Rum tax pits islands against each other

Yo ho ho and a generous rum tax break!

A long-standing U.S. tax policy has liquor manufacturers making off like bandits, or rather like pirates, since the tax subsidy and booze production are based in Caribbean Islands.

Uncle Sam collects a $13.50 per proof gallon excise tax on distilled spirits imported into the United States. However, "locally produced" liquor -- that being alcohol made in the U.S. territories of Puerto Rico or the U.S. Virgin Islands -- gets special treatment.

Those island governments each get back $13.25 per proof gallon of that tax for rum produced there and sold in the U.S. mainland.

Followers of tax extenders legislation are familiar with the rum tax break. It's been a perennial feature of the various measures that have passed over the years.

This economic aid program generally means around $400 million for Puerto Rico, where industry leaders Diageo and Bacardi had long made their rum, and $80 million for the U.S. Virgin Islands, home of Cruzan, the world's fifth-largest rum maker.

Questions about tax transfer to private industry: But a generous transfer of the tax break to a foreign rum giant has pitted the island nations against each other and produced a tax and political hangover.

As noted, the U.S. tax money goes back to the islands as economic aid.

And U.S. Virgin Island leaders decided in 2008 that the best way to aid that Caribbean nation's economy was to give more of its annual rum tax rebate to private liquor manufacturers.

So the Virgin Islands lured Captain Morgan, a Diageo brand, from Puerto Rico by offering to give the British-based company half of the islands' rum-tax money if it would stay there for 30 years.

Virgin Islands officials say the deal, as well as a similar one with Cruzan rum, is an economic development coup that will deliver several hundred jobs and millions of dollars in new rum-tax revenue for roads, schools and other projects.

But the Virgin Islands will benefit at Puerto Rico's expense, $120 million a year in lost rum-tax revenue to be exact.

Puerto Rico's supporters say that the Virgin Islands' tax transfer to Diageo is exorbitant: 10 times what it got from Puerto Rico. They also say the Virgin Islands will give Diageo a 90 percent income-tax break, a complete exemption from property taxes and a state-of-the-art $165 million rum distillery.

Folks on the Puerto Rico side are characterizing the deal as a U.S. taxpayer bailout for a wealthy foreign company.

Even some U.S. Virgin Islands residents aren't too happy with the deal, arguing that the islands' leaders were misled into using public money for corporate welfare.

"We’re not against big businesses," said Michael J. Springer Jr., a candidate for the Virgin Islands Senate, "but for the government of the Virgin Islands to give that much money to a foreign corporation when it was intended to help the residents and their communities, is outrageous. In the meantime, the government is borrowing to pay its operating expenses."

U.S. distillers also unhappy: Distillers within the continental 48 are concerned about a $1 billion subsidy the Virgin Islands recently awarded Fortune Brands, the American company that makes Cruzan Rum, as well as Jim Beam Bourbon and other spirits.

Fortune's rum-tax-financed incentives include $100 million for improvements to its distillery on the island and a wastewater treatment program. The deal also guarantees that the company will pay no more than 16 cents a gallon for molasses, the main ingredient of rum; molasses currently sells for more than $2 on the open market.

It's no surprise that the Diageo and Fortune deals are upsetting distillers that work within U.S. mainland borders.

"If our own federal government is also letting its taxes subsidize foreign corporations and offshore producers, it makes it harder to survive," said Philip E. Prichard, head of an independent distillery in Tennessee that makes rum and bourbon. "It flies in the face of entrepreneurship."

Related posts:

• Tax extenders on tap ("Tax umbrella for your drinks" section)
• Bottoms up and bellies out

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