Plugging a Loophole

Editorial of The New York Sun
January 31, 2006

The Treasury Department and the IRS yesterday announced a final regulation that will go a long way toward plugging a loophole that allowed some very rich Americans to cut their personal income tax bills by 90% by declaring themselves residents of the U.S. Virgin Islands. Front-page New York Sun articles in August and September of 2003 highlighted the obscure tax break, which Virgin Islands officials touted as an economic development program. The Sun reported back in 2003 that prominent money managers such as Richard Driehaus and Jeffrey Epstein were availing themselves of the provision and that the provisions on who qualified as a Virgin Islands resident for tax purposes were vague.

Now the Treasury Department has clarified the rules, essentially requiring those who take advantage of the tax breaks to spend at least 183 days a year in the U.S. Virgin Islands. We're all for laws that allow jurisdictions to compete to offer lower state and local taxes, but for competition to work the way it is supposed to, laws have to be transparent and clear and they have to be enforced. At a September 2003 conference in Washington that was aimed at promoting economic development in the U.S. Virgin Islands and other possessions such as Guam, President Bush's interior secretary, Gale Norton, touted "very generous" tax incentives and "beaches that beckon."

There's no doubting that the beaches beckon, though so do those on Long Island. And as for the tax incentives, well, here's hoping the new rules mean they apply only to those who actually live in the Virgin Islands. And if the population of those islands genuinely increases under these provisions, it may be time to think about bringing the rest of America to similarly attractive levels of taxation.