U.S. Virgin Islands Gov. deJongh Issues Letters Alerting Sens. Baucus and Grassley of CRS Report Validating Territory's Economic Development Deals

Congressional Research Service Finds Puerto Rican Legislation Damages USVI Economy, Counters Congress' Intent

Report States Puerto Rico Benefits If Company Leaves United States Rather Than Locate in USVI

WASHINGTON, Feb. 4 /PRNewswire-USNewswire/ --U.S. Virgin Islands (USVI) Governor John J. deJongh, Jr., yesterday alerted Senate Finance Committee Chairman Max Baucus and Ranking Member Charles Grassley to a Congressional Research Service (CRS) report on the rum excise tax cover-over economic development program and the USVI's long-term public-private partnerships. The CRS report refutes misinformation promoted by Puerto Rican officials and validates the USVI's economic development agreements with rum makers Diageo and Fortune Brands.

In letters to Senators Baucus and Grassley, Governor deJongh wrote that the CRS report reaffirms that:

• According to the rum cover-over law's original intent, the USVI can use its rum excise tax cover-over revenue as deemed appropriate by its local legislature;
• Legislation proposed by Puerto Rico's Delegate Pedro Pierluisi would limit both territories' autonomous power to allocate cover-over funds for economic development purposes;
• Rum excise taxes returned to the territories under the cover-over program are paid by the rum producers, not American taxpayers.

The report deals a serious blow to Delegate Pierluisi's proposed bill, and highlights that Puerto Rico would prefer Diageo locate in a foreign country – taking jobs and economic impact with it – than operate in the USVI.

Full text of Governor deJongh's letter to Chairman Baucus follows.

February 2, 2010

The Honorable Max Baucus

Chairman

Committee on Finance

SD-219 Dirksen Senate Office Building

United States Senate

Washington, DC  20510-6200

Dear Mr. Chairman:

You probably have read press reports or heard from advocacy groups in recent months about the public-private partnerships my Administration has negotiated over the course of the last two years to strengthen our long-term economic development and financial foundation by fostering a stronger relationship with the historic rum industry in the Virgin Islands.  Many of these reports have made erratic and unsubstantiated charges about the Virgin Islands improperly "luring" or "poaching" a rum company from Puerto Rico through "unreasonable" subsidies financed by the rum taxes, paid by the rum manufacturers, remitted to the treasuries of the Virgin Islands and Puerto Rico.  

I have consistently maintained that these charges are false and irresponsible.  The Congressional Research Service "(CRS)" has now issued a report on the history of, and current issues involving, the rum tax cover-over program that corrects much of the misinformation put forward by these advocacy groups.  

The creative and forward-looking public-private partnerships negotiated by the Virgin Islands are not subsidized by "federal taxpayer dollars."  Rather, as the CRS report notes, under long-standing rules that govern the tax and political relationship between the United States and its Territories, "[m]ost federal excise taxes do not apply" in the Virgin Islands or Puerto Rico.  The exception at issue here is the "equalization tax" that is imposed on products manufactured in the Virgin Islands and Puerto Rico and shipped to the United States.  It is a tax imposed on the Territorial producer which is triggered when the Territorial product enters commerce in the United States.  It is not a sales tax imposed on U.S. consumers.  It is not intended to raise revenue for the U.S. Treasury.  It is intended only to protect U.S. producers of like products from Territorial manufacturers who, because of our political status, are exempt from federal taxation.  And as the CRS report notes, since the purpose of the equalization tax is not to raise revenue for the U.S., Congress has, beginning in 1917,  given, or "covered-over," the revenue back to the Territories for disposition as their respective legislatures see fit.  

Indeed, the CRS also quotes the legislative history of the Revised Organic Act that confirms Congress' intent that the Virgin Islands use its cover-over revenues "to loosen [its] dependence  . . . on periodic appropriations from the U.S. government" and to "bend [its] efforts to stimulating and increasing business in every possible way."  That is precisely the purpose of the agreements and the resulting public-private partnerships negotiated by my Administration.  As you know, the Virgin Islands and other U.S. Territories are not treated equally with the States in federal programs, such as Medicaid, or in the federal appropriations process.  The Virgin Islands public-private partnerships will increase government revenues, and lessen our dependence on ad hoc federal appropriations, while strengthening the Virgin Islands rum industry in the face of increasing global competition as the brands gain visibility.  

The CRS report also notes that these partnerships do not break new ground.  Rather, the report recognizes that historically both the Virgin Islands and Puerto Rico have subsidized their rum industries over the years to strengthen brand identification and to withstand foreign competition.  As the report also points out, "Puerto Rico uses cover-over revenue to finance marketing and promotional activities for [its] rum industries.  The exact amounts and extent of these activities is [sic] unclear as there is not separate publicly available budget accounting [in Puerto Rico]."   In contrast, the Virgin Islands public-private partnerships, and the contracts that form the foundation of these partnerships, have been the subject of public hearings in the Virgin Islands, are fully transparent, and are accessible to all on the Government of the Virgin Islands' website.

In analyzing H.R. 2122, legislation introduced by Puerto Rico Resident Commissioner Pedro Pierluisi to limit "unreasonable" subsidies, the CRS concluded that passage of the bill "would result in severe limits on Puerto Rico's and the USVI's ability to finance economic development projects with this revenue."  Even more egregious, however, the CRS report notes that the legislation "would also seem to preclude the USVI from using [its] general revenue to subsidize [its] rum producers."   The receipts generated from the cover-over revenues have been used by the Government of the Virgin Islands to invest in infrastructure -- the building of roads and schools, for example -- and to secure bond financing for future infrastructure investments and capital projects.

I believe it is unfair -- not to mention, unprecedented -- that a Member of Congress from one jurisdiction would introduce legislation that would bar the legislature of another jurisdiction from using its general revenues for any legislative purpose duly considered and enacted by that body.  Florida does not tell Montana what its legislature can or cannot do with its general revenues.  Indeed, as the CRS report correctly notes, "the justification for using tax incentives and subsidies to attract industry has long been a part of sub-federal economic development strategies.  There are numerous examples of states offering manufacturing firms reduced property taxes, access to tax-exempt financing, and favorable corporate income tax policies."  The CRS report also notes that the Pierluisi bill "would not prohibit tax incentives and subsidies; just limit them such that the status quo is maintained."  That is, the Pierluisi bill concedes that tax incentives and subsidies to encourage economic development are acceptable, but just so they aren't used to disrupt the "status quo" in Puerto Rico.  

The CRS report identifies what is likely the real reason for the Pierluisi bill.  Because under the Caribbean Basin Initiative (CBI), Puerto Rico and the Virgin Islands were held harmless in the event that Territorial rum production was lost to foreign producers benefiting from duty-free access to the U.S. market, Puerto Rico would be better off if Diageo -- the company relocating its rum operations from Puerto Rico to the Virgin Islands -- had instead relocated to Brazil, Jamaica or Guatemala rather than to another U.S. Territory.  As correctly analyzed by the CRS report:  

In the case of Diageo, news reports indicate that Diageo had already decided to leave Puerto Rico and the USVI presented the most attractive option.  While other Caribbean countries were said to be in the competition for the Diageo facility, Diageo's decision to produce rum in the USVI presents the worst case scenario for PR because PR loses not only to Diageo but also future excise tax revenue from USVI production.  As mentioned previously, a portion of rum-tax revenue collected from other countries' imports to the United States is paid to PR, but not on imports from the USVI.  

Under the CBI allocation formula, excise taxes on foreign rum are split between the Virgin Islands and Puerto Rico on the basis of market share.  Accordingly, the CRS report concludes that any Territory "losing" a rum producer to another jurisdiction "would be better off if the rum producer relocated outside of PR, USVI or the U.S."

As with many issues, things are not always what they seem.  It always pays to dig a little deeper when someone tries to restrict another's economic freedom.  The CRS report does a great public service by "digging a little deeper."  It should give pause to anyone who -- like the Virgin Islands -- values, and is committed to, economic freedom, playing by the rules, and fair play.  

I am attaching for your information a copy of the CRS report.  I commend it to your attention in the event that you choose to consider this issue which is so critical to the economic future and fiscal stability of the Virgin Islands.  

                                         Very truly yours,  

                                         John P. deJongh, Jr.

                                         Governor

SOURCE Office of U.S. Virgin Islands Governor John P. deJongh, Jr.