Political unity seems unachievable at the moment. It’s not just the policy views of the two sides that are so apart. They don’t even agree on the problems.
Perhaps the trick is to find things the government does that are so ridiculous both sides can find a good reason to eliminate them. A worthy candidate for this new bipartisan chopping block should be the “rum cover-over” program.
The rum cover-over program is one of those items that gets passed in the big legislation at the end of every year to continue funding for political pet projects such as wind power and shipping rules. Congress has the opportunity this fall to eliminate the program and make a statement about fiscal waste that should appeal to both the Republicans and Democrats alike.
The program, which began in 1917 to help Puerto Rico and the U.S. Virgin Islands get on their feet financially, calls for the $13.25 per-proof-gallon excise tax on rum to be returned to fund public services and, to a small degree, rum promotion. For other spirits, the $13.25 goes into the Treasury.
Puerto Rico and the Virgin Islands each get all the tax revenue on the rum they produce on their islands. Revenue from rum produced elsewhere also goes to the islands and is divided by how much rum each island produces relative to the other. If Puerto Rico produced 60% of the rum during a given period, it would receive 60% of the revenue.
Thus the more rum each island produces relative to the other, the more revenue it gets from taxes on its own rum and rum made elsewhere. So instead of spending the subsidies on programs to help their residents, the governments of both Puerto Rico and the Virgin Islands increasingly have subsidized expansion of rum production.
Cruzan, the Virgin Islands’ native producer, receives 46.5% of the tax revenue collected on its rum but says it needs more to maintain. The Virgin Islands, which had provided $2.7 billion over 30 years in subsidies to Diageo, the makers of Captain Morgan rum, built the firm a $165 million state-of-the-art distillery to lure it from Puerto Rico and sweetened the deal with price controls on molasses, the main ingredient in rum, a 35% subsidy for advertising and a 90% income tax break.
If you’re thinking this has to come close to zeroing out Diageo’s costs for producing one of the world’s most popular rums, you are not alone.
If you’re thinking it is imprudent to base your spending plan on revenues from a source that could so dramatically change from year to year, there is support for that as well. Not only are the wild swings a problem — the Virgin Islands went from $81 million in rum tax revenue in 2005 to $256 million in 2012; Puerto Rico went from $420 million to $376 million over the same period — but so are the exorbitant subsidies.
That state-of-the-art distillery on St. Croix produces only 70 permanent jobs, but it allows the Virgin Islands to collect billions in revenues that largely aren’t making their way to poorer residents, and they force Puerto Rico into its own short-sighted decisions. Others worry rum producers will take advantage of another trough of unnecessary incentives — those around sugar — and use their distilleries to make blended whiskeys, vodka and gin, which would put thousands of jobs on the mainland at risk.
There’s a lot to like about killing this program. Returning rum tax revenues to the Virgin Islands and Puerto Rico might be justifiable if the money went as intended — to help the islands get on their feet economically. But if it is going to subsidize more rum manufacturing, distort markets, potentially put mainland agriculture workers out of a job and pit the island economies against each other in a revenue death-match funded by U.S. rum-drinking taxpayers, it is time for lawmakers to take seriously their biennial opportunity to eliminate or at least reform the program.
“If Congress once against fails to act on the immediate repeal of this wasteful program, it will confirm that politics today remains an inside game between those corporate lobbyists seeking favors and those giving them away,” wrote Kellen Guida for the Daily Caller. “Politicians can point fingers and engage in a blame game, but who is going to come forward and call for an end to this outrageous tax scheme that threatens to destroy American jobs and divert additional tax dollars to a foreign liquor conglomerate?”
He wrote those words in 2011. Congress should not continue this program that is expected to be part of the so-called “Tax Extenders” bill that likely will pass at the end of this year.
• Brian McNicoll, a freelance writer based in Alexandria, Virginia, is a former senior writer for The Heritage Foundation and former director of communications for the House Committee on Oversight and Government Reform.