Pierluisi files bill to extend lapsed rum rebate hike, Section 199 tax break
Fortified rum rebates to the U.S. Caribbean territories and a deduction on production in Puerto Rico are just two of more than 50 temporary provisions — ranging from renewable energy and railroad maintenance, to research & development tax credits and an exemption allowing financial firms to shield foreign profits — that fell by the wayside at the end of last year — at least for now.
At stake for Puerto Rico is about $65 million in additional rum rebate revenue every year and upward of $365 million in tax savings over two years for companies operating on the island, according to Pierluisi.
“Now more than ever, as we face big challenges amid a serious fiscal crisis, we must defend all federal initiatives that promote investment and create jobs on the island,” the resident commissioner said. “These two measures outline a path to follow so that these dispositions are included when the overall extenders legislation is considered.”
Unlike in the past, President Barack Obama didn’t include the rum rebate and Section 199 extenders in his 2014 budget and the timing of their renewal, if at all, remains unclear.
Pierluisi’s bills unveiled Sunday would extend the rum rebate boost and Section 199 through the end of 2015. The benefits would be retroactive to January 1, 2014.
Such so-called “extenders” are routinely rolled over with retroactive funding, but their future is now clouded by federal budget woes and uncertainty swirling around Washington about a major tax reform eyed by top congressional finance chiefs and the White House that could have even deeper implications for Puerto Rico.
Permanent law gives Puerto Rico and the U.S. Virgin Islands (USVI) $10.50 of the $13.50 per proof gallon tax on rum distilled in each territory and foreign countries. However, since the Clinton administration, temporary law — which expires each year and requires recurring congressional approval — provides an additional $2.75 per proof gallon, pushing up the take for Puerto Rico and the USVI to $13.25 per proof gallon. The additional $2.75 lapsed in Congress at the end of 2011, but was among dozens of temporary tax breaks renewed through 2013 under the fiscal cliff deal earlier this year.
Puerto Rico is also facing the end of the extension of Section 199, which allows a company to receive a deduction equal to 9 percent of the taxable income that the company derives from qualified production activities within the U.S. This effectively reduces the top federal tax rate that most companies pay on such income from 35 percent to slightly above 32 percent. Qualified production activities include manufacturing, electricity and water production, film production, and domestic construction.
That’s because the chairmen of the congressional finance committees, Michigan Republican Dave Camp of the House Ways & Means Committee and Sen. Ron Wyden of the Senate Finance Committee, along with President Obama, want to reform tax laws.
Wyden is set to take over this month as the top Democratic tax writer in the Congress after Sen. Max Baucus of Montana was nominated by Obama to become U.S. ambassador to China. Wyden, an Oregon senator who made waves in Puerto Rico last year and drew the ire of the island’s Popular Democratic Party for his blunt dismissal of commonwealth as a future option to resolve the status question, backs approving the extenders, while Camp wants to wait for tax reform.
Washington insiders expect Congress to eventually approve both the rum rebate and Section 199 extenders, but action on that front may not be on the immediate horizon.
Still, there is a growing feeling, particularly among Republicans, that the temporary provisions of tax law shouldn’t be simply extended in total, but that only those that can be well-justified should be extended.
The inclusion of the rum rebates in last year’s fiscal cliff deal and the national media attention it garnered, added fuel to a spirited fight between Puerto Rico and the USVI about the funds, which has spread to other producers in the Caribbean, as increasing portions of the rum rebates are funneled directly to rum producers in the U.S. territories.
The “rum war” between the two territories was sparked in 2008 when British-liquor giant Diageo announced it would move production of Captain Morgan rum from Ponce to St. Croix after landing huge incentives from the USVI government, which split the rum-rebate revenue between the government and the liquor producer.
In response, Puerto Rico passed basic incentives worth 46 percent of the rum-rebate revenue generated from branded-rum sales and 25 percent from bulk-rum sales, which is rum produced for third parties.
While Puerto Rico has historically received about 80 percent of all rebate revenue, its share fell to roughly 60 percent with the exit of Captain Morgan.
Puerto Rico officials worry that the high level of subsidies being paid to rum producers could prompt Congress to kill or cut back the program, which is aimed at funding infrastructure and other socially beneficial programs in the two U.S. Caribbean territories.
“The fundamental aim of the rum rebate program is to use the bulk of the funds to help the territories undertake infrastructure projects and provide essential government services in the areas of health care, security, education and land conservation,” Pierluisi said Sunday.
“Together with my allies in Congress, I continue to support the reform of this program so that the funds are used toward these ends and not to give excessive and unreasonable subsidies to rum producers,” he said.