Since its creation by Congress over 91 years ago, the rum cover-over program has provided important budgetary support for Puerto Rico, and later for the U.S. Virgin Islands.  New plans to use federal tax revenues to excessively subsidize individual rum companies could put the entire program in jeopardy. 

History of the Rum Cover Over Program

 In 1900, Congress approved the first law for the governing of Puerto Rico, and provided that federal taxes on Puerto Rican products would be used to help pay for the government of the U.S. territory.

The original version of the current law was enacted in 1917. It now “covers over” (transfers) to Puerto Rico’s government most of the federal taxes collected on rum produced on the Island and in foreign counties to help pay for the cost of government.

In 1954, Congress granted the request of the U.S. Virgin Islands for support of its government budget similar to that granted to Puerto Rico.

Current permanent law gives Puerto Rico and the U.S. Virgin Islands $10.50 of the $13.50 per proof gallon tax on rum distilled in each territory and in foreign countries.  Temporary law, which requires recurring congressional approval, provides an additional $2.75 per proof gallon.

Puerto Rico’s Use of Federal Rum Tax Revenues

Puerto Rico uses 94 percent of the federal tax revenues to support investments in infrastructure, health, education, and environmental preservation.

Six percent is being spent to promote the territory’s rum industry. Local law limits to 10 percent the amount that can be used for this purpose. These funds support marketing, efficiency and innovation initiatives of the industry as a whole and do not directly benefit individual rum companies.

Puerto Rico adheres to this limitation to keep the use of the funds true to the original intent of Congress in transferring the taxes to Puerto Rico’s government.

Excessive Subsidies and Fair Trade Concerns

The program as created by Congress was intended to provide budgetary support to the territorial governments – never that federal revenues be used to excessively subsidize rum companies.

The Government of the Virgin Islands has recently developed plans to use most of the federal tax to individually benefit two large corporations that brand and sell rum. 

One of the arrangements would give a single company more than $60 million, nearly 50 percent, of the federal tax each year for 30 years. This amount is so large it would cover the entire cost of producing the product.

Puerto Rican producers say they will not be able to compete with distillers subsidized to the extent planned in the Virgin Islands.  Giving the federal tax to rum producers that also sell the rum abroad would be an actionable subsidy under U.S. international fair trade commitments.

Future of the Program

Puerto Rico’s resident commissioner and eight other members of the U.S. House of both parties have sponsored a bill (H.R. 2122) to limit to 10 percent the amount of federal tax revenue that can be used to subsidize rum production.  The federal taxes at issue have not been collected yet and their use is fully within the purview of the Congress to determine or limit.

The legislation sets parameters on what constitutes a reasonable subsidy under this federal program, and helps devise a fair and reasonable policy going forward to ensure congressional intent.

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This entry was posted on Thursday, January 21, 2010 at 2:10 pm and is filed under Press Releases. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.