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Amendment Would Limit Subsidies to Rum Companies with Federal Rum Tax Grants

U.S. Senator Robert Menendez (D-NJ) today proposed limiting the amount of Federal grants that the insular governments of Puerto Rico and the U.S. Virgin Islands can use to subsidize companies that make rum in the islands.

Menendez and other members of Congress have proposed similar legislation before.  Today, the Senate Finance Committee member proposed it an as an amendment to a bill that would extend a higher amount of grants to the two territories of taxes on rum made in the islands and in foreign countries. The bill will be considered by the Committee tomorrow.

The bill would extend the granting of an additional $2.75 per proof gallon of the tax on rum to the territories. Ongoing law grants $10.50 of the $13.50 per proof gallon tax. Temporary law granted the additional $2.75 through last December 31st.  The bill sponsored by Senate Finance Committee Chairman Ron Wyden (D-OR) would extend the temporary grant through December 31st, 2015 along with extensions of 43 other expired temporary provisions of tax law.

The Menendez amendment would require that 85% of all rum tax grants be used for public infrastructure and other essential public services in the territories.  It would also guarantee Puerto Rico not less than 65% of the grants f taxes on foreign rum nor more than 70%, with the rest going to the U.S. Virgin Islands.

Puerto Rico received $349 million in grants of Federal taxes on rum in Federal Year 2013.  President Obama’s Fiscal Year 2105 Budget estimates that it will receive $422 million in the grants this fiscal year and $425 million in Fiscal Year 2015.

The U.S. Virgin Islands received $263 million in the grants last fiscal year.  The Obama budget estimates that it will receive the same amounts this year and next.

The grants to the U.S. Virgin Islands are two and a half times as great as the amounts it received before the territory agreed to give the world largest liquor company, Diageo of Great Britain, subsidies worth up to 47.5% of the grants based on its Captain Morgan rum if it would distill the liquor in the Virgin Islands instead of at the Serralles distillery in Puerto Rico.

The Diageo subsidies led to American liquor giant Beam convincing the Government of the Virgin Islands to give it subsidies worth 46% of the grants based on its rum for continuing to produce its Cruzan rum in the territory and, then to the Government of Puerto Rico reluctantly agreeing to give the remaining producers of rum in Puerto Rico subsidies worth up to 46% of the grants based on their rum.

Previously, the Government of Puerto Rico had spent six percent of the grants on its rum industry.  The U.S. Virgin Islands, which had once spent seven percent, had earlier agreed to subsidize Cruzan rum with 30% of the grants it received.

Prior to the subsidies, Puerto Rico received about four-fifths of the grants based on its relative share of U.S. territory rum production.  The U.S. Virgin Islands now receives about two-fifths of the grants.

The Menendez amendment would split the grants of taxes on foreign rum between the two territories mid-way between the former relative shares and the current relative shares.

The rum tax grants provision is one of two in the Wyden bill that are directly Puerto Rico-related. 

The other applies the Domestic Production Deduction to income from the territory. This enables companies in the States that manufacture directly in the territory — versus through ‘controlled foreign corporations’ as most do — to exclude nine percent of the profits from their taxable income. The exclusion effectively lowers the corporate tax rate from 35% to about 32%.

The staff of the Congress’ Joint Committee on Taxation has estimated that extending the deduction would save companies based in the States manufacturing in Puerto Rico $222 million in Federal income taxes.


It also estimated that extending the higher amount of rum tax grants would give $336 million to the governments of Puerto Rico and the U.S. Virgin Islands.

The chairman of the U.S. House of Representatives committee, Ways and Means Committee Chairman Dave Camp (R-MI), yesterday announced that his committee will hold a hearing on the expired temporary provisions of tax law April 8th.

Camp, who will retire from Congress at the beginning of January, has also said that he wants to determine this year which provisions should be made permanent and which should not be revived as a first step in a broad reform of the Federal tax system.

Wyden has said that this should be the final time that the provisions are extended.  He, too, wants to reform the Federal tax code.

The Domestic Production Deduction is ongoing law for income from the States but has been temporary law for income from Puerto Rico because of the opposition of a “Commonwealth” party representative of the territory.  When the U.S. Senate Finance Committee originated the deduction and applied it to income from Puerto Rico in 2003, Resident Commissioner Anibal Acevedo Vila said that he did not want it to be applied. Income from Puerto Rico was excluded in the final legislation that became law.

Acevedo supported the effort of Governor Sila Calderon to instead have all income from the territory exempted from Federal taxation. Their total tax exemption effort was rejected by the Senate committee, the chairman of the House Ways and Means Committee, the Treasury Department, and the White House.

Acevedo’s successor, Luis Fortuno of the statehood party, succeeded in getting income from Puerto Rico qualified for the deduction but only on a temporary basis because the then chairman of the Ways and Means Committee also wanted to reform the Federal tax system and did not want to create new permanent provisions of tax law before a reform.

Camp has proposed a reform that would eliminate the deduction. But his reform would also lower the corporate income tax rate to 25%, about seven percent below the current rate with the deduction.

President Clinton initiated the temporary increase.When he did, the Federal government decided to keep 25 cents of the tax to underscore that the territories did not have a right to the revenue, as some ‘commonwealthers’ in Puerto Rico and others had claimed.

President Obama’s budgets for this fiscal year and next year have not suggested extending the two Puerto Rico-related provisions.

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