Battle over rum tax to continue after break

The battle between the U.S. Virgin Islands and Puerto Rico over Caribbean rum tax subsidies is likely to heat up again after lawmakers return from Easter break.

Sen. Robert Menendez (D-N.J.), a member on the tax-writing Senate Finance Committee, intends to offer legislation that limits the amount of the subsidy that can be returned to companies.

Rum companies in the USVI and Puerto Rico pay an excise tax that is based on the amount of liquor they produce. Most of the proceeds are refunded to the islands for economic development. Payouts are based on where the rum is produced and often benefit the companies themselves.

By capping the amount returned to rum producers, the senator's bill would essentially kill an agreement that involves rum company Diageo moving from Puerto Rico to the USVI. Diageo is expected to receive a greater share of the excise tax in Virgin Islands and Puerto Rico could lose million in revenue if the deal goes through.

Menendez opposes the deal because it won't benefit the Virgin Islands' economy. 

"It's hard to understand how you in fact give a private company billions in dollars in tax breaks when it is really for a deminimus number of jobs," he recently told The Hill. 

The senator has spoken with fellow Finance members about moving his bill. He has yet to speak with the committee's chairman, Sen. Max Baucus (D-Mont.). 

"I think that the more people know about how this rum tax is being used, the less they'll like it," Menendez said. 

However, Puerto Rican rum companies receive subsidies beyond those related to the rum excise tax and total in the millions of dollars, according to sources close to the matter. The revenue is funneled to them through an organization called Rums of Puerto Rico. 

One executive said his company received an additional $40 million in brand development and marketing from Rums of Puerto Rico, sources said. This was on top of the $75 million it received from the rum excise tax.

Jeffrey Fallow, a consultant to the Puerto Rican government and a former White House official under President Jimmy Carter and Bill Clinton, told The Hill those figures were unrealitic since the total amount to rum companies is $25 million annually.

USVI Gov. John DeJongh plans to travel to Washington and persuade tax-writers against supporting measures like Menendez's bill.   

The USVI and Puerto Rico have bumped heads over the rum tax before. Tempers flared recently when Sen. George LeMieux (R-Fla.) sought to amend jobs legislation with a provision benefiting Puerto Rico and rum producers like Bacardi at the expense of the Virgin Islands and Diageo.