New wrinkle in Caribbean rum tax battle

Legislation has been introduced in Puerto Rico's legislature allowing rum producers to receive 60 percent of the rum tax subsidy paid to the island by the federal government. The subsidy is currently capped at 10 percent.

The change in law is in reaction to rum producer Diageo moving from Puerto Rico to the U.S. Virgin Islands.  

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. 

Diageo is expected to receive a greater share of the excise tax in the Virgin Islands than if it remained in Puerto Rico. If the deal goes through, Puerto Rico would lose million in revenue.

"If the Virgin Islands is going to be subsidizing companies in excess of 50 percent of the rum tax subsidy, that leaves the government of Puerto Rico with one of two alternatives," Jeffrey Farrow, a consultant to the Puerto Rican government and a former White House official under President Jimmy Carter and President Bill Clinton, told The Hill. 

Puerto Rico will either have to get out of the rum business or increase the excise tax payout to companies to stay competitive with the USVI, Farrow said. 

David Paul, fiscal advisor to the USVI, told The Hill that Diageo will receive 40 percent of the subsidy, of which a third would go to debt servicing for the company's new facility. Another third of the payment would go to a molasses subsidy.  

Several lawmakers on Capitol Hill have criticized the USVI for luring Diageo away from Puerto Rico by promising to increase its excise tax payout. It is unclear how a potential move by Puerto Rican lawmakers to increase the subsidy will be received stateside.  

"If the federal government acts, there wouldn't be a need for this legislation," Farrow said.

Sen. Robert Menendez (D-N.J.), a member on the tax-writing Senate Finance Committee, intends to offer legislation that caps all subsidy payments to companies at 10 percent, the current limit in Puerto Rico. The USVI has no limit.  

The senator recently told The Hill that he opposes the Diageo deal because it doesn't benefit the USVI 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 said," adding, "I think that the more people know about how this rum tax is being used, the less they'll like it." 

Menendez has spoken with fellow Finance members about moving his bill and could introduce it after Congress returns from Easter break. Lawmakers are expected to return next week.