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Old 01-30-2010, 05:50 PM   #1
Rum Runner
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Default Proposed legislation would limit ability of US Caribbean territories to finance econo

Source: Caribbean Net News

Published on Saturday, January 30, 2010

WASHINGTON, USA -- A Congressional Research Service (CRS) analysis of the rum excise tax cover over program, from which Puerto Rico receives about $400 million annually and the US Virgin Islands about $90 million annually, finds that proposed legislation by the Puerto Rico Resident Commissioner would be detrimental to economic development in the US Caribbean territories if it is passed, said Virgin Islands Delegate to Congress Donna Christensen.

The report issued last week said that “passage of HR 2122 would result in severe limits on Puerto Rico’s and the USVI’s ability to finance economic development projects with this revenue source.”

USVI Delegate to Congress Donna Christensen
“This undermines the intent of the Congress when they designed the program for the territories,” said Christensen. “As the report clearly states, Congress did not outline specific uses for cover over revenue, but it recommends that it be used to stimulate and increase business activity.”

The CRS Report gives a history of the rum cover over program and how Congress intended for it to be used. It points out that the US Senate report language accompanying the Revised Organic Act of 1954 “expressed a desire that the USVI use the covered-over revenue to loosen the dependence of the USVI on periodic appropriations from the US government,” giving “the people of the Virgin Islands…a far greater degree of control over their finances.”

HR 2122 would limit the territories from using more than 10% of their covered over revenue to subsidize the rum industry on their shores. It would be retroactive, affecting already inked agreements with Diageo and Fortune Brands and it would penalize the territory providing more than 10% by giving the excess to the other territory. The report states that “the restriction seems intended to make it more costly for the Virgin Islands to provide incentives to (Puerto Rico rum producers) to relocate to the United States Virgin Islands.”

Christensen reiterated that the US Virgin Islands government entered into agreement with Diageo only after it had decided to leave Puerto Rico and relocate elsewhere. At that point, she said it was only fair that the US Virgin Islands compete with other potential sites in the Caribbean region for the company to locate its operations. “The Diageo agreement and that with Fortune Brands ensures that jobs remain on US soil in these recessionary times,” said Congresswoman Christensen.

The CRS Report outlines how the US Virgin Islands uses its cover over proceeds, to secure tax exempt bonds to finance public infrastructure funding for projects such as schools and roads. It also outlines the “statutory incentives” and others given to Diageo and Fortune Brands. It also points out that Puerto Rico uses its cover over revenue “to finance marketing and promotional activities for the rum industries,” but “the exact amounts and extent of these activities is unclear as there is not separate publicly available budget accounting.” It also cites the claims of Puerto Rico officials that only “about 6%” go to promote Puerto Rican rums.

Christensen pointed out that ten or even six percent of the $400 million in revenue to Puerto Rico is far more than 10% of the $90 million annually to the Virgin Islands. “This legislation would devastate the economy of our small territory,” she stated. “It would unfairly tie our hands in a time when we have to compete in a global economy. One territory does not and should not have the right to limit another.”

Christensen refuted another claim of backers of HR 2122 that US tax dollars are being used to subsidize business. “It is an unfair claim as no individual taxpayer dollars are used in the program, but rather the producers are taxed and that is the revenue that is returned to the treasuries of Puerto Rico and the US Virgin Islands,” she said.

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Old 02-01-2010, 08:08 PM   #2
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We haven't heard the last of this one yet. Diageo has other sources for rum if this deal falls through the cracks though Diageo would probably rather own its rum producing distillery rather than buy product from another source which gives them less control over the whole process and costs.
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Old 02-04-2010, 07:03 PM   #3
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Default A letter from the USVI Governor

My opinion.
"While the Puerto Rican Government continues to try to tell it's neighbor territory how to conduct it's economy, it fails to offer any explanation as to how it lost the "golden goose" in the first place."

Read the letter below.

USVI Governor de Jongh sends a letter to the US Congress.

Source: PR Newswire.

The report deals a serious blow to Delegate Pierluisi's proposed bill, and highlights that Puerto Rico would prefer Diageo locate in a foreign country – taking jobs and economic impact with it – than operate in the USVI.

Full text of Governor deJongh's letter to Chairman Baucus follows.

February 2, 2010

The Honorable Max Baucus


Committee on Finance

SD-219 Dirksen Senate Office Building

United States Senate

Washington, DC 20510-6200

Dear Mr. Chairman:

You probably have read press reports or heard from advocacy groups in recent months about the public-private partnerships my Administration has negotiated over the course of the last two years to strengthen our long-term economic development and financial foundation by fostering a stronger relationship with the historic rum industry in the Virgin Islands. Many of these reports have made erratic and unsubstantiated charges about the Virgin Islands improperly "luring" or "poaching" a rum company from Puerto Rico through "unreasonable" subsidies financed by the rum taxes, paid by the rum manufacturers, remitted to the treasuries of the Virgin Islands and Puerto Rico.

I have consistently maintained that these charges are false and irresponsible. The Congressional Research Service "(CRS)" has now issued a report on the history of, and current issues involving, the rum tax cover-over program that corrects much of the misinformation put forward by these advocacy groups.

The creative and forward-looking public-private partnerships negotiated by the Virgin Islands are not subsidized by "federal taxpayer dollars." Rather, as the CRS report notes, under long-standing rules that govern the tax and political relationship between the United States and its Territories, "[m]ost federal excise taxes do not apply" in the Virgin Islands or Puerto Rico. The exception at issue here is the "equalization tax" that is imposed on products manufactured in the Virgin Islands and Puerto Rico and shipped to the United States. It is a tax imposed on the Territorial producer which is triggered when the Territorial product enters commerce in the United States. It is not a sales tax imposed on U.S. consumers. It is not intended to raise revenue for the U.S. Treasury. It is intended only to protect U.S. producers of like products from Territorial manufacturers who, because of our political status, are exempt from federal taxation. And as the CRS report notes, since the purpose of the equalization tax is not to raise revenue for the U.S., Congress has, beginning in 1917, given, or "covered-over," the revenue back to the Territories for disposition as their respective legislatures see fit.

Indeed, the CRS also quotes the legislative history of the Revised Organic Act that confirms Congress' intent that the Virgin Islands use its cover-over revenues "to loosen [its] dependence . . . on periodic appropriations from the U.S. government" and to "bend [its] efforts to stimulating and increasing business in every possible way." That is precisely the purpose of the agreements and the resulting public-private partnerships negotiated by my Administration. As you know, the Virgin Islands and other U.S. Territories are not treated equally with the States in federal programs, such as Medicaid, or in the federal appropriations process. The Virgin Islands public-private partnerships will increase government revenues, and lessen our dependence on ad hoc federal appropriations, while strengthening the Virgin Islands rum industry in the face of increasing global competition as the brands gain visibility.

The CRS report also notes that these partnerships do not break new ground. Rather, the report recognizes that historically both the Virgin Islands and Puerto Rico have subsidized their rum industries over the years to strengthen brand identification and to withstand foreign competition. As the report also points out, "Puerto Rico uses cover-over revenue to finance marketing and promotional activities for [its] rum industries. The exact amounts and extent of these activities is [sic] unclear as there is not separate publicly available budget accounting [in Puerto Rico]." In contrast, the Virgin Islands public-private partnerships, and the contracts that form the foundation of these partnerships, have been the subject of public hearings in the Virgin Islands, are fully transparent, and are accessible to all on the Government of the Virgin Islands' website.

In analyzing H.R. 2122, legislation introduced by Puerto Rico Resident Commissioner Pedro Pierluisi to limit "unreasonable" subsidies, the CRS concluded that passage of the bill "would result in severe limits on Puerto Rico's and the USVI's ability to finance economic development projects with this revenue." Even more egregious, however, the CRS report notes that the legislation "would also seem to preclude the USVI from using [its] general revenue to subsidize [its] rum producers." The receipts generated from the cover-over revenues have been used by the Government of the Virgin Islands to invest in infrastructure -- the building of roads and schools, for example -- and to secure bond financing for future infrastructure investments and capital projects.

I believe it is unfair -- not to mention, unprecedented -- that a Member of Congress from one jurisdiction would introduce legislation that would bar the legislature of another jurisdiction from using its general revenues for any legislative purpose duly considered and enacted by that body. Florida does not tell Montana what its legislature can or cannot do with its general revenues. Indeed, as the CRS report correctly notes, "the justification for using tax incentives and subsidies to attract industry has long been a part of sub-federal economic development strategies. There are numerous examples of states offering manufacturing firms reduced property taxes, access to tax-exempt financing, and favorable corporate income tax policies." The CRS report also notes that the Pierluisi bill "would not prohibit tax incentives and subsidies; just limit them such that the status quo is maintained." That is, the Pierluisi bill concedes that tax incentives and subsidies to encourage economic development are acceptable, but just so they aren't used to disrupt the "status quo" in Puerto Rico.

The CRS report identifies what is likely the real reason for the Pierluisi bill. Because under the Caribbean Basin Initiative (CBI), Puerto Rico and the Virgin Islands were held harmless in the event that Territorial rum production was lost to foreign producers benefiting from duty-free access to the U.S. market, Puerto Rico would be better off if Diageo -- the company relocating its rum operations from Puerto Rico to the Virgin Islands -- had instead relocated to Brazil, Jamaica or Guatemala rather than to another U.S. Territory. As correctly analyzed by the CRS report:

In the case of Diageo, news reports indicate that Diageo had already decided to leave Puerto Rico and the USVI presented the most attractive option. While other Caribbean countries were said to be in the competition for the Diageo facility, Diageo's decision to produce rum in the USVI presents the worst case scenario for PR because PR loses not only to Diageo but also future excise tax revenue from USVI production. As mentioned previously, a portion of rum-tax revenue collected from other countries' imports to the United States is paid to PR, but not on imports from the USVI.

Under the CBI allocation formula, excise taxes on foreign rum are split between the Virgin Islands and Puerto Rico on the basis of market share. Accordingly, the CRS report concludes that any Territory "losing" a rum producer to another jurisdiction "would be better off if the rum producer relocated outside of PR, USVI or the U.S."

As with many issues, things are not always what they seem. It always pays to dig a little deeper when someone tries to restrict another's economic freedom. The CRS report does a great public service by "digging a little deeper." It should give pause to anyone who -- like the Virgin Islands -- values, and is committed to, economic freedom, playing by the rules, and fair play.

I am attaching for your information a copy of the CRS report. I commend it to your attention in the event that you choose to consider this issue which is so critical to the economic future and fiscal stability of the Virgin Islands.

Very truly yours,

John P. deJongh, Jr.


SOURCE Office of U.S. Virgin Islands Governor John P. deJongh, Jr.
Waylaid in the West Indies

Last edited by Rum Runner; 02-04-2010 at 07:28 PM.
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