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OFFICE OF THE GOVERNOR
PRESS RELEASE
(for immediate release – Thursday, February 28, 2008)
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Gov. Togiola testifies on impact of minimum wage hike
at U.S. Senate hearing
(WASHINGTON DC) - Governor Togiola Tulafono today appeared before the U.S. Senate Committee on Energy and Natural Resources to testify on the impact of increased minimum wages on the economy of American Samoa.
Governor Togiola, in his testimony to the committee, said there is an urgent need for remedial legislation to address the minimum wage increases that Congress has mandated for American Samoa. He also raised with the Committee an underlying concern over federal policy consistency that is necessary to foster economic development in the Territory.
Governor Togiola described for the committee past and current economic conditions in American Samoa, as well as the inconsistent federal action towards the Territory. He also offered economic impact and remedial proposals, such as minimum wage legislation, tax credit, and territorial operational costs and job incentive programs. (See full testimony below)
Testimonies at the committee hearing were also given by Congressman Faleomavaega Eni and Mr. Nikolao Pula, Director of the Office of Insular Affairs of the Department of the Interior.
STATEMENT
FROM GOVERNOR TOGIOLA TULAFONO
to U.S. SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES
Washington DC – February 28, 2008
Talofa and greetings Chairman Bingaman and honorable members of the Committee. I greatly appreciate this opportunity to testify before the Committee on the urgent need for remedial legislation addressing the minimum wage increases that Congress has mandated for American Samoa. I also wish to raise with the Committee an underlying concern over federal policy consistency necessary to foster economic development in American Samoa.
CURRENT ECONOMIC CONDITIONS IN AMERICAN SAMOA
American Samoa’s transition from a subsistence economy began in the 1960's with road, airport, health care, and school modernization. The Federal Government also instituted a policy for territorial self-government. Since 1977 American Samoa has elected its own governor. Over the past fifty years, the territory has made significant progress, but in its January 25, 2008 report to Congress, the Department of Labor states that the territory’s economy is still small, developing, and fragile. Similarly, in hearings before this Committee on March 1, 2006, Deputy Assistant Secretary David Cohen of the Department of Interior stated, “American Samoa has the narrowest economic base” of the four territories. To document this point, Secretary Cohen noted that the per capita gross domestic product (GDP) in American Samoa ranks far below the other territories.
Further evidencing the necessity of additional economic development: (1) American Samoa has a per capita income that is only one-fifth that of the rest of the United States. (2) The territory has a large number of subsistence workers who cannot find paid employment. (3) 88% of all farms in the Territory operate on a subsistence basis. (4) Despite a large out-migration of American Samoans to the United States, the territory still has a young population that is growing three times faster than the national growth rate. (5) The Territory’s income primarily comes from two fish canning operations and from the Federal Government’s operational and capital grants. (6) Recent employment gains in the Territory have occurred mainly in low wage sectors. Even in the low-wage sectors, however, the Territory is at a competitive disadvantage to the Philippines and Thailand where wages are a fraction of the mandated federal minimum wage in American Samoa.
The Federal Government had provided trade and tax incentives for economic development in American Samoa. Although federal funds play a significant role in the Territory, the per capita rate of federal expenditures in American Samoa is half that for the rest of the country. Reliance on the private sector had to be fostered. Specifically, preferential quota allocations, particularly for canned fish, as well as favorable tariff treatment and federal tax credits allowed American Samoa to develop a seafood canning industry. As a recent Department of Interior-funded study has reported, the fish canning industry is the mainstay of the Territory’s economy. The two canners in American Samoa directly employ half of the Territory’s entire workforce directly and indirectly.
The growth of the fish canning industry has boosted employment and spurred development in the territory. Such a heavy reliance on two canneries however is not economically sound, and my Administration with assistance from the Department of the Interior has pursued every opportunity to diversify the Territory’s economy. The territorial government has actively promoted business investment opportunities in agriculture, fisheries, tourism, call centers, electronic information processing, and an international fiber optic cable connection for American Samoa. If American call centers can operate in India and Guatemala, they should certainly be able to operate in American Samoa. But such investments have been deterred by the erosion of existing federal policy and inconsistent federal action towards American Samoa.
INCONSISTENT FEDERAL ACTION TOWARDS AMERICAN SAMOA
To implement a policy of global trade expansion, the United States has negotiated a series of trade agreements. These agreements have the effect of reducing and soon ending the quota and tariff protections for American Samoan products. In addition, as part of a budget offset measure, Congress repealed the possession tax credit that had stimulated investments in American Samoa. The subsequent reports of the Government Accountability Office and Joint Committee on Taxation Staff raise concerns over the adverse effect on American Samoa. As a result, Congress has temporarily delayed full repeal of the tax credit. The temporary delay assists only the two cannery operations that had previously qualified for the credit. The temporary credit extension does not apply to new businesses that might start up in the Territory.
The loss of trade and tax incentives renders existing cannery operations in American Samoa far less economical. Even starker is the effect on the diversification and development of the Territory’s economic base. Changing federal policy, with little regard to the impact on the territory, has crippled efforts to start new businesses in American Samoa. Furthermore, as the Department of Labor report to Congress states, legislation in 2007 mandating annual increases of the minimum wage in American Samoa hobbles the Territory in dealing with the threatened cutback of cannery operations.
Recognizing that the Territory’s economic level is far below that of the 50 states, Congress had previously decided to establish the federal minimum wage rate in American Samoa proportionate to economic development. Under a procedure that had been applied to Puerto Rico and the Virgin Islands, Congress adjusted the minimum wage in American Samoa administratively every two years so as to reflect the Territory’s progress. Such adjustments therefore were economically sustainable not throttling the economy. The biennial adjustments over time would raise the minimum wage in the American Samoa to parity with the regular federal rate as had occurred in other territories.
In Public Law 110-28, the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, however, Congress increased the regular federal rate nationwide. Congress also mandated an immediate 50 cent increase in the hourly minimum wage rate for American Samoa as of July 24, 2007 with an additional 50-cent increase every year thereafter until the minimum wage in the territory matches the new federal rate of $7.25. This minimum wage hike for American Samoa, similar to past tariff and tax changes, was inserted in the rush to enact the larger legislation without assessing the impact on the Territory.
That legislation did call for an after-the-fact review of the consequences. The Department of Labor has now submitted that report to Congress and the report predicts bitter results for the people of American Samoa. The Department illustrates the impact in a telling way. At the relative level of economic development in the Territory, the mandated wage increase is equivalent to imposing a $16.50 federal minimum wage requirement on the states. The economic and political fall-out of such a drastic hike for the United States’ economy is obvious. The Territory must now contend with these very consequences.
ECONOMIC IMPACT AND REMEDIAL PROPOSALS
A. Minimum Wage Legislation
The regular federal rate reflects the United States’ advanced industrialized economy. American Samoa needs to undergo major economic development to match the United States’ economic level. In the 2006 hearings, the Department of Interior reported that per capita GDP in American Samoa amounted to $9,041 which is equal to 34.4% of per capita GDP in the lowest of the states and 22.8% of the national average. This also compares to a higher $13,350 per capita GDP in the Commonwealth of the Northern Mariana Islands, $22,661 on Guam, and $25,815 in the Virgin Islands.
Per capita income in American Samoa is also the lowest of the territories and only one-fourth that of the United States. Can the new minimum federal wage rate which reflects a developed, industrialized economy be sustainable in American Samoa? To this question, the Department of Labor reports that American Samoa cannot sustain the mandated increase. The report notes that 77.8 percent of workers in the Territory currently earn less than the mandated hourly minimum wage. Raising hourly wages to $7.25 an hour, the report says, will
result in an increased wage bill of $40 million per year across all American Samoa industry sectors. Based on the $120 million annual payroll across all American Samoa industries reported by the 2002 Economic Census, this would represent a 33 percent increase in wage costs. General economic experience suggests that it is not likely that such an increase in wages could be absorbed through increased productivity, reduced profits, or higher prices passed along to consumers.
The separate Department of Interior-financed study of the minimum wage impact on the fish canning industry also predicts the closure of the two canneries in the Territory. From this economic analysis, the Department of Labor concludes that losing the canneries would eliminate 44 percent of all jobs in American Samoa. The economic contraction would increase shipping and utility costs for the remaining sectors. Moreover, the remnants of the Territory’s economy would depend almost exclusively on Federal Government funds to survive. The study funded by the Interior Department is attached as Appendix 1.
These budgetary problems caused by the congressionally mandated wage hike will require supplemental federal appropriations. Given the stark assessment of the Labor Department’s report as well as the of the Interior Department’s study, I request expedited enactment of remedial legislation along the same lines that you Mr. Chairman had outlined with Senator Akaka and our Congressman in a letter on May 18, 2007 to congressional leaders. Future increases of the minimum wage in American Samoa should be contingent on the Secretary of Labor’s determination (through the Bureau of Labor Statistics’ analysis) that such increase will not cause adverse impact on the American Samoan economy. For the Bureau of Labor Statistics to have sufficient time to conduct a substantive analysis, future increases should occur every two years. Our Congressman has introduced such a proposal.
Legislative inadvertence towards the territory is partly due to the fact that the Bureau of Labor Statistics and the Census Bureau do not collect timely economic data on American Samoa. Regular data collection provides Congress with ample details on labor, employer, and household conditions in the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. But the lack of such data for American Samoa leaves Congress and the federal Departments unaware of the economic consequences to a very distant part of the country. The remedial legislation should also require such data collection. A proposal is attached as Appendix 2.
B. Tax Credit.
As earlier stated, federal policy had provided an incentive in the tax code for economic development in the territories. To offset tax expenditures in other areas, Congress later repealed this section 936 possession tax credit and provided a temporary economic activity credit as a phase-out measure. Subsequently, the Senate Finance Committee requested the Joint Committee on Taxation to report on the tax and economic policy implications of the repeal again after the fact. The Finance Committee also requested the Government Accountability to report on the economic impact of federal tax policy on the territories. The two reports were submitted to Congress in 2006. To secure time to review its legislative options, Congress delayed the full repeal of the tax credit for American Samoa through 2007.
As a further stopgap measure, the House Ways and Means Committee in section 333 of the Temporary Tax Relief Act of 2007, H.R. 3996, would have temporarily extended by one additional year the economic development credit for American Samoa. The House committee explained that “it is important to encourage investment in American Samoa. With the expiration of the possession tax credit, the American Samoa economic development credit is an appropriate temporary provision while Congress considers long-term tax policy toward the U.S. possessions.” The end-of-the-year legislative calendar, however, prevented the House from acting on this limited extension which would have applied only to taxpayers that were already qualified.
At this Committee’s hearing in 2006 I had stated that without a consistent federal policy American Samoa would be unable to foster economic growth. The American Samoa Government therefore suggested enactment of a federal economic development tax program consistent with longstanding tax principles. The proposal has been introduced in the House of Representative by our Congressman as H.R. 1916. It extends the present section economic activity credit for a longer period so that businesses can make plans and undertake investments with assurance of qualifying for the credit. And it makes the credit available for all business ventures so as to encourage economic diversification in American Samoa.
I request this Committee’s support for expeditious enactment of the proposal. The loss of trade incentives for our economic development places greater reliance on alternative programs. The proposed economic development tax incentive is such an alternative. The proposal is attached as Appendix 3.
C. Territorial Operational Costs and Job Incentive Program
Increased business development in American Samoa depends on attracting investments from the United States. The economic development in American Samoa requires the cooperation not only of the Federal Government but also of the private sector, the people, and the government of the Territory. The American Samoa Government is absolutely committed to developing the Territory’s economy for the purpose of raising our people’s standard of living. In addition to federal initiatives, the Territory should create a local development program just as the states have.
Following the recommendations of the American Samoa Economic Advisory Commission, the Government Accountability Office, and the Intergovernmental Group on Insular Areas, the American Samoa Government has examined state development initiatives. These state programs offer economic incentives to businesses that commit to investments, hiring, and long-term operations in the respective state. Utilizing the states’ experience, the territorial government has drafted a similar proposal to promote business development. The proposal is attached as Appendix 4. Resources for this proposal, however, have had to be diverted to cope with the problems produced by the federal minimum wage increase.
Higher government payroll costs to cover the past July and the upcoming May minimum wage hike mandated by Congress, have curtailed funding for new territorial programs and even existing programs. The Department of Labor’s assessment of the impact of the minimum wage increase states: “General experience in the U.S. and elsewhere has shown that potential adverse employment effects of minimum wage increases can be ... offset to some degree by an expanding economy that is generating net employment growth. In a declining economy, any adverse effects on employment will not be offset.” Let me note that the territorial economy at present is anemic and that the territorial government must deal with falling tax revenues.
The Labor report also projects that the minimum wage increase for territorial government workers alone will increase operating costs for the American Samoa Government by $7.2 million a year. The report concludes: “Paying for the increases in government worker minimum wages will present a significant challenge to ASG [the American Samoan Government]. .... These increases may force ASG to make difficult choices between reducing government payrolls, reducing available hours of paid work, raising taxes, or cutting non-wage expenditures.” I would point out that the first 50 cent mandated increase last July has already imposed added operational costs on the territorial government as will the second increase coming in May. As a result, the American Samoa Government may have to request supplemental budget authorization and appropriations to cover the additional operational costs imposed by recent federal legislation and to implement a local development program.
CONCLUSION
The Governmental Accountability Office in 1985 and again in 1994 had called attention to the lack of a clearly defined and coordinated federal policy for American Samoa’s economic development. In its 2006 and 2007 reports, GAO repeatedly stressed the need for policy and program coordination. Policy clarification and coordination has not occurred. In fact the changes to the federal minimum wage, tariff and trade preferences, and tax incentive cited above are additional setbacks. These changes have drastically impacted American Samoa.
Mr. Chairman, this Committee has been acutely sensitive to the ramifications federal policy change has on American Samoa. In particular, you and Senator Akaka sought to modify the 2007 minimum wage legislation to reflect actual economic conditions in the Territory. On behalf of the people of American Samoa, I wish to publicly express appreciation for your attempt to ward off well-meaning but disastrous legislative mandate.
Now that the Department of Labor has documented the dire impact of the 2007 legislative change on American Samoa, I urgently request this Committee and Congress to enact timely remedial legislation. Committee support for additional enactment of the tax, procurement and appropriation measures to correct the unintended but very real consequences of past legislation is also needed. We in American Samoa are proud to be Americans and we have served our country with valor and devotion. Remedial legislation will help us to develop our economy so that we can stand with the other territories and the 50 states as one nation.
---americansamoa.gov---
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