The beer lobby is taking aim at a tax benefit for Puerto Rico and the U.S. Virgin Islands up for renewal this year that they argue unfairly subsidizes their rum-producing competitors, amid an escalating dispute with the spirits industry over how to tax new alcoholic beverage options.
The transfer of rum tax collections to the U.S. territories enjoys support on both sides of the aisle in Congress and would be a strong contender for a potential year-end tax package. But the squabble between beer brewers and liquor distillers is putting some new heat on the “rum cover-over.”
“The rum cover-over program has turned into a handout to large liquor companies,” a voiceover narrates in the Beer Institute’s minute-long ad on the issue. “Congress should take a hard look at this program and reform it to ensure that the people of Puerto Rico and the U.S. Virgin Islands get the assistance they need.”
The video is part of a “Stand with Beer” website that the Beer Institute — which represents the largest U.S. beer producers — launched this summer to tout its own benefits to the U.S. economy and question tax breaks that aid distilled spirits companies.
The U.S. collects taxes on rum like it does other spirits produced domestically or imported. But in a unique arrangement, it sends most of that revenue to the U.S. territories, which dominate the domestic rum market. Puerto Rico and the Virgin Islands split the tax collections based on their annual rum production levels.
Nearly all of the rum taxes the federal government charged — $13.25 per proof gallon out of $13.50 collected — were sent to the territories until the end of 2021. Then that bigger benefit lapsed back to $10.50 per proof gallon.
Restoring the higher revenue transfer, which the Joint Committee on Taxation has said would deliver over $200 million extra annually to the island territories, is a top contender if lawmakers can agree on a bipartisan “extenders” package this year.
Lawmakers behind a bipartisan proposal to revive the higher transfer say the cover-over is critical for economic development and supporting services like health care and education in the territories.
The sponsors — Sens. Bob Menendez, D-N.J., and Bill Cassidy, R-La., along with Resident Commissioner Jenniffer González-Colón, R-P.R., and Del. Stacey Plaskett, D-V.I. — also propose a new measure that would require a portion of the revenue to be sent to the Puerto Rico Conservation Trust, a private nonprofit dedicated to protecting the island’s natural areas and resources.
The Beer Institute doesn’t oppose the cover-over program as a whole. But they want curbs on how Puerto Rico and the Virgin Islands can spend the tax revenue.
“With so much money going back to the rum business interests, the residents of Puerto Rico and the U.S. Virgin Islands lose out,” the group’s ad says. “Instead of building schools, roads and bridges with your American tax dollars, large liquor companies are getting richer.”
Some like-minded lawmakers, including Louisiana Republican Rep. Clay Higgins and Senate Finance member James Lankford, R-Okla., have criticized the rum cover-over. They argue much of the money sent to the territories now ends up being used as subsidies for distillers or puts continental U.S. rum makers at a competitive disadvantage.
In his “federal fumbles” series, Lankford highlighted the cover-over as unfair to taxpayers and the territories’ economies because of the amount of money that’s increasingly gone to rum companies.
In 2017, Higgins introduced legislation to repeal the cover-over entirely, with backing from the American Distillery Institute and American Craft Spirits Association, and groups like the right-leaning Heritage Foundation have targeted it for elimination.
Fight for market share
Until the late 2000s, the vast majority of cover-over revenue was going to the territories’ general funds.
That changed when the Virgin Islands offered Diageo Plc, the London-based maker of Captain Morgan, incentives to leave Puerto Rico and instead distill its products on St. Croix, a move that would directly boost the territory’s share of cover-over revenue. That deal included subsidies for building the new distillery, income and property tax breaks — and a big slice of annual cover-over revenue.
Not long after, the Virgin Islands also agreed to subsidies for Fortune Brands, now owned by New York-based Beam Suntory Inc., for distilling its Cruzan rum there based on rum tax revenues. Meanwhile, Puerto Rico began delivering a hefty share of its cover-over revenue to its big rum makers, mainly Bacardi but also Don Q producer Destilería Serrallés and Club Caribe, according to a 2017 report by the San Juan-based Center for Investigative Journalism.
While the subsidies have drawn rebukes, attracting and keeping distillers stands to give the territories significant benefits. If rum producers leave, that territory’s share of the cover-over revenue falls, which would still impact local government services.
Still, lawmakers’ criticism combined with the beer industry’s new campaign could spark some friction, though it’s still likely the cover-over would have enough support if lawmakers can agree on a bipartisan set of tax provisions to extend in the coming weeks.
Ways and Means Chairman Jason Smith, R-Mo., has cited the provision as one with bipartisan support that could be extended. The panel’s top Democrat, Richard E. Neal of Massachusetts, said he hadn’t heard of any new resistance to extending the higher cover-over.
“It’s being discussed. It’s like everything else,” Neal said. “It’s more right now like an art form. It’s part of a series of ‘what if’ questions.”
