GET-Rich or Keep Trying: Reimagining Tax Reform in the Federated States of Micronesia

Abstract

Since 2005, the Federated States of Micronesia (FSM), nervous over the uncertain future of the Compact of Free Association and seeking to improve its fiscal self-sufficiency, has wasted time and resources on a pie-in-the-sky tax reform proposal with too many moving parts and too many stakeholders to satisfy. A more practical path to tax reform must be found—and as the authors argue, Hawaii's unique tax system should be used as a map forward.The FSM and Hawaii each have broad-based consumption taxes—the gross revenues tax and the general excise tax, respectively. Although these two taxes appear similar at first glance, Hawaii's tax has developed sophisticated characteristics over the past eighty-five years. Instead of attempting yet again to discard its gross revenues tax, the FSM should transform it. Replicating and accelerating Hawaii's eighty-five-year tax evolution could offer the FSM a much more practicable—and less politically daunting—shortcut to a modernized, efficient, and lucrative tax system.