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U.S. Senate Staff Suggest Limiting Federal Rum Tax Grant Subsidies

The staff of the U.S. Senate committee with jurisdiction over taxes has included  limiting subsidies that Puerto Rico and the U.S. Virgin Islands can give producers of rum as a possible provision for a reform of the Federal tax system.

Many in official Washington, including Senate Finance Committee Chairman Max Baucus (D-Montana) and House of Representatives Ways and Means Committee Chairman Dave Camp (R-Michigan), want a reform law this Congress.  Others think that a major overhaul will take longer but expect one eventually.

The joint Democratic and Republican staff options list suggested inclusion of a bill sponsored during the last Congress by Senator Bob Menendez (D-New Jersey) and Florida’s senators, Marco Rubio (R) and Bill Nelson (D).

They sponsored the bill at the request of Puerto Rico’s representative to the Federal government, Pedro Pierluisi (statehood/D), and then Governor Luis Fortuno (statehood/R).  Pierluisi led eight other members of the U.S. House of Representatives from both national political parties in sponsoring a similar bill.

The bills would have limited subsidies to companies producing rum to 15% of Federal rum tax grants to the territories.

The Federal tax on liquor is $13.50 per gallon of alcoholic content.  Ongoing law gives the territories $10.50 of Federal collections of the tax on rum produced in the islands and in Caribbean Basin countries and sold in the States.  Temporary law that will expire at the end of this year if not extended again gives an additional $2.75.

When the temporary increase was initiated, the Ways and Means Committee chairman insisted on the Federal government keeping 25 cents for each gallon to rebut claims from some islanders that the revenue was insular money the  islands were entitled by their political relationships with the Federal government.  This was a particular claim of Puerto Rico commonwealthers.

Federal withholding of the money is evidence that the “compact” which provides the current governing arrangement for Puerto Rico can be unilaterally changed by the Federal government, contrary to “commonwealth” claims.

That the arrangement can be changed without Puerto Rico’s consent was also proven during the 1980s when the tax was increased from $10.50 to $11.50 and then $13.50 and Congress declined to give the additional $1 and $2 to the territories.

The proposed legislation would underscore that the revenue is Federal money and can be granted as determined by the Federal government.

The $10.50 on locally produced rum was given to both territories as subsidies for local government costs when their economies were much less developed and they, therefore, lacked a tax base large enough to afford all of the expenses of government.

The $10.50 on foreign Caribbean Basin rum was a congressional addition to President Reagan’s Caribbean Basin Initiative.  The “CBI” eliminated customs duties on foreign Caribbean rum.  The tax on that rum was given to the Virgin Islands and Puerto Rico because it was feared that sales in the States of their rum -– and, thus, Federal rum tax grants — would drop due to increased sales of foreign Caribbean rum since it would no longer carry the cost of customs duties.

President Clinton originally obtained the grant of the $2.75 per gallon on a temporary basis to help Puerto Rico and the Virgin Islands recover from a devastating hurricane.

The grants have been major sources of revenue for the territories.  In Federal Fiscal Year 2012, the amount for Puerto Rico was $376 million and for the Virgin Islands $256 million.  In Fiscal Year 2009, it was $473 million for Puerto Rico and $110 million for the Virgin Islands.

The recent increase in grants to the Virgin Islands and decrease in grants to Puerto Rico is due to the Virgin Islands taking production by the world’s largest liquor company, Britain’s Diageo, away from Puerto Rico when commonwealther Anibal Acevedo Vila was Governor of Puerto Rico.  It did this by agreeing to give the company up to 47.5% of the Federal tax grants on Diageo’s rum.

For many years, the Government of Puerto Rico spent $25 million a year to promote Puerto Rican rum, about 6% of its Federal rum tax grants.  After subsidizing its longtime rum producer to the extent of 7% of the grants, the Virgin Islands increased the percentage to 30%.  It, then, agreed to give Diageo 47.5% if it would move and, subsequently, agreed to give its original sole producer (now Beam Inc.) 46.5%.

The Virgin Islands subsidies prompted Puerto Rico under Fortuno to reluctantly agree to assistance of up to 46.5% of the grants to Puerto Rico’s remaining rum producers, such as Bacardi, after first seeking Federal legislation to limit subsidies.

The subsidies are now under attack by Caribbean Basic rum producing countries as prohibited by international trade rules to which the U.S. has agreed.  The foreign governments are considered to have a good claim in the World Trade Organization that could ban any assistance to rum companies.

The foreign governments did not object when the assistance to rum producers in the territories was 6% and 7% of Federal rum tax grants but say that their companies cannot compete with 47.5% and 46.5% — Fortuno’s original complaint.

The administration of Fortuno’s “commonwealth” party successor has said that it will not seek to limit the subsidies. Secretary of Economic Development and Commerce Alberto Baco Bague has said that it will, instead, try to get rum companies to hire more people in the territory.

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