Congress should stay out of dispute between the Virgin Islands and Puerto Rico

Wendell Cox Senior Fellow, Committee to Unleash Prosperity
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Our nation is not yet out of the economic woods. Americans are trying to regain their footing and businesses are still searching for reassurance before they make long-term investments. In this environment, it is crucial for Congress not to restrict growth in any corner of the nation. Yet there is an economic threat to the U.S. territory of the Virgin Islands with ramifications for businesses and local governments nationwide.

Puerto Rican leaders are lobbying Congress to block two major economic development partnerships in the Virgin Islands and limit the territory’s ability to set its own fiscal policy. The previous Congress rejected Puerto Rico’s campaign for legislation that would have tread on the Virgin Islands’ rights and overturned previously signed contracts that are already producing economic results. But Puerto Rico is ramping up its efforts again. The new Congress should carefully consider the harm to the American economy if companies and governments fear that public-private partnerships negotiated in good faith may be retroactively upended for political reasons.

Several years ago, Virgin Islands Governor John deJongh recognized the value of modernizing the territory’s rum industry, one of its most important business sectors. With that in mind, deJongh signed 30-year exclusive production agreements for three of the top-selling U.S. rums: Illinois-based Fortune Brands’ Cruzan Rum and Ronrico and Diageo’s Captain Morgan. He has developed a cycle of investment that is expanding local rum production, increasing sales, creating jobs and further growing rum excise tax “cover-over” revenue that will be reinvested into the rum sector and dedicated to public needs.

The economic development program known as the “cover-over” law was originally enacted by Congress nearly 100 years ago. The governments of Puerto Rico and the Virgin Islands are rebated the federal excise taxes paid by rum companies on mainland sales of rum made in the territories or produced elsewhere in the Caribbean basin (such as Jamaica or Barbados). In establishing the rebate program for the Virgin Islands in 1954, Congress sought to reduce reliance on federal appropriations and recommended that “the people of the Virgin Islands bend their efforts to stimulating and increasing business in every way possible.” The cover-over program has been an essential economic tool ever since.

Congress and the Congressional Research Service have repeatedly stated that the Virgin Islands and Puerto Rico have full control over how to use their cover-over revenue. In the Virgin Islands, a clear majority goes toward schools, roads, public infrastructure and economic development projects, just as Congress intended.

Governor deJongh’s initiatives have run afoul of Puerto Rico, which objects to the partnerships despite having long subsidized its own rum industry with rebate revenues (the amounts of which it does not disclose).

The heavy hand of Washington interference would not end with the repeal of long-standing arrangements. Puerto Rico’s efforts could lead Congress to pass legislation killing the agreements, even though they were executed several years ago and production is already underway at Diageo’s new facility in St. Croix. This could result in the movement of production from the Virgin Islands to a foreign country.

Think about the dangerous precedent this would set. Imagine if Midwestern automobile-producing states were to enlist Congress to force Hyundai to close its automobile assembly plant in Alabama or BMW to close its facility in South Carolina. To call any such proposal “dead on arrival” would be an understatement. Congress has no more business picking winners between the Virgin Islands and Puerto Rico than between Alabama and Michigan or any other states.

Through a quirk in the cover-over law, should a Virgin Islands rum producer leave the United States for another Caribbean country, Puerto Rico would come out ahead. The Puerto Rican government would receive hundreds of millions of dollars in rum revenue annually, all diverted from the Virgin Islands. The United States needs to increase its exports, but not of jobs and production.

The sanctity of contracts is a lynchpin of the American economy and respect for the rule of law represents an important competitive advantage in attracting business investment. Businesses need assurance that their agreements with local governments will be secure, without the threat of Congressional interference. Undoing these partnerships would be devastating to the Virgin Islands, which is doing the right things to grow its economy. But, even more, it would send a costly signal that could discourage investment and job creation by both domestic and foreign companies.

Wendell Cox is principal of Demographia, an international public policy firm in St. Louis. He has served as a visiting professor at the Conservatoire National des Arts et Metiers in Paris since 2002, is a fellow of numerous think tanks, and a frequent commenter in U.S. and U.K. newspapers.