Rum and Taxes

The rum trade is facing a major change. Diageo, the British-owned parent company of Captain Morgan rum – the largest distiller of rum in the world, has decided to transfer its operations from Puerto Rico to the Virgin Islands.

As U.S. territories, Puerto Rico and the Virgin Islands are the beneficiaries of a rum excise tax.  The tax collects revenue from rum imported to the American mainland and reverts it back to the islands for economic use.  Under the excise tax scheme, rum exported from Puerto Rico and the Virgin Islands generates rebate money contributable to the territories’ treasuries proportionate to the amount of rum locally produced.  Puerto Rico, home to four major rum distilleries, receives the greater tax benefit in this respect, while the Virgin Islands, home to only one major rum distillery, receives the lesser.

The move, expected in 2012, is going to shift part of Puerto Rico’s tax benefit to the Virgin Islands.  Now, even as Puerto Rico expects to lose over $6 billion in long-term revenues and 320 permanent jobs, the Virgin Islands expect to gain, in kind, $230 million in long-term revenues and 70 permanent jobs.

Unsurprisingly, while the Virgin Islands see Diageo’s move as encouraging progress “towards fiscal self-reliance,” Puerto Rico sees cause for major concern.  Last year, Puerto Rico used less than ten percent of the $450 million it received in rum revenues on its rum-producing businesses and used the rest of the rebate to support necessary island infrastructure and social service programs.  With Diageo’s planned departure, Puerto Rican officials have accused the Virgin Islands of forcing them to dismantle their socially-conscious revenue allocation system.  The officials claim that the Virgin Islands lured Diageo to their shores via a “sweetheart deal” that subsidized its corporate interests with public money and set an ominous precedent in the Caribbean for courting big business at any price.

Diageo’s decision to move from Puerto Rico to the Virgin Islands, in fact, was based on a tax incentive offer worth $2.7 billion.  Under a thirty year contract, the Virgin Islands promised Diageo: a new plant built at taxpayer expense; exemption from all property and gross receipt taxes; a ninety percent reduction of corporate taxes; marketing support; and production.  All in all, when Diageo moves to the Virgin Islands in 2012, the territory will allocate almost half of its excise tax revenue to the company each year by contract.

A bill currently before Congress could threaten the Diageo deal; if passed, it would cap the amount of rum rebate that the Virgin Islands and Puerto Rico are able to use in subsidizing rum producers.  In the U.S., tax reform debate has swirled around the idea of preventing the “government [from] . . . using federal funds to guarantee [the] profits of . . . huge multinational corporation[s]’” and offshore enterprises.  Indeed, Diageo’s relocation has generated a good deal of mainland American angst.  Legislators fear that the Virgin Island tax incentives may prove so great that island liquor companies might start making whiskeys, vodkas, and gins in competition with those made in the heartland.  Also of concern is the consideration that lost rum revenues in Puerto Rico may injure its economy, forcing higher taxation from Washington.

Does Diageo’s transfer empower island residents “to control [their] own destiny,” as predicted by Virgin Island officials?  What should the outcome of these so called “rum wars” be?  Is concern for higher taxation from Washington justified?

3 comments

  1. While Virgin Island residents may feel that having this company move there will help them be more financially independent, it is worth highlighting that most of that excise tax rebate will be going directly back to the company and not to the people of the Virgin Islands. And with an addition of only 70 permanent jobs, the move does not seem that advantageous for the people of the Virgin Islands.

    The bill before congress limiting the percentage of the tax that could be given back to the company does sound like a great idea from a social good point of view. However, just by limiting the amount of that money that can be used to lure companies to a particular island, does not ensure that those funds will then be used for social programs as they were in Puerto Rico.

    It is also a very valid concern of not only Puerto Rican but of all Americans, of what will be done to replace that source of funding for social welfare programing in Puerto Rico in the future. At a time when the budget is so tight in every state and in the federal government as well, it seems unclear where money to help continue these programs could come from.

  2. While I understand that there could be tax ramifications on the mainland of the United States as a result of the move from Puerto Rico to the Virgin Islands, mainly due to a lower tax revenue in Puerto Rico why should the Virgin Islands be denied potential tax revenues that they could use for their benefit? Why should Puerto Rico be given a favorable advantage over the Virgin Islands? If Puerto Rico chose to use these tax revenues to bolster their social welfare programs, the Virgin Islands should be extended the choice of how to spend their new tax revenues.

    If Puerto Rico used the tax revenues to fund social programs, but the Virgin Islands did not previously have this tax revenue, it is possible that the new tax revenues in the Virgin Islands could offset the need for federal government subsidies and tax breaks. Therefore, what is now going to need to be given to Puerto Rico may be saved in some respect by not having to give as much to the Virgin Islands. While this new “rum scheme” may not be a total wash for the outflow of federal funding to U.S. territories, it certainly cannot be as big of an outflow as some may think.

  3. The Virgin Islands will certainly benefit from the move of the Diageo plant from Puerto Rico and it will help them become more economically self–reliant. However, as set forth above, the Virgin Islands will have to allocate almost half of its excise tax revenue to the rum company each year by contract. It is unfortunate that the Virgin Islands will not be gaining as much as Puerto Rico seems to be losing.
    While the legislation currently before Congress to cap the amount of rum rebate that the Virgin Islands and Puerto Rico are able to use in subsidizing rum producers at first glance seems like a good idea, no one will benefit if the legislation is passed. While it is not ideal that Puerto Rico will be losing its social programs, if the legislation is passed, Puerto Rico would still lose those programs, even if ultimately Diageo decides to remain in Puerto Rico.
    I think that the bill currently before Congress regarding the excise tax should not be passed. States and territories should be competing for private sector jobs by making it more advantageous to come and conduct business in the state or territory. Free market competition will hopefully encourage all states and territories to establish a level playing field and enable each of them to compete fairly to attract jobs.

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