Sen. Robert Menendez, D-N.J., yesterday joined the ongoing rum-tax revenue debate between Puerto Rico and the U.S. Virgin Islands by filing legislation that would limit subsidies to rum makers to 10% of a territory’s yearly rum-tax revenue.
The measure is in response to a deal that the Virgin Islands crafted with U.K. company Diageo PLC, maker of Captain Morgan rum, in which the company will move production of the rum to St. Croix from Puerto Rico.
In that 30-year agreement, the territory will give annual subsidies to Diageo beyond 10% of its rum-tax receipts and also finance a new distillery for production of Captain Morgan.
Menendez believes that allocating more than 10% of rum-tax revenue to spirit makers alters the intent of the rum-tax revenue program.
“We need to assure U.S. taxpayers that the vast majority of taxpayer dollars going to the territories under this program are being used to rebuild schools, roads, and hospitals and protecting the environment, instead of being passed off to multinational corporations,” Menendez said in a statement. “This is about ensuring that taxpayer money is reinvested in the working people of the territories, not foreign corporations.”
Puerto Rico and the Virgin Islands receive $13.25 of the $13.50-per-gallon tariff that rum makers pay to the federal government. The rum-tax receipts are sometimes called matching-fund revenue or cover-over revenue.
Puerto Rico law prohibits the commonwealth from allocating more than 10% of its rum-tax receipts to rum producers. Each year, the government directs about 6% of its rum-tax revenue to Rums of Puerto Rico, which helps promote the island’s rum industry.
Puerto Rico has nearly $2 billion of outstanding rum-tax backed bonds through the Puerto Rico Infrastructure Financing Authority. Bacardi & Co. is the major rum producer in the commonwealth.
On Monday, Javier Vazquez, executive director of the Puerto Rico Industrial Development Co., announced that if Congress does not take action, Puerto Rico may need to change its 10% limit to compete with the level of subsidies that the USVI gives to its rum producers. PRIDCO oversees the Rums of Puerto Rico program.
Starting in fiscal 2012, which begins Oct. 1, 2012, the Virgin Islands will pay Diageo $36.3 million from $118.9 million of rum-tax revenue that it anticipates collecting that year, according to a Fiscal Strategies Group report. That yearly payment to Diageo will increases annually to $89.1 million in fiscal 2027, when the territory expects to receive $226.3 million of rum-tax receipts.
In addition, the Virgin Islands will pay $18.4 million in debt-service costs from fiscal 2012 through fiscal 2038 for tax-exempt bonds that the Virgin Islands Public Finance Authority sold last year to help finance the new Captain Morgan distillery in St. Croix.
The PFA also sold tax-exempt bonds in 2009 to help finance a new wastewater treatment plant and expansion projects for Cruzan VIRIL Ltd., maker of Cruzan rum. In return, the spirit maker will stay in the territory for 30 years.
The authority has $767.2 million of total outstanding rum-tax debt.
Virgin Islands Gov. John deJongh has asked Menendez to reconsider his legislation. The governor stressed that the territory’s agreement with Diageo will keep the rum-maker in the U.S. and generate needed revenue for the USVI.
“The agreement between the USVI and Diageo is an extraordinary collaboration that will secure the USVI’s taxbase and create good, high-paying union jobs on U.S. soil for at least 30 years,” deJongh wrote in an April 8 letter to Menendez. “The revenues generated for the USVI by this agreement will allow the government to invest in economic development, fix our badly underfunded government employees retirement system, improve our public services and public infrastructure, and protect our priceless natural resources and environment.”
Menendez’s legislation would reduce a territory’s rum-tax collections if it exceeds the 10% limit and allows the secretary of the Treasury authority to require documentation of the uses of the revenue.
“The Diageo deal sets a precedent for the territories and long-term could be devastating to both territories,” Menendez said in a press release on the bill. “The precedent has clearly been set; without action, the substantial financing of the rum industry by American taxpayer dollars will become the standard, not the exception.”
Last year, Puerto Rico’s congressional representative, Pedro Pierluisi, filed HR 2122, which would also restrict subsidies to rum makers to 10% of a territory’s rum-tax collections. That bill is awaiting consideration by the House Ways and Means Committee.
