment
in the CNMI is caused by the garment and tourist industries or by their
use of foreign labor. On the contrary, we agree with the October 1999
report prepared under the supervision of Northern Marianas College with
funding from the Department, which states that the garment and tourist
industries are the source of most of the CNMI's economic activity,
including exports, employment, and production of goods and services. We
did not determine the cause of the high rate of unemployment among U.S.
citizens, but we added the views of the Department and the CNMI government
to the report (see footnote 2, chapter 2).
We agree with the Department that the long-term prospects for the CNMI
economy are also a concern. The report states that the CNMI's reliance on
these two industries and on foreign labor for much of its workforce makes
the economy vulnerable to outside events. Specifically, we say that
changes in the Asian economy that affect tourism, potential legislation
changing the CNMI's immigration policy, and the potential for changes in
international trade agreements that might cause all or part of the garment
industry to leave the CNMI would all have a major impact on its economy.
5. We agree with the Department that the multipliers for the CNMI garment
industry are low compared with garment industries in other countries and,
as we stated in comment 4, that high unemployment rates among U.S.
citizens and the budget deficit are problematic. We did not determine the
cause of the high rate of unemployment among U.S. citizens, but we added
the views of the Department and the CNMI government to the report (see
footnote 2, chapter 2).
We do not agree that private sector employment for local workers has grown
little since 1995. For example, according to data from the CNMI Department
of Commerce, private sector employment of U.S. citizens increased by about
24 percent between 1995 and 1999 on Saipan, while total employment of U.S.
citizens, including employment in the government sector, rose by about 22
percent. Employment of non-U.S. citizens increased by about 43 percent
over the same period, but this includes about a 27-percent increase in
employment of people born in the Freely Associated States, who are not
considered foreign workers.
Furthermore, the numbers that the Department presents and its use of
multipliers may be misleading. The Saipan economy added about 2,100 jobs
for local residents, including about 1,650 jobs for U.S. citizens and 450
jobs for workers born in Micronesia. During the same period, the economy
added about 10,000 new jobs for foreign workers. In other words, the
economy added almost 2 jobs for local residents for every 10 jobs it added
for foreign workers, about twice what the Department claims. The growth in
employment for U.S. citizens from 1995 to 1999 occurred even though the
economy suffered a 30-percent decline from 1997 levels in visitors in 1998
and 1999.
6. We do not intend to give the impression that the CNMI is a melting pot
in the sense commonly used to describe the United States. Foreign workers
send much of their incomes back to support their families in their home
countries. Nonetheless, the CNMI does not have sufficient labor and skills
to have developed as it has without access to foreign workers, and all
sectors of the CNMI economy rely on foreign workers.
We do not agree with the Department's implication that the economic
advances of local residents come at the cost of transferring wealth from
foreign workers. While it is true that foreign workers earn lower wages
than do local resident workers-we point this out in figures 4 and 5 of our
report and in the accompanying text-it is also true that for foreign
workers born in Asia, wages have risen since 1980 and that in 1999, these
workers' average wages were $5.33 per hour. Moreover, average wages of
workers born in Asia in every major occupational category except
(r)farming, forestry, and fishing(c) (in which only 76 people were
employed in 1999) were higher than the CNMI's minimum wage of $3.05 per
hour. Finally, foreign workers come to the CNMI voluntarily to work, and
the Philippine Consul told us that the CNMI is a destination of choice for
workers from her country, in part because wages in the CNMI for foreign
workers are much higher than wages in the Philippines. The minimum wage in
the Philippines is about $1.00 per day, compared with $3.05 per hour-or
$24.40 per 8-hour day-in the CNMI.
We do not agree that the distribution of income in the CNMI has changed in
favor of the affluent. As discussed in the report, the distribution of
income was flatter in 1999 than in 1980. Median household incomes of local
residents have increased-in particular, Chamorro household income rose
from about $8,900 per year in 1980 to about $30,700 in 1999.
7. The data collected by the CNMI government are not sufficiently detailed
to evaluate the Department's claim that jobs in the tourist industry are
inherently more attractive than jobs in the garment industry. The data on
employment do show that on Saipan in 1999, about 900 workers born in the
CNMI (and who were therefore U.S. citizens) worked as operators,
fabricators, and laborers-the occupational category that employs about
86 percent of Chinese workers, most of whom work in the garment industry.
About 2,000 workers born in the CNMI worked in managerial and professional
specialties, and about 2,000 worked in technical, sales, and
administrative support positions. However, for these 4,000 U.S. citizens,
the data do not distinguish whether they work in the garment or tourist
industry or elsewhere.
We do not disagree that a large proportion of tourism employees in Guam
and the United States may be recent immigrants or that, as resident
immigrants, these workers have a bigger stake in their communities than do
temporary resident workers. As stated, in chapter 2 of our report, foreign
workers in the CNMI send much of their earnings back to their countries of
origin.
8. We disagree that the garment industry in the CNMI will necessarily
cease in 5 years' time. The advantages that the CNMI garment industry have
over many of its international competitors are three-fold: (1) They can
sell their products to buyers in the United States without import tariffs.
(2) The products are not subject to U.S. import quotas. (3) The products
can bear labels identifying them as being made in the United States. Even
if quotas are eliminated as scheduled, the tariff and labeling advantages
will remain largely intact, and whether garment production will leave the
CNMI for other WTO members in 2005 and beyond will depend on whether the
value of the benefits received from the tariff-free status and the
identification of products as having been made in the United States offset
the higher wages paid in the CNMI.
9. We disagree that the growth in the economy based on alien labor has led
to increased fiscal deficits. On the contrary, we found that a study
prepared for the Office of Insular Affairs that concluded that alien
workers had a negative fiscal impact on the CNMI government was
methodologically flawed. We also disagree that the growth of the economy
has led to increased unemployment as discussed in comment 4.
We agree that our report does not offer a complete alternative analysis to
the 1999 Fiscal Impact Report. We believe, however, our report offers
detailed, factual examples indicating that foreign workers have a smaller
fiscal impact than do local residents. It also points out that the 1999
Fiscal Impact Report understates the contributions of the garment and
tourist industries to the CNMI economy and provides specific examples of
the types of contributions that were not taken into account in the 1999
Fiscal Impact Report.
10. We added text to include the information provided by the Department
that since 1991, the births in the CNMI to mothers who were not U.S.
citizens have been greater than births to mothers who were U.S. citizens.
We also added information showing that the birth rate for women between
the ages of 15 and 45 is much lower for non-U.S. citizens than for U.S.
citizens and discussed the implications of this on the fiscal impact of
foreign workers.
11. We disagree that the inclusion of the Freely Associated States of the
Marshall Islands, the Federated States of Micronesia, and Palau distorts a
comparison with the CNMI. These countries have a shared history with the
CNMI as part of the former Trust Territory of the Pacific Islands and have
an ongoing economic and social relationship--citizens of the Freely
Associated States have the right of residency and employment in the CNMI,
and many have come to the CNMI to live and work. In addition, the Freely
Associated States and the CNMI receive federal funds. Finally, as the
Department has pointed out, the CNMI was similarly dependent on federal
budget assistance during the early years of its commonwealth status. These
factors, along with congressional interest, make the comparison between
the CNMI and the Freely Associated States relevant. To ensure that the low
level of economic activity in the Marshall Islands and the Federated
States of Micronesia does not distort the comparison, we present data
showing the percentage of local source revenue as a proportion of GDP--if
local source revenue is low because local economic activity is small, then
the ratio of the two is a way to control for the size of the economy.
12. We added text clarifying that we included annual Covenant funding from
the Department of the Interior in calculating federal transfers to the
CNMI. For more details on the amounts and types of federal transfers and
grants to the CNMI and Guam, see, for example, General Purpose Financial
Statements and Independent Auditors' Report, Commonwealth of the Northern
Mariana Islands, fiscal 1997 (pp. 55, 61), and General Purpose Financial
Statements, Additional Information and Independent Auditors' Report,
Government of Guam, fiscal 1997 (pp. 53, 67-71, 73, 75, 84, 94-95).
13. We do not agree that federal income taxes paid by U.S. federal
employees in Guam should be considered local revenues rather than federal
transfers in making a fair comparison of the self-sufficiency of Guam and
the CNMI. We classified federal income taxes paid by federal employees in
Guam and then remitted to the government of Guam as federal transfers
because this remittance is legislatively required. The CNMI has not sought
similar treatment for wages and salaries paid to federal employees in the
CNMI primarily because the amounts are very small. (For example, total
wages and salaries paid to federal employees in 1997 were about $1.9
million in the CNMI compared with $359.2 million in Guam.)
14. We changed our source of data on gross receipts for the CNMI garment
industry for 1997 and 1998 to make it consistent with the data that we
used in previous years. This change resulted in a small reduction in the
ratio of taxes to gross receipts for the CNMI garment industry for those 2
years. We also added a note to table 3 that acknowledges possible lags in
reporting gross receipts.
However, we do not agree with the Department that the revenue that the
CNMI receives from the user fee on garment exports to the United States
should be considered as a federal transfer because nothing required the
CNMI to impose a user fee on garment exports. Instead, the decision to
apply the user fee was an autonomous act of the government of the CNMI,
independent of the exemption from U.S. tariffs. Therefore, it is
appropriate to include the revenue received from the user fee as local
revenue when evaluating the revenue-raising effort of the CNMI.
15. We disagree that the CNMI's user fee should be excluded from the
comparison between taxes paid by the garment industry in the CNMI and
taxes paid by the garment industry in the United States as explained in
comment 14. We did not address the question of whether the taxes and fees
actually borne by the CNMI garment industry are nearly negligible and
lower than those borne by the U.S. garment industry. We compared the taxes
and fees paid by the garment industry in the CNMI, expressed as a
percentage of gross receipts, with the taxes and fees paid by the U.S.
garment industry. In our report, we state that one limitation to this
approach in evaluating the relative tax burden of the garment industry in
the CNMI and in the United States is that there is uncertainty about which
economic groups actually bear the burden of the taxes paid by the CNMI and
U.S. garment industries. Garment manufacturers may shift some or all of
their tax burden to others, and data limitations prevent a reliable
estimate of the extent of this shifting.
16. We have added a note to table 4 indicating that we included the
employer's share of Social Security taxes in our calculation of taxes paid
by U.S. garment manufacturers. Accordingly, it is appropriate to also
include them in calculating taxes paid by the CNMI garment industry. We
disagree that the nonresident worker fee should be excluded when comparing
the taxes paid by the garment industries in the CNMI and in the United
States. The Department states that we should exclude that fee because we
do not include fees that U.S. garment manufacturers pay to employment
services. However, the former is a tax paid to the CNMI government by
garment manufacturers who hire foreign workers and is correctly included
in the total taxes and fees paid by the CNMI garment industry, while the
latter is not a tax paid by the U.S. garment industry and is correctly
excluded.
17. As discussed in comment 15, we did not address the question of the tax
burden borne by the CNMI garment industry. However, in comments 14 and 16,
we explain why it is appropriate to include the user fee, the employer's
share of Social Security taxes, and the nonresident worker fee in
calculating the taxes paid by the garment industry in the CNMI.
18. We believe that the CNMI economy and its local resident population
have benefited from the economic growth in the past 20 years. That growth
has been driven by the garment and tourist industries and the use of
foreign workers. In terms of future growth--as discussed in comment 4-we
agree with the Department that the long-term prospects for the economy are
a concern. The report states that the CNMI's reliance on the garment and
tourist industries and on foreign workers makes it vulnerable to outside
events that affect either industry or the economy's access to foreign
workers.
GAO CONTACTS AND STAFF ACKNOWLEDGMENTS
======================================
GAO Contacts
Jay Cherlow, (202) 512-4918
Frank Rusco, (202) 512-4597
James Wozny, (202) 512-9084
Acknowledgments
In addition to those named above, Roy Judy, Anne Stevens, Emil Friberg,
Shirley Jones, Dick Kasdan, Nina Pfieffer, and Cheryl Pilatzke made key
contributions to this report.
(141326)
Table 1: Percentage of Revenue From Local Sources and Federal
Transfers and Grants in Relation to Total General Revenue for
the CNMI and Other Outlying Areas, Fiscal Years 1994 Through 199751
Table 2: Revenue From Local Sources as a Percentage of GDP for
the CNMI and Other Outlying Areas, Fiscal Years 1994 Through 199754
Table 3: Taxes and Fees Paid by the CNMI Garment Industry as a Percentage
of Its Gross Receipts, Fiscal Years 1993 Through
1998 55
Table 4: Taxes and Fees Paid by the U.S. Garment Industry as
a Percentage of Its Gross Receipts, 1991 Through 199656
Table 5: Taxes Collected in the CNMI, Fiscal Years 1994 Through
1997 62
Table 6: Sources and Types of Revenue Collected in the CNMI,
Fiscal Years 1994 Through 1997 62
Figure 1: Map of the Pacific Showing the Northern Mariana Islands18
Figure 2: Population Growth on Saipan, CNMI, 1980 to 199921
Figure 3: Rate of Change in Selected Economic Variables for the
CNMI and Guam, 1982 Through 1997 23
Figure 4: Average Hourly Wages on Saipan, CNMI, 1980 to 199924
Figure 5: Average Hourly Wages in Selected Occupations, by Place
of Birth, 1999 25
Figure 6: CNMI Visitor Arrivals and Spending, 1980 to 199935
Figure 7: Saipan Employment and Local Labor Force, 1980 to 199940
Figure 8: Distribution of Local and Foreign Workers by
Occupation and Place of Birth, 1999 41
Figure 9: Income Distribution for Saipan Households, 1980 and 199943***
*** End of document ***