By NEIL HARTNELL
Tribune Business Editor
Foreign investors were yesterday said to have halted construction projects, with some threatening to sell their high-end properties, as the "shockwaves" from Budget tax changes hit home.
Robert Myers, the Organisation for Responsible Governance's (ORG) principal, told Tribune Business that much of the Bahamas' second home market "is dead" unless the Government "clarifies" the real property tax hikes stemming from the changed "owner-occupied property" definition.
He described the Real Property Tax Act amendments, which accompanied the Budget, as "bad policy" that could undermine GDP growth given its potential impact on high-end communities in New Providence as well as the Family Islands that are especially reliant on the second home industry.
Many realtors have suggested that the impact from the changes is too early to determine, but Mr Myers, whose construction, landscaping and other businesses draw heavily on a client base provided by western New Providence's gated communities, said they were already undermining confidence and certainty among many second homeowners.
While acknowledging there was nothing wrong with the Government seeking more taxes from the second home market, the ORG principal warned that the Budget-induced changes had effectively crossed a fine line and were threatening to "scare people off".
He warned that the impact would trickle down to Bahamian businesses and employees reliant on this sector, with the magnitude of the tax hike giving some foreign investors this nation is "radical" when it comes to taxation.
"We must make sure the Budget doesn't create any hurdles when it comes to the ease and cost of doing business," Mr Myers told Tribune Business, "of which one is the change to owner-occupied status.
"We need clarity on that. That's an example of bad policy that negatively impacts GDP growth, and services businesses and goods. That needs to be clarified as quickly as humanly possible. We know of people that have said they will sell if that is the case, and know of several construction projects already stopped until such time as clarification is made."
While Mr Myers' comments echo previous warnings by realtors and developers, they provide the first tangible evidence about the impact the change in the Real Property Tax's definition of "owner-occupied" property may be having on investment decisions.
The concerns stem from the term "owner-occupied property" being altered to remove the phrase "or seasonal basis", instead inserting a requirement that an owner must reside in their property for at least six months annually to qualify under this definition.
The Bahamas' second homeowner community, many of whom are in this nation for just a few months per year, will now fall out of the "owner-occupier" category and lower tax rates that were reduced in 2016.
And, besides the higher tax rate, which has doubled from 1 percent to 2 percent on the property value above $500,000, they will also lose the $50,000 "cap" that set the ceiling, or limit, on how much they pay annually to the Public Treasury
Beginning January 1, 2019, an owner that resides in their property for less than six months in any given year will be required to pay real property taxes at the rate of 0.75 percent on that part of the market value which does not exceed $500,000, and 2 percent on that part of the market value which exceeds $500,000.
One attorney, speaking on condition of anonymity, previously told Tribune Business that a $2 million vacation home would see its tax bill jump from around $18,000 to $33,000 - a $15,000 or 83.3 per cent increase.
But they suggested the impact was even more startling for a $10 million home, which currently pays $50,000 based on the real property tax 'cap'. With this removed, the attorney calculated that the tax bill will rise to around $193,000 - a $143,000 or 286 per cent increase.
"The second home market is dead if they don't put the cap back in," Mr Myers told Tribune Business. "These are the things that are important, because if you don't correct them it stifles growth, you can create hysteria in the market and lack of confidence builds in the Government.
"Foreign direct investment begins to distrust the Bahamas overall as it's seen as inconsistent or radical in its tax tendencies. That can be a real problem as it sends shockwaves through the system."
He continued: "We have to be careful that the right message is being sent; that we're pro-investment; pro-growth; pro-FDI, pro-second home. If we want to squeeze a little more tax out of non-domiciles, OK, but don't scare these people off as there's a huge impact; a huge impact to the services sector, the food sector. It sends shockwaves through the second home market, and property values plummet."
Mr Myers' comments echo warnings given by the likes of John Christie, director and vice-president of HG Christie, who recently told Tribune Business that the high-end second home market was in "a state of shock" and "panic" over fears of "exorbitant" real property tax hikes.
He described the rate increase and cap removal as a "double whammy" for the market, and added: "People are in a state of shock in the luxury high-end market. There is a lot of talk in New York and other places like that. People are afraid they can't sell their homes. In some cases you're talking about going from $50,000 a year in property tax to $200,000 a year in property tax.
"There are a lot people upset up about this. There are a lot of people who want to buy and move forward, but are now saying let me wait and see what happens here."
K P Turnquest, deputy prime minister, previously told this newspaper that changes to the definition of 'owner-occupied' property were designed to eliminate "loopholes" that had allowed mainly foreign homeowners to escape with a lower tax rate.
"One of the issues is that these homes were claiming owner-occupied status, and some are not being used in any significant way," the Deputy Prime Minister told Tribune Business.
"The benefit is intended for Bahamians owning their own homes. It's a bit of a loophole we sought to close. It's also a reality that some of those homes were being used as vacation rentals rather than owner-occupied, so we're seeking to close the loophole."
When asked whether the change was also designed to prod wealthy foreign investors and second homeowners to choose the Bahamas as their primary domicile, Mr Turnquest replied: "That would be an added benefit.
"It's just a matter of tightening up the holes. In any tax administration, there's always areas that are grey that need to be tightened up as you go along, and this is one of those."