Gov. Urges Congress to Preserve Rum Cover Over Program, Ensure U.S. Tax Dollars Not Used to Excessively Subsidize Individual Rum Companies

Jan 21, 2010, 18:53 ET from Puerto Rico Federal Affairs Administration

WASHINGTON, Jan. 21 /PRNewswire-USNewswire/ -- Puerto Rico Gov. Luis Fortuno is urging U.S. lawmakers to preserve the intent of the long-standing rum cover over program originally created by Congress to provide budgetary support to the territorial governments, expressing concern that plans of the U.S. Virgin Islands to use the federal tax dollars to provide excessive subsidies to individual rum companies will thwart competition, endanger the rum cover over program and destroy the Puerto Rican rum industry.

In letters to U.S. Senate Finance Committee members, Gov. Fortuno also called for Senate passage of a key extension of the program which provides Puerto Rico's government with federal taxes on rum produced on the Island and in foreign counties. Permanent law gives Puerto Rico and the U.S. Virgin Islands $10.50 of the $13.50 per proof gallon tax on rum distilled in each territory and in foreign countries. Temporary law, which expired Dec. 31 and requires recurring congressional approval, provides an additional $2.75 per proof gallon. The U.S. House approved the extension in December.

"I am writing to respectfully request that the grant of the additional $2.75 be extended as proposed by the President and the House of Representatives, and that you act to ensure federal revenue is not used to excessively subsidize companies that produce rum," Gov. Fortuno wrote.

At issue are plans by the Government of the Virgin Islands to use most of the federal tax to individually benefit two large corporations that brand and sell rum. One of the arrangements would directly and indirectly give a company more than $60 million of the federal tax a year for 30 years -- almost half of the tax that the federal government would give the territory and more than double the cost of producing the rum. This level of subsidy would essentially guarantee that the company could undercut all competition in the marketplace and still make a profit on every bottle sold.

Under this scenario, Gov. Fortuno argued, Puerto Rican producers would find it very difficult if not impossible to compete with distillers subsidized to the extent planned in the Virgin Islands.

"There would likely be pressure on the Government of Puerto Rico to grant similar excessive subsidies but doing so would further diminish revenue to the territorial treasury -- and transfer federal tax dollars away from the needs of the people and to private businesses," he wrote.

The Governor said the planned subsidies imperil the entire Puerto Rico rum industry, jeopardizing all of the federal tax given to the territory -- almost 6.5 percent of the budget -- and the additional revenue, the jobs, and the substantial spin-off of economic benefits created by the industry.

Puerto Rico uses 94 percent of the federal tax revenue to support much-needed investments in infrastructure, health, education, the Puerto Rico Conservation Trust and other environmental protection, and the Puerto Rico Life Sciences Trust. Approximately six percent of the funds go support marketing, efficiency and innovation initiatives of the industry as a whole and do not directly benefit individual rum companies. The Governor said this limitation keeps the use of the funds true to the original intent of Congress in transferring the taxes to the local government. He added that a local law has been in place in Puerto Rico since 1969 capping industry marketing support to 10 percent.

There is ample precedent for limiting the use of the funds, the Governor wrote. For example, the law provides that collections of the tax will not be transferred to territorial treasuries if a "Federal excise tax subsidy" has been provided for the product in the case of goods other than distilled spirits. Additionally, for many years, the Virgin Islands' use of the rum tax grants had to be approved by the President of the United States or his designee, he said.

The Governor noted that Puerto Rico's resident commissioner, Pedro Pierluisi, and eight other members of the U.S. House of Representatives of both parties have sponsored a bill, H.R. 2122, to limit to 10 percent the amount of taxes covered into the treasuries of the territories that can be used to subsidize rum production. He also stressed that the federal taxes at issue have not even been collected yet and their use is fully within the purview of the Congress to determine or limit.

"I hope that the Senate will pass this legislation if sent to it or approve a similar measure," Gov. Fortuno said.

**For a fact sheet on the rum tax issue, please visit:

SOURCE Puerto Rico Federal Affairs Administration