Earlier this week, the federal government reached the legal limits of its spending authority.
Congressman Paul Ryan and the House Republicans are stressing the point to the Obama administration that government spending must be cut. One of countless programs that can be cut is a wasteful corporate welfare program that will cost U.S. taxpayers close to $20 billion over the next ten years.
Under the rum cover-over program, the federal government imposes a $13.50 excise tax on each gallon of rum produced in a U.S. territory and sold in the U.S. The federal government returns more than 98% of the revenue it collects from this excise tax to rum-producing territories (like the U.S. Virgin Islands) as economic aid — and there are virtually no strings attached to how that money is spent. Recently, this program has become an even more outrageous corporate welfare scheme designed to line the pockets of foreign companies at the expense of U.S. taxpayers.
Earlier this year, the Obama administration confirmed a new loophole in the program that not only increases the program’s cost from $700 million a year to nearly $2 billion a year but also puts in jeopardy the jobs and competitiveness of corn growers and distilleries throughout the Midwest.
In 2008, the U.S. Virgin Islands (USVI) entered a 30-year agreement (renewable for up to 60 years) with the British alcohol firm Diageo. In return for relocating its rum production facility to the USVI island of St. Croix, Diageo will receive almost half of the Virgin Islands’ rum tax money, a 90 percent income tax break, and a property tax exemption. The government will also build Diageo a new state-of-the-art distillery and guarantee — subsidize — sugar prices (sugar is a key ingredient in rum) for the next 60 years. The deal could be worth well over $6 billion to Diageo.
And it’s getting worse. According to domestic alcohol industry insiders, the USVI is now trying to convince domestic manufacturers to relocate their operations to the territory and purchase USVI bulk rum to blend into domestic alcohol products. This could destroy thousands of jobs throughout the Midwestern states as distillers move their operations to the Caribbean to take advantage of the tax breaks and subsidies. It could also cost corn producers 22 million bushels worth of demand, since corn is a major ingredient in domestic alcohol production.
Not only would such developments further line the pockets of private companies, but the resulting economic losses to the United States would be devastating.
— If domestic corn-based alcohol producers relocate to the USVI or if the USVI bulk rum is used as a substitute for domestic alcohol production, annual federal excise tax revenue losses from domestic alcohol production could eventually exceed $3 billion per year;
— Losses to domestic corn producers — the main ingredient used in domestic alcohol production — could reach $1.4 billion annually. This would be in addition to the accompanying loss of agriculture-sector jobs;
— Domestic producers will be put in the perilous position of either accepting the USVI terms or competing against them. However, USVI producers are so heavily subsidized that their incentives exceed their production costs. In fact, molasses — the key ingredient in making rum — currently sells for about $1.50 per gallon. These foreign companies will only pay 16 cents per gallon, even if the price skyrockets, and U.S. taxpayers will have to pay the difference.
There is something wrong when U.S. territorial governments use federal tax revenues to provide lavish subsidies to private firms — and destroy American jobs — while our elected officials sit by idly. Congress must immediately end this outrageous subsidy that will hurt American business at a cost of nearly $20 billion to U.S. taxpayers over the next 10 years.