The Virgin Islands and Puerto Rico would like to know where their rum subsidy has gone
posted at 7:01 pm on June 9, 2014 by Erika Johnsen
Why is this a thing? Via Politico:
Virgin Islands Gov. John P. deJongh, Jr. in recent remarks said he is held up in finishing the territory’s budget — in large part because of revenue loss from a missing rum subsidy.
“We’re still dealing with a fiscal year shortfall that we project at about $40 million,” he said. “We’re going to have to make some very drastic decisions about how we’re going to bridge that gap.”
The U.S. has already sent the territory an advance of more than $60 million with the expectation that Congress will eventually reach a deal, as it often does at the eleventh hour with these breaks. If Congress doesn’t act, the Virgin Islands will have to repay the funds.
How did a rum subsidy intended to fund development in the Virgin Islands, which also helps Puerto Rico, get tied to a batch of expired tax breaks?
An excellent question, but an even better one might be why the United States is perpetuating a terrible and convoluted subsidy system that helps a few niche interests thwart the otherwise healthy competition of the wider Caribbean rum market to the detriment of consumers.
Like with all other imported distilled spirits, the U.S. federal government imposes an excise tax on rum of $13.50/gallon — but no matter the country from which the rum was imported, most of the net revenue generated by rum gets directly kicked back to the U.S. Virgin Islands and Puerto Rico. That money was once supposed to go toward “economic development” with a limit on how much the two territories could use to then directly subsidize their own domestic rum producers, but in practice, the pair of them can export rum to the United States at a much less expensive rate than their competitors in Nicaragua, Guatemala, and other producers in the Caribbean.
It is true that rum companies benefit. The Virgin Islands pays global rum giants Cruzan and Diageo, maker of Captain Morgan, about half of the rum add-on funds they receive. …
The Senate Finance Committee has already approved a 2-year extension of the expanded payment as a part of a broader bill to extend the bevy of expired breaks known as tax extenders. The rum program is one of the least-expensive provisions among the group, with a price tag of just $336 million over ten years, according to the Joint Committee on Taxation.
Still, criticism of the rum rebate continues. It heated up in 2008 when the Virgin Islands struck a deal with Diageo to leave Puerto Rico and open a new Captain Morgan distillery in the territory. The deal included $250 million in matching bonds to help fund the construction.
And because of the amount of kickbacked cash afforded to the Virgin Islands after that deal increased their market share so expansively, the U.S. effectively tipped the international rum market significantly in their favor and deprived other countries of the financial footing to compete.
Again, the biggest question here is why even have this complicated, opaque system of delivering money to special niche interests when we could just de-complicate everything and stop dishing out corporate welfare by lowering taxes for everyone.