What Does The US Remittance Tax Mean For The Pacific?

Scoop

11 hours ago

The United States is set to implement a tax on remittances paid by migrants to their communities overseas.
The tax is a component of the " One Big Beautiful Bill", a cornerstone fiscal measure under President Donald Trump.
When the spending bill passed through the House of Representatives, the tax was set at 5 percent. The US Senate reduced it down to 3.5 percent, and now again to 1 percent.
The bill has undergone numerous amendments in the Senate before it goes back to the House for final negotiations and then to the White House.
However, even if the final tax level falls on the lower end, Pacific development experts say that both direct and indirect impacts pose a significant threat to the region.
What is the remittance tax?
Deep within the pages of congressional reports on the "One Big Beautiful Bill" lies a section titled "Removing Taxpayer Benefits for Illegal Immigrants".
The tax takes aim at outward flows of income generated by illegal immigrants within the US economy, one of several measures designed to disadvantage illegal immigrants financially.
Remittance transfer providers, such as US banks, credit unions, or licensed brokers and dealers, would collect the tax at the point of transfer before the remittance is sent abroad, increasing the cost of sending remittances.
The tax applies to all US citizens and nationals sending money overseas, though it had originally been aimed only at illegal immigrants before a Senate redraft on 30 June.
With the US responsible for the largest global share of remittances, particularly to Latin America and the Caribbean, critics argue it could cause serious damage in the developing world.
In May, Mexican President Claudia Sheinbaum denounced the tax as "a measure that is unacceptable".
It is also proven controversial in right-leaning circles, particularly among libertarians, prompting draft after redraft of the policy. The American Enterprise Institute, a conservative-leaning think tank, called the tax "poorly designed".
"Although the Senate bill's narrowing of the tax would greatly diminish these problems, it would not eliminate them. That outcome can be attained by rejecting the remittances tax in its entirety."
Impact on the Pacific
The US Migration Policy Institute estimates that, as of 2023 there are 166,389 immigrants currently in the US who were born in Oceania (other than Australia and New Zealand).
The Pacific Network on Globalisation (PANG), an organisation of civil society groups throughout the region, said the tax will have "profound implications" on Pacific livelihoods.
PANG deputy coordinator Adam Wolfenden told RNZ Pacific that, while relatively less remittance cash finds its way into the Pacific, these are nations who rely on it.
"For a country like Samoa, which gets 20 percent of its remittance money from the US, we'll see that cut. For a country like Tonga, for who the US is its biggest source of remittances at just over 35 percent, this will see a cut."
"Studies have shown that any increase in the cost of sending money home has a larger impact."
According to the World Bank, sending remittances currently costs an average of 6.62 percent of the amount sent, thanks to things like provider fees.
Wolfenden pointed to a study by the Center for European, Governance and Economic Development Research, which found that demonstrates that one percentage point increase in remittance costs would correlate with a 1.6 percent decline in the amount that reaches it's final destination.
A potential 3.5 percent tax would reduce remittance flows by 5.6 percent, PANG said.
"The fear is that, for those who receive remittances in those domestic economies, particularly that rely on remittances to fund a lot of consumption, the tax will ultimately lead to some kind of decrease in economic growth.
Amid other US actions in the Pacific, such as massive cuts to aid, tariffs and increased militarisation, Wolfenden believes the US simply is not considering the Pacific in the decision making.
"I think they are promoting their interests above all else. And I think that is a short-sighted view towards what a relationship with the Pacific means."
The Australian National University's Development Policy Centre deputy director Dr Ryan Edwards called the tax "terrible".
"Remittances can get sent in many ways. There's the cash ones which will be targeted through formal channels, and informal channels, where people often just carry it back in their suitcases and declare it or find other ways," he said.
"This will push everything to the informal channel market, which many countries have tried for a long time to move people away from for security reasons."
Edwards told RNZ Pacific that he is concerned about the precedent the policy will set, and what kind of signal it would send to governments with significant aid contributions.
"We have seen the current US administration testing the waters with international trade, aid, and other things. [These things] tend to benefit both sides in ways that we often do not pick up at a first glance.
"It is a slippery slope in terms of setting an example, and the US has historically had a role as a global example setter...but not so much anymore."