Puerto Rico’s attempt to stop economic recovery

Harry Alford Contributor
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There is no one-size-fits-all solution to America’s economic challenges. States and territories are working hard to stabilize their local economies, provide essential services for residents, and keep budgets balanced. This means ensuring local leaders are empowered to use smart economic strategies and public-private partnerships that reduce their dependence on federal assistance. The U.S. Virgin Islands has found good answers, but unnecessary federal intervention risks halting the territory’s progress.

The Virgin Islands is tackling the economic crisis head-on while laying the groundwork for future growth. Because the Virgin Islands receives less federal funding than the 50 states, it must be innovative. The territory’s two 30-year public-private partnerships are modernizing a core Virgin Islands industry, generating new revenue that makes the local government less dependent on federal handouts, cleaning up the environment and creating and protecting jobs and economic activity. That’s a win-win for the territory, its residents and the federal government, particularly as states nationwide ask for more assistance.

With the Virgin Islands doing all the right things, threats of intervention are counterintuitive. Yet a group of Puerto Rican politicians and activists are desperate to convince Congress to overturn these partnerships. That would make the Virgin Islands more dependent on the federal government, which no one wants.

The Virgin Islands’ governor, John deJongh, seized an opportunity to partner with two well-known companies in agreements that will transform his territory. Rather than simply offer tax breaks or subsidies, deJongh created a cycle of investment that will reap decades of benefits for the Virgin Islands.

The partnerships are expected to more than double the Virgin Islands government’s net rum excise tax cover-over revenue from $90 million to $240 million annually. This is new revenue for economic development, infrastructure, education and social programs. Under the agreements, the Virgin Islands will work with Fortune Brands, maker of Cruzan Rum, and Diageo, owner of Captain Morgan rum, to increase production of their branded rums. By locking in exclusive production, the agreements will grow the rum brands’ strength in the market. The growth in cover-over revenue is a tangible return on investment for the government.

The cover-over program, which dates to 1917, takes excise taxes paid by the rum producers when they import their product to the U.S. mainland and rebates them back to the government of the territory where the rum was distilled. The program is an essential economic tool for the Virgin Islands, and is part of its special relationship with the federal government.

Congress encouraged the Virgin Islands to use cover-over revenue to build its local rum industry and strengthen its economy. And it declared the Virgin Islands has full control over this cover-over revenue. So why the vicious anti-Virgin Islands campaign by Puerto Rico — with its misinformation, smears and attacks — to retroactively undo this progress?

One of the companies, Diageo, currently buys rum from a Puerto Rican supplier. Their contract expires after 2011, and following attempts to negotiate an extension under market-based terms, Diageo decided to leave Puerto Rico. Diageo considered foreign locations before approaching the Virgin Islands and committing in 2008 to make all Captain Morgan in the territory. The company and its economic impact are staying in the United States.

Puerto Rico doesn’t like it and wants to overturn the deal. Not because they expect Captain Morgan to locate in Puerto Rico, but because of a quirk in the cover-over law. If Diageo moves to a Caribbean country, almost all excise tax revenue generated by Captain Morgan imports will be diverted directly to Puerto Rico’s coffers. Blocking the Virgin Islands’ agreements allows Puerto Rico to execute a massive cash grab, even if it forces companies to leave America.

Fortunately, most of Washington is ignoring Puerto Rico’s campaign. Retroactively overturning these local economic agreements would set a dangerous precedent for federal intrusion. It is exactly what businesses and local governments don’t need right now, and Congress realizes it. And with many of the same Puerto Rican power brokers leading the Puerto Rican statehood movement, it gives a distressing glimpse of how the state of Puerto Rico would treat its counterparts.

The global economy is competitive. Labor costs, environmental standards and other protections are lower in many foreign countries. At all levels of government, we need smart solutions that take advantage of natural U.S. assets and fully leverage economic incentives. Now, more than ever, the federal government must ensure states and territories like the Virgin Islands can continue to do the right things for America’s economy.

Harry C. Alford is the president and CEO of the National Black Chamber of Commerce.