With Kiera Knightley having burnt their supply of rum while he was asleep, Johnny Depp memorably demands to know from her, "Why is the rum gone?" in the first Pirates of the Caribbean movie.
She responds, "Because it is a vile drink that turns even the most respectable men into complete scoundrels!”
The accuracy of her statement notwithstanding — most rum that pirates drank in the Golden Age of Sail was actually grog: part rum, part sea-water — rum has been a fixture of trade and tourism in the Caribbean for hundreds of years. And for travelers passing through there, they are best advised to pick up their rum from the airport duty free shop, rather than from U.S. territories who slap a huge excise tax on them.
That’s the case in Puerto Rico and the U.S. Virgin Islands. Rum produced here falls under the federal excise tax umbrella of $13.50 per gallon on rum. Not only is that amount outrageous, but what happens with that money is, too — something Congress could change this fall, if it has the will to do so.
Given the unique status of the two as unincorporated territories, $13.25 of the federal tax revenue collected from rum produced in Puerto Rico or the Virgin Islands is transferred back to the location of production (rather than the point of sale). This is called a “cover-over tax.”
If that money were going to directly to enrich the people of the islands, that would be fine. Alas, such is not the case: there are still pirates in the Caribbean. Corporate welfare by a different name, the “Rum Cover-Over” up was established in 1917 to assist the two territories stand on their own, economically speaking.
Well intentioned to begin with, certainly, the program is now a multi-billion-dollar corporate welfare scheme to benefit a handful of rum distillers, rather than the Puerto Ricans and U.S. Virgin Islanders.
But this is where things get complicated. The two territories also split revenue from foreign-produced rum, based on how much of the beverage they produce relative to each other.
If one produces more rum than the other, that territory increases their share of the rum tax. This obviously incentivizes increased production in competition for the international tax kickbacks.
This creates a “subsidies war,” so to speak, which distorts the two territories’ struggling economies, creates perverse incentives, and even destabilizes the local governments, as the Tax Foundation determined many years ago.
As time has gone on, the program has gotten to the point that 40 to 50 percent of the federal cover-over tax dollars get diverted from the territorial governments into the coffers of Diageo and Bacardi, two large, international liquor distillers, in the sum of about $300 million each year.
This started around 2003, when the two multinational companies misled some officials of the territories into changing the rules, according to this article by the executive director of the Puerto Rico Industrial Development Company, raising the subsidies of Cruzan rum from 7.5% of the grants to 46.5%.
Sorry, children of the failing public school systems of Puerto Rico and USVI: these businesses need that $300 million more than you do!
With the struggling islands in constant need of help, the Uncle Sam is stuck with the bill left by these companies — who have P.O. boxes there but don’t want to pay for the privilege. The U.S. taxpayer is stuck paying for services that once used to be covered by the rum tax.
Congress will probably slip the Tax Extenders into the lame duck session after the midterms. If they end this program, or at least reform it significantly, both parties can take this as a win home to their constituencies.
Progressive Democrats can say they’re retrieving money for public services; America First Republicans can say they’re clamping down on multinationals exploiting the U.S. taxpayer.
Crony capitalism is a vile practice that turns even the most respectable companies into complete scoundrels. Let’s hope that Congress does the right thing, so we can wake up one day and rejoice that the rum cover-over is finally gone.
Jared Whitley is a longtime politico who has worked in the U.S. Congress, White House and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. Read Jared Whitley's reports — More Here.
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