When it’s liquor before beer, the U.S. Virgin Islands is in the clear, to paraphrase an old limerick. Critics from the beer industry, however, have questioned the wisdom of that sophomoric anthem, saying the tax breaks for rum distillers in Puerto Rico and the USVI do a disservice to the territories while maximizing profits of international corporate conglomerates.
For 105 years, almost all federal taxes collected on rum from the U.S. territories have been reverted back to the islands. While the so-called rum cover-over has become an important tool in keeping Puerto Rico and the Virgin Islands financially solvent, it’s also long been the target of critics who view the plan as an unfair industry subsidy. That lobby was recently joined by the Beer Institute, which advocates federal policies for brewers, importers, and beer industry suppliers.
The argument is that, while well-intentioned, rum cover-over doesn’t actually go to build “schools, roads, and bridges,” according to the Beer Institute, but funds giant liquor companies like Diageo and Bacardi through heavy local tax breaks. This pits Puerto Rico and the Virgin Islands — the world’s largest rum producers — against each other in a lose-lose battle, long-time critics have said.
In 2008, the USVI lured Diageo — makers of Captain Morgan and other liquors — away from Puerto Rico with vast tax breaks and a new distillery.
St. John’s Sen. Angel Bolques Jr. worried challenges to the rum cover-over would undermine an important part of Virgin Islands finances. The rum cover-over is used to bolster the Government Employees’ Retirement System, which was forecast to collapse by October 2024 before rum money was used to back bonds, saving the system.
“I cannot stress enough the urgency with which Congress must address the current impasse over tax extenders and benefits. The prolonged delay in reaching a decision has profound and far-reaching implications, not just for the Virgin Islands, but for all U.S. territories relying on such critical funding,” Bolques said in a written statement on Wednesday.
“Every day of inaction exacerbates the challenges we face, hindering our ability to effectively support our healthcare, education, and other vital sectors. It is imperative that Congress acts swiftly and decisively to resolve this issue, demonstrating a commitment to the well-being and prosperity of all territories under the U.S. flag. The future of our communities hangs in the balance,” he said.
Every few years, Congress must consider whether to reenact the rum cover-over, which returns between $10.50 and $13.25 of the $13.50 tax per proof gallon to the territories. While a new bill would make the tax returns permanent, a push by the Beer Institute and other tax hawks seeks to limit how the territories can spend the money. It’s not a new idea. A 2009 House bill would have curtailed Puerto Rico and the USVI’s ability to finance economic development projects with this revenue source. It did not become law.
