 NATIONAL NEWS |
Puerto Rico-Virgin Islands Rum War Threatens Economic Ruin, Says Congresswoman
by Pharoh Martin
NNPA National Correspondent
Originally posted 2/4/2010
WASHINGTON (NNPA) - A war is brewing between two of America's island territories in the Caribbean.
It is a fight that is developing over rum subsidies. And while the governments of Puerto Rico and the U.S. Virgin Islands aren't trading bullets per se, their barbs and legislative battles threaten to unravel at least one of their fragile economies and the way the rum industry does business.
Advocates on both sides say this is not a ''Brown verses Black issue''. Rather, they describe it as a war for economic vitality.
Delegate Donna Christensen, the U. S. Congressional representative from the Virgin Islands says the dispute could ultimately collapse the Virgin Island's economy and more.
''I think this dispute could result in damaging the relationship between the two governments if it continues to go on because what they propose to do would really destroy the Virgin Island economy,'' Christensen said. ''If they were to prevail, the Virgin Island's economy would just crumble.''
The territories are in a dispute over how much they are able to subsidize rum producers using federal excise tax revenues. Puerto Rico argues that their sister territory, the Virgin Islands, is using excise tax revenues from rum sales to make the kind of deals that amount to, essentially, unfair trading practices that will distort the market.
This is the background: For decades, the federal government taxed rum producers on each proof gallon of their alcohol entering the U.S. But Congress initiated a cover-over program that rebates all but 25 cents of rum excise tax revenues back to the U.S. territory that produced the rum.
The federal program generates hundreds of millions of dollars annually in economic aid for Puerto Rico and the U.S. Virgin Islands.
To combat record deficits facing the Virgin Islands, territorial governor John deJongh looked to leveraging business deals tied to cover-over revenues. deJongh cut deals with two producers that make some of world's top-selling rum brands to create public-private enterprises. London-based Diageo, LLC, which produces Captain Morgan Rum, is ending a subcontractor relationship it has in Puerto Rico in 2012 and is relocating to the Virgin Islands where it will remain for the next 30 years and receive subsidy incentives worth up to half of the cover-over revenue that the U.S. Virgin Islands receives.
Fortune Brands, which produce locally-based brand Cruzan recently received a similar deal.
The deal threatens Puerto Rico, which as the world leader in rum production is losing not only the number two rum brand in Captain Morgan, but also maintains the high subsidies that Diageo is receiving from the Virgin Islands undercuts stability of the entire rum industry. U.S. territories are free to use revenues from the cover-over program as they see fit, for now.
Virgin Island leaders argue that the deal not only brings badly needed revenue and jobs to their struggling island but that it also keeps leading rum producers on U.S. soil. Diageo could not renegotiate favorable terms with their third-party manufacturer in Puerto Rico and was preparing to move production of its Captain Morgan brand to a foreign country but instead struck a lucrative deal with the Virgin Islands worth $2.4 billion dollars in direct subsidies and other incentives that include tax breaks, brand promotion and a $165 million dollar local distillery. Virgin Island leaders hold that the agreements have already saved 2000 jobs and will create hundreds more. The deal is forecasted to bring in an estimated six billion dollars in revenue for the tiny island over the 30-year agreement.
''Our position is that there is a rum industry in both territories,'' said Congressman Pedro Pierluisi (D- P.R.), Puerto Rico's delegate to congress. ''And the way it should work is that the rum producers compete with each other based on the quality of their products and their prices. The issue is that the Virgin Islands opted to use the cover-over funding to give exaggerated and purely unreasonable subsidies to individual producers and that makes no sense''.
The Puerto Rican delegate said that the Virgin Island's subsidies are so large that, in the case of Diageo, the rum producer could manufacture a gallon of rum free of cost.
''It distorts the whole market,'' he explained. ''If the federal government looks the other way, does nothing and allows this to happen, the odious result is that producers would be seeking similar subsidies because it's the only way that they could compete.''
Decades ago, Puerto Rico legislated a self-imposed cap on itself so that no more than ten percent of cover-over revenue would fund subsidies, and would prevent ''abuse'' by producers seeking unreasonable subsidies, Periluisi said. And while federal law sets no such limits Periluisi is proposing a federal bill in congress that would do just that.
Pierluisi maintains that the domino has already fallen because the Virgin Island's other subsidy agreement with makers of the locally-produced Cruzan Rum was a result of the rum manufacturer looking for a deal similar to the one Diageo received.
''Any producer coming to either territory is going to ask for the same kind of deal,'' he said. ''It makes no sense. Both territories will end up losing about half of their excise tax cover-over revenues just to give subsidies to individual producers. That cannot be the purpose of the program. It has to do with the industry. It shouldn't work this way.''
Puerto Rico received about $371 million dollars from the excise tax in 2008. Whereas, the Virgin Islands receive just under $100 million dollars in the same year, according to public records.
“It’s a big discrepancy because they have so much more money,” argues Congresswoman Donna Christensen (D-V.I.), U.S. Virgin Island's congressional delegate. “So ten percent for them is a lot of money. It’s four times plus what we can subsidize ours for.”
HR 2122, a bill that Pierluisi introduced last April, would cap the amount that territorial governments could use cover-over tax revenues to subsidize private entities to no more than 10 percent.
''The bill that I've proposed puts a limit of ten percent but I am not fixed on that number,'' Pierluisi said. ''It could be a higher amount but, again, it cannot be fifty percent of the excise tax, which ends up being the cost of a gallon of rum. I'm just trying to protect the market, protect the industry and make sure that there is a level playing field.''
Pierluisi said that because the cover-over revenue is based on production the Virgin Islands could make more money by simply increasing their production and making themselves more attractive to producers without the excessive subsidies.
The legislation could also undo any existing deals that the Virgin Island has made thus far. The Virgin Islands government has already issued hundreds of millions of dollars of government bonds and hired employees to start relocation construction and distilleries. Because they've begun their costly developments, Christensen insists that any retroactive actions proposed by the bill would essentially sink the Virgin Island economy.
''We've already established these agreements and our governor has already been able to borrow to keep us afloat through a recession because of the strength of those agreements,'' Christensen said.
Pierluisi disagrees that HR 2122 is retroactive in a way that would decimate the Virgin Island economy but said that there will be changes in the way that territories can legally used these funds. He maintains that huge corporations like Diageo have clauses in their contracts that provide with changes in the law.
''You cannot expect when you do any deal that the law will remain the same. The law can change at any time. The federal government is not a party in that contract. It is the Virgin Islands and this private entity, which knows very well that the cover-over program can change at any time.''
According to Pierluisi, manufacturers like Diageo could undercut their competition's prices or launch behemoth advertising campaigns that other producers not receiving similar subsidies would have a impossible time trying to match.
The Congress appears to see the controversy as a dispute between two U.S. territories and sees no need to get involved. This is also the position of the Congressional Black Caucus. As they see it, private companies move from one jurisdiction to another every day. Currently, the bill is sitting in the House Ways and Means committee awaiting debate.
Says Monique Watson, chief of staff for Congresswoman Christensen, it's really about fairness: ''It's not a Brown versus Black issue. It's a big territory versus a small territory issue. It has to do with the economic competitiveness of the Virgin Islands, which is a very small territory.''
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