Home Local News Pierluisi revives rum war in Congress
Issued : Friday, May 13, 2011 06:15 AM
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Pierluisi revives rum war in Congress

By : KEVIN MEAD

In a renewed effort to reform and protect the rum cover-over program, Resident Commissioner Pedro Pierluisi introduced legislation Thursday in Congress that would prohibit the governments of Puerto Rico and the U.S. Virgin Islands (USVI) from providing subsidies to rum producers that exceed 15 percent of the federal excise tax revenue each government receives each year.

The legislation, the “Investing in U.S. Territories, Not Corporations Act of 2011,” would ensure that at least 85 percent of cover-over revenue received by each government will be used to provide critical services to the people of the territories, rather than to enrich major corporations.

“Using funds provided under this important federal program to provide excessive subsidies to companies is completely indefensible. It destroys the purpose and integrity of the cover-over program, which was intended to help the territories provide essential government services, like health care, infrastructure development, education, and land conservation,” said Pierluisi.

Also Thursday, Sen. Robert Menéndez (D-N.J.) introduced legislation in the upper chamber identical to the resident commissioner’s in order to maximize the chances that the proposed reforms to the cover-over program will become law.

“Everybody knows that we have to reform the cover-over program to ensure that taxpayer money is being invested in vital public services for the U.S. territories, such as building roads, hiring teachers, and providing health care,” Menéndez said. “This bill would ensure that both territories will have more money for these integral services to create jobs and help the lives of working families, instead of that money being used to provide excessive subsidies to large, profitable corporations.”

The New Jersey Democrat is a member of the Senate Finance Committee, which has jurisdiction over this issue.

The new legislation adds another twist to a percolating rum war between Puerto Rico and the USVI over the neighboring territory’s use of its rum rebate funds.

The rum war was sparked by the 2008 decision by British liquor-giant Diageo, the world’s largest producer of spirits, to move production of its Captain Morgan rum to St. Croix after landing huge incentives from the USVI government. Ponce-based Destilería Serrallés has been producing Captain Morgan for Diageo in Ponce under a contract that runs dry in 2012.

Diageo chose to relocate on the condition that it would be provided with subsidies — paid for with federal cover-over revenue — in an amount equal to 47.5 percent of the cover-over revenue the USVI would receive from the U.S. Treasury in connection with Diageo’s move.

The move is expected to cost Puerto Rico billions of dollars in economic damage and hundreds of jobs, while also sparking a “race to the bottom,” according to the resident commissioner’s office.

The USVI also entered into a similar deal that will use federal rum tax-rebate proceeds to finance $105 million in improvements to the Cruzan rum facilities on St. Croix and provide other benefits. Cruzan is produced by Fortune Brands — a multibillion dollar conglomerate.

Pierluisi and Puerto Rico government officials have been pushing in Congress to cap the amount of rum rebate revenue that can be used to subsidize the rum industry following the USVI deals, which grant the manufacturers about half of all rum-rebate revenue.

Earlier this year, the USVI celebrated the opening of a Captain Morgan rum distillery in St. Croix, which is expected to generate more than $100 million a year in revenue for the next 30 years.

While Puerto Rico advocates often accuse the neighboring territory of luring Captain Morgan away with its sweetheart deal, USVI officials insist the approach was made only after the firm had decided to leave Puerto Rico.

USVI officials have attacked Puerto Rico’s stance as trying to interfere with their ability to develop the USVI economy. USVI Gov. John deJongh has warned that scuttling its deals “will cause economic crisis in the U.S. Virgin Islands, after we have signed partnerships that have rescued our government’s finances from the brink of disaster in the recession.”

Indeed, should Congress change the rum-rebate program, or cap the amount that could be used to subsidize, the U.S. Virgin Islands government may find itself hard-pressed to live up to its commitments with its rum makers.

The federal government returns most of the $13.50 per proof gallon tax on rum distilled in each territory and in foreign countries to Puerto Rico and the U.S. Virgin Islands. The territories keep the revenue produced in their jurisdiction, and taxes collected on foreign rum are split between the two jurisdictions based on their ratio of the U.S. market. That’s what makes the move from one territory to the other so painful: the U.S. Virgin Islands share of foreign tax rebates also goes up at Puerto Rico’s expense.

In 2008, Puerto Rico received about $370 million and the U.S. Virgin Islands some $80 million under the program. Puerto Rico currently has an 86 percent share to the U.S Virgin Island’s 14 percent, but after Captain Morgan’s move, the proportion will change to a 60 percent-40 percent split, according to industry experts.

The stakes are high in the rum fight and the Puerto Rico government passed legislation early this year that gives it a range of tools to boost local producers.

The Puerto Rico government agreed in February to give Bacardi $95 million from the federal rum rebate program that will be invested in the next five years to renovate its production plant in Cataño.

The deal also promises Bacardi Ltd. production and marketing incentives that will equal 10 percent of federal rum rebates from Bacardi sales in the U.S.

In return, the company has to maintain a minimum level of production in Puerto Rico for the next 20 years, an agreement that translates into more than $230 million in yearly revenue for Puerto Rico through federal rum excise taxes, according to Economic Development & Commerce Secretary José Pérez-Riera.

The Bacardi deal was announced just over a month after Gov. Luis Fortuño signed the legislation to increase the resources the government of Puerto Rico may dedicate to provide incentives to and promote the local rum industry as it looks to protect its turf amid the heated rum war with the USVI.

The legislation increased from 10 percent to 25 percent the portion of the monies from the federal rum rebate that the island government can invest to provide incentives to and promote Puerto Rican rums.

That amount had been capped at 10 percent by local legislation.

In addition, it gives the government of Puerto Rico the ability to work directly with rum producers to develop incentives and promotional strategies that will enhance their competitiveness and, therefore, their potential for growth in the future.

The measure also gives the governor the discretion to increase this percentage up to 46 percent if the U.S. Congress does not impose, before December 31, 2011, a cap on the amount of subsidies that a U.S. jurisdiction can give a rum producer out of the federal rum excise tax cover-over program.

The Puerto Rico government is seeking similar deals with three other producers: Serallés, Trigo Corporation and Edmundo B. Fernández, Inc. The rum industry in Puerto Rico employs roughly 4,500 workers and generates $400 million in yearly revenue, more than 70 percent of which comes from Bacardi.

While the incentives granted to Bacardi ensure the island’s biggest rum producer stays on the island, it is Serrallés that is feeling the sharpest blow from the shot that sparked the Puerto Rico-USVI rum war — Captain Morgan’s exit to St. Croix.

Serrallés announced in February it would lay off 20 workers amid a reduction in production. The family-owned distillery in Ponce is taking steps to minimize the impact of a 70 percent volume reduction beginning to be felt in the wake of Diageo’s move.

The company has said it is “totally focused” on its effort to win equal treatment under the Puerto Rico government’s incentives program for local rum producers.

A massive bipartisan tax package inked by President Barack Obama in December included the temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the U.S. Virgin Islands.

The temporary increase, which has been approved every year since the early 1990s, boosts the territories’ shares of federal rum taxes. Puerto Rico and the U.S. Virgin Islands currently get $13.25 of the $13.50 tax slapped on each proof gallon of rum. Lawmakers must renew the increase or the rebate will drop back to $10.50.

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