Vargas Vidot proposes cutting rum subsidies to help finance nonprofits
SAN JUAN – Independent Sen. José Vargas Vidot has introduced legislation that would reduce the percentage of the Rum Excise Tax Cover-Over Program that is given to the liquor’s producers in Puerto Rico to help finance the operations of nonprofit organizations.
According to the bill, the percentage of rum cover-over tax funds given to rum producers will fall by 11%, from 46% to 35%. The money instead will go to the more than 11,000 nonprofit organizations that help about 700,000 people on the island.
Jorge Fernández Porto, the Executive Director of the Senate Community Initiatives Committee, said island rum producers are in good financial state and can handle the cut.
“We question the need to give these companies, which have no financial problems, these funds when money to nonprofit organizations have been reduced,” he said. “That money should go to help people and not to give it away.”
The U.S. Virgin Islands persuaded the world’s largest distiller, Diageo, to leave Puerto Rico, and move to St. Croix by offering $2.7 billion in tax incentives to produce Captain Morgan there. The move resulted in a huge loss for the Serrallés Distillery.
In what came to be known as the “rum wars,” the government of Puerto Rico, in response to the move of the government of the USVI, tried, in various ways, to keep Diageo from leaving. To stop other rum producers from leaving the island, the government enacted Act 178 of 2010, which increased from 10% to 25% the amount of rum cover-over money given to local producers so they could compete overseas. The law allowed the governor to increase to 46%, from 25%, the amount given to distilleries in cover-over money.
Federal excise taxes collected on rum produced in Puerto Rico and exported stateside are covered over—paid—to the treasury of Puerto Rico, and federal excise taxes collected on rum produced in the USVI and transported to the states are covered over to the treasury of the USVI.
In addition, federal excise taxes collected on rum imported to the United States from foreign countries are covered over to Puerto Rico and the USVI pursuant to a formula established by the Alcohol and Tobacco Tax and Trade Bureau within the U.S. Department of the Treasury. The primary purpose of the cover-over program is to help the two territories provide essential public services. The use of funding for public purposes is particularly critical now that the government of Puerto Rico is struggling to fund its healthcare, education and public safety systems.
Federal excise taxes are imposed on rum at the generally applicable distilled spirits rate of $13.50 per proof gallon. Under current law, excise tax collections on imported rum, including rum produced in Puerto Rico and the USVI, are covered over to Puerto Rico and the USVI at the rate of $13.25 per proof gallon. Of this amount, $10.50 per proof gallon is permanent and the remaining $2.75 per proof gallon requires periodic reauthorization by Congress as part of tax extenders legislation.
According to Senate Bill 301, the Puerto Rican government used 94% of the reimbursement to promote economic development, which in 2009 included $17.59 million for the preservation and purchase of land for environmental conservation and $5 million for the Science and Technology Trust. That same year, about $27 million of the cover-over money was used to support the promotion and marketing of local rums.
To this day, however, the distribution of the tax money has undergone considerable changes. Fernández Porto highlighted press reports that contend that in the last six fiscal years the three rum companies have received $555 million in cover-over money. The firms have grown by 11% over the past six years and they also pay 18% less in taxes, according to reports.
Nonprofit organizations, according to the bill, employ about 150,000 people, comprising 16 percent of the jobs on the island, and they have about 380,000 volunteers.
Fernández Porto anticipated that the senator is slated to introduce another bill that would help create an investment fund for nonprofit groups.
Rum producers did not immediately return messages seeking comment.