Setting the record straight on the rum issue

Early last century, the federal government decided to grant the Government of Puerto Rico federal taxes on Puerto Rican products to pay for the costs of government in the territory.  In 1954, Congress expanded the rum “cover over” program to the USVI. The Senate floor manager of the bill noted that “this grant is intended to replace the annual appropriation bill for municipal deficits, central administration, public works and certain other programs.”

Until recently, the grants were spent for those purposes.   Both the Governments of Puerto Rico and the USVI spent most of the money — federal taxes on rum — on services for their citizens, with a small portion going to promote the rums produced in their territory.  Puerto Rico enacted a law limiting assistance to the rum industry to 10 percent of the granted federal taxes but for many years has only used six percent for the industry and the rest, 94 percent, for public services.

Then the two multinational companies misled some officials of the USVI into changing the rules.

Between 2003 and 2007, they agreed to increase the subsidies of Cruzan rum, now made by Fortune Brands, from 7.5 percent of the grants of federal taxes on the rum to 30 percent.  They have further agreed to increase the subsidy to 46.5 percent.  

Diageo also persuaded the current Governor and a majority of local legislators to promise it subsidies equal to as much as 47.5 percent of the federal tax grants on Captain Morgan rum for 30 years if the company would move production of Captain Morgan to the USVI from Puerto Rico.  The subsidies have been estimated to be worth at least $2.7 billion.  Included are the cost of a distillery that would be given to Diageo free of charge and paid for with more than $550 billion in federal tax grants, almost all of the cost of the main ingredient in rum – molasses, 35 percent of what Diageo spends to market the rum, and an additional 8-9.5 percent of the federal tax grants on the rum. This subsidy is so huge that the net cost to Diageo to produce rum is zero.  From Diageo’s point of view, it is the perfect deal. 

The deals will cost Puerto Rico government revenue, economic activity, and jobs.  They also threaten the complete demise of the Puerto Rican rum industry due to unfair, excessively-subsidized competition.  Puerto Rican producers would only be able to compete in the marketplace if they, too, are given massive subsidies – but this would be at the expense of the public services that the federal tax grants were meant to support in the territories.

Anti-tax groups such as Taxpayers for Common Sense, oppose the USVI deals.  Labor unions, including the SEIU, AFSME and UNITE-HERE, are also opposed.

Virgin Islanders should also be opposed — as some in the territorial legislature and others are.  The deals would inadvisedly — and needlessly — give away billions of federal tax grants that should be used for public services in that territory.  Diageo, for example, would certainly have moved Capitain Morgan rum production to the Virgin Islands with a subsidy of a lot less than 47.5 percent of the federal tax grants due to sales of Captain Morgan: Captain Morgan was thriving in Puerto Rico with government assistance of only about three percent of the grants. 

I urge Members of Congress to support bipartisan legislation sponsored by Sen. Robert Menendez and four other senators and Puerto Rico’s Resident Commissioner Pedro Pierluisi and 13 other House Members that would limit subsidies to rum companies to 10 percent of federal rum tax grants.  This is a generous amount of assistance as proven by Diageo’s current profitability in Puerto Rico.

Most importantly, the legislation will ensure that federal tax dollars — which are ultimately paid by American rum drinkers – will go to support services such as healthcare, education, and public facilities for the Americans of the territories, and do not excessively subsidize foreign or multi-national companies that are already profitable.

If we want to restore the public’s faith in government spending, we need to ensure that  federal rum tax grants are primarily used for their intended purpose – providing public services for citizens, not massive subsidies for rum companies.

Javiar Vazquez is the executive director of the Puerto Rico Industrial Development Company, a public corporation that administers the Rums of Puerto Rico program.