U.S. Senator Weighs In On Spirited 'Rum War’

It’s far from closing time for the ongoing “rum war” between Puerto Rico and the U.S. Virgin Islands as a U.S. senator is seeking to distribute rum-tax revenue based on population rather than the amount of rum a territory produces, which is the current system.

Puerto Rico and the USVI receive $13.25 from the federal government for every barrel of rum they generate. The revenue comes from a $13.50 per-barrel rum tariff that rum manufactures pay to the federal government. A tax-extender bill, HR 4213, would continue the $13.25 rate through 2010. Without the renewal, the rate drops to $10.50.

HR 4213 now sits in the Senate after House members passed the bill in early December. Sen. George LeMieux, R-Fla., late Wednesday filed an amendment to the legislation to change the way that the government allocates the rum-tax revenues. LeMieux seeks to distribute rum-tax receipts based on population and not from the number of barrels a territory produces.

The allocation change would be phased in gradually beginning this year, with the distribution completely based on population beginning in 2030, according to LeMieux spokesman Ken Lundberg.

“We need a better methodology for distributing assistance,” he said in an e-mail. “Right now, the formula doesn’t make sense. Providing assistance based on population instead of the amount of rum produced is a better course.”

Puerto Rico’s population is estimated at 3,967,288, far outstripping the USVI’s estimate of 108,612, according to the U.S. Census.

In response to the LeMieux amendment, USVI Gov. John P. deJongh said changing the distribution of rum-tax revenue in such a way could create a potential default on the territory’s outstanding rum bonds.

“Sen. LeMieux’s plan could cause us to default on hundreds of millions of dollars in bonds, which would stop progress on infrastructure projects and environmental improvements, and would force the government of the U.S. Virgin Islands to the brink of receivership.”

The U.S. Virgin Island Public ­Financing Authority has $767.2 million of total outstanding rum-tax debt.

Puerto Rico has nearly $2 billion of rum-tax bonds outstanding through the Puerto Rico Infrastructure Financing Authority. Bacardi & Co. is the major rum producer in the commonwealth.

The amendment is the latest twist in a spirited dispute between Puerto Rico and the Virgin Islands that many refer to as a rum war. Each jurisdiction uses a portion of its rum-tax receipts to offer molasses subsidies and other benefits to rum-makers after it has met any debt-service obligations on outstanding rum-tax debt. Puerto Rico’s resident commissioner, Pedro Pierluisi, last year filed a measure to limit subsidies to rum producers in the commonwealth and the USVI to 10% of rum-tax revenue. USVI officials oppose the bill.

The Pierluisi legislation has stalled in the House Ways and Means Committee. Rep. Charles Rangel formerly served as chairman of the panel and has said the two territories should work out any disagreements about rum-tax subsidies among themselves. Sen. Sandy Levin is now the acting chairman of the committee after Rangel stepped down as  chairman on Wednesday.

In the summer of 2008, the U.S. Virgin Islands announced that Diageo PLC would move its production of Captain Morgan rum from Puerto Rico to USVI. Since then, USVI has sold $250 million of Diageo rum-tax bonds to help finance a new distillery for Captain Morgan. Diageo in 2012 will receive funds from the rum-tax revenue through tax incentives, marketing campaigns, and molasses subsidies.

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