Robert Menendez Re-Introduces Legislation to Prevent Taxpayers Subsidizing Big Businesses in U.S. Territories

U.S. Senator Robert Menendez (D-NJ) today re-introduced legislation to ensure that more taxpayer money for the U.S. territories is used to invest in job creation and vital public services instead of subsidizing foreign corporations. The Investing in U.S. Territories, Not Corporations Act would cap at 15 percent the amount of money U.S. territories can use to subsidize rum producers.

“Everybody knows we have to reform the cover-over program to ensure that taxpayer money is being invested in vital public services for the U.S. territories, such as building roads, hiring teachers, and providing health care,” said Menendez. “This bill would ensure that both territories will have more money for these integral services to create jobs and help the lives of working families, instead of that money being used to provide excessive subsidies to large profitable corporations.”

Recently, the US Virgin Islands and Diageo reached an agreement to shift up to $2.7 billion from the rum tax to private corporations, setting a precedent potentially devastating to the territories’ economies. Created to provide budgetary support to the territories for essential public infrastructure and services, the federal excise tax on rum sold in the U.S. is given—“covered-over”—to the treasuries of Puerto Rico and the U.S. Virgin Islands. Unless action like this legislation proposes is taken, excessive subsidies paid out of cover-over revenues could siphon off billions of dollars that would otherwise go to funding for vital public services.

Background

Under current law, most of the revenue generated from the federal excise tax on rum sold in the U.S. is given—“covered-over”—to the treasuries of Puerto Rico and the U.S. Virgin Islands.  The purpose of the cover-over program is to provide budgetary support to the territories for essential public infrastructure and services.

However, a deal that the United States Virgin Islands (USVI) brokered with Diageo, a British multi-national spirits company, to entice it to move production of Captain Morgan rum to St. Croix is threatening to gut the program by redirecting billions of dollars that are currently being used to fund vital public services in the territories to increase the profits of Diageo.  The deal commits 47.5 percent of cover-over revenues, totaling some $2.7 billion over 30 years, from the treasuries of the territories to Diageo. While decisions by companies to move operations to and from jurisdictions happen all the time as the order of regular business, the immense size of the subsidies given over to Diageo as a prerequisite for this deal highlights a tremendous loophole in the cover over program that must be closed.

Unless action is taken, excessive subsidies paid out of cover over revenues could siphon off billions of dollars that would otherwise go to funding for vital public services.  This is a tremendous opportunity cost for the territories as this is money that is currently going to such services as building roads and infrastructure, hiring teachers and improving schools, and providing funding for Medicaid.

The Diageo deal sets a terrible precedent for the territories and long-term could be devastating to both territories.  While some may argue this was a unique deal, the fact is that similar deals have been negotiated since.   The precedent has clearly been set; without action, the substantial financing of the rum industry by American taxpayer dollars will become the standard, not the exception.

Investing in U.S. Territories, Not Corporations Act

This bill would reform the cover-over program by placing a reasonable cap of 15 percent on the amount of money the territories could use to subsidize private liquor producers.  The bill doesn’t play favorites or pick winners or losers; it simply requires the territories to use at least 85 percent of the taxpayer dollars they receive through the cover over program for vital public services as intended.

• Cap Excessive Subsidies: Would ensure territories aren’t using the program to excessively subsidize rum companies.  If a territory exceeds the 15 percent limit, its cover over revenue in the next year would be reduced by twice the amount that it exceed the cap.
• Ensure Transparency: Would give the Secretary of the Treasury authority to require documentation of the uses of cover over revenues to ensure transparency.
• Create Reasonable Allocations of Revenues: Would create reasonable minimum and maximum percentage of the cover-over revenues each territory could receive.  The percentages would be no more than 70 percent and no less than 65 percent for Puerto Rico, no less than 30 percent and no more than 35 percent for USVI.  The cover-over program has a similar provision already with respect to the allocation of taxes raised from rum imported from other parts of the world, but the bill would expand to include all cover over revenues.
• Create Additional Taxpayer Protections: Would create a prohibition on cover over revenues for rum that is redistilled in the States to make other liquors.  Recently, labels for a ‘whiskey’ largely made from alcohol redistilled from USVI rum were submitted to Treasury by Fortune Brands, a corporation that owns the other large scale rum producer in USVI.  If Congress doesn’t pass this prohibition, liquors such as vodka or whiskey could become eligible for cover-over subsidies if cane-neutral spirits made from rum produced in the territories is a main ingredient.  This is a new loophole that could cost the US Treasury billions.

These sensible reforms will preserve the integrity of the program and ensure more funding for both of the territories. This is money that could be used to provide critical public services to families living in the territories, rather than to provide excessive subsidies to corporations.

From: menendez.senate.gov

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