By Jay Heflin - 04/16/10 01:03 PM EDT
Puerto Rico currently receives the lion's share of the subsidy, but that arrangement would change if rum producer Diageo follows through on its plan to move from the island to the USVI. Under the deal, Diageo would receive more of the subsidy than it currently gets and forces Puerto Rico to lose millions in revenue.
The bill offered by Menendez would essentially kill the Diageo deal by capping all subsidy payments to companies at 10 percent. The senator is a member of the tax-writing Senate Finance Committee and his legislation already has 4 co-sponsors.
If the senator's bill is enacted, deJongh said Diageo will not remain in Puerto Rico but move offshore, meaning U.S. jobs will be lost on both islands.
Jeffrey Farrow, a consultant to the Puerto Rican government, told The Hill that Diageo vowing to move offshore could be an idle threat.
deJongh also warned that Diageo failing to move to the USVI would cause certain revenue bonds to collapse and devastate the island's economy.
"It will cause economic crisis in the U.S. Virgin Islands, after we have signed partnerships that have rescued our government's finances from the brink of disaster in the recession," the governor said. "Construction has already started [in anticipation of Diageo's arrival], commitments have been made and economic growth is occurring."
Under the senator's bill, rum producers that receive more than 10 percent of what the islands receive from the federal government would have their payments reduced the following year by the amount that exceeded the 10 percent mark.
David Paul, fiscal advisor to the USVI, told The Hill that Diageo would 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.
Diageo receives roughly 6 percent of the subsidy in Puerto Rico, according to Farrow. However, if Congress fails to act on the senator's bill, 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.
Farrow told The Hill that local lawmakers will likely act on the bill if Congress does not address the issue.