Congress Passes Extension of Rum Tax Through 2009

Rum tax revenues will continue to flow to Puerto Rico and the U.S. Virgin Islands through the end of next year after Congress last week passed a bill to extend a $13.50 per-gallon tax on the rum produced there.

Lawmakers included the rum tax issue in the federal government's $700 billion bailout bill, which passed in the House in a 263 to 171 vote. Extending the rum tax to the end of 2009 benefits both jurisdictions. The commonwealth has $2.1 billion of Puerto Rico Infrastructure Financing Authority debt secured by rum-tax receipts and the revenues are important to the USVI's general fund. In addition, the USVI is preparing to leverage anticipated future rum tax revenues in a $250 million bond deal that will help support a new distillery plant for spirit maker Diageo, which produces Captain Morgan rum.

The rum tax law expired on Dec. 31, 2007, and automatically reduced the tax to $10.50 per gallon. That fee will now return back to $13.50 with the enactment of the bill, according to Horacio Aldrete, an analyst at Standard & Poor's.

"It's something that had been stuck in Congress for some time," Aldrete said. "It's something that in the past, when the rebate was set back to $10.50, typically Congress would set it back to a higher rate. From that standpoint, it's a good thing because it increases the revenues available for repayment on the bonds."

Puerto Rico collected $362 million of rum tax revenue in fiscal 2008, which ended on June 30, and expects to receive $372 million of rum tax receipts in fiscal 2009, according to the Government Development Bank for Puerto Rico. Debt service coverage on the PRIFA bonds is 3.3 times.

"We are always pleased to see the tax rebate extended at the current level," GDB president Jorge Irizarry said via e-mail. "In any case, this would not affect our PRIFA bonds since they receive a fixed amount of rebate dollars regardless of the level at which the tax rebate is extended."

USVI anticipates receiving $20.5 million of rum-tax receipts in fiscal 2009, which began Oct. 1. With production of Captain Morgan rum moving to the USVI from Puerto Rico, officials expect USVI's rum-tax revenues to grow to $119 million beginning in 2012 and to $226.3 million in 2038, according to financial analysis data from Fiscal Strategies Group Inc.

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