In defense of the rum cover-over program

Paul Arnold Contributor
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For the U.S. Virgin Islands and Puerto Rico, rum is much more than a tasty beverage. Thanks to the federal rum excise tax cover-over program, which was established in 1917, rum is an essential economic engine that brings jobs, local government revenue and business activity to America’s Caribbean territories. The benefits to the territories — fiscal stability and self-reliance — are clear. The positive impact for U.S. taxpayers, particularly as the United States addresses the budget crisis and debt ceiling, is just as pronounced.

The rum cover-over program has been a subject of recent dispute. Some have called for its elimination, others for Congress to interfere retroactively with two 30-year public-private partnerships negotiated according to the program’s letter and intent. Either course would leave U.S. taxpayers feeling the pain.

If the cover-over program suddenly disappeared, the USVI and Puerto Rico would be forced to ask Congress for immediate financial help. The federal government would be compelled to make up hundreds of millions of dollars in revenue for the territories each year — or leave them broke.

Both the USVI and Puerto Rico invest in their local rum industries to drive economic development. Two years ago, the USVI government reached 30-year exclusive production agreements that expand production of Diageo’s Captain Morgan rum and Fortune Brands’ Cruzan Rum and ensure both companies stay in the United States. These partnerships will substantially grow revenue under the cover-over program, which rebates the federal excise taxes collected from rum companies in the territories back to the territorial government where the rum was made. By continually reinvesting cover-over money to grow production, our territory will receive a larger and more dependable revenue stream to build schools, fix roads, improve public infrastructure, fund the government pension system and improve the environment.

After decades of reliance on federal handouts, the USVI is achieving fiscal stability. If not for projected cover-over revenue that allowed it to secure long-term credit, the territory recently might have fallen into receivership and been forced to halt essential public services at the low point of the recession.

Much of what has been written about the cover-over program has left the mistaken (and perhaps intentional) perception that it is a subsidy borne by all taxpayers that adds to the deficit. Not so!

Last year, the Congressional Research Service examined the legislative history of, and intent behind, the cover-over program. CRS once again confirmed that the program was designed to collect excise taxes on rum from rum producers and rebate those sums to the territories — at first Puerto Rico, later the USVI as well — for locally established long-term economic development priorities.

Beyond leaving the cover-over program intact, Congress should also continue to reject calls to dismantle the USVI’s two partnerships negotiated according to the program’s letter and spirit. Doing otherwise would set a terrible precedent on two grounds.

First, it would violate the sanctity of contracts signed several years ago, cause production to halt, eliminate jobs, destroy real economic activity and possibly force companies to leave the United States. That would be akin to telling a state to rip up the roads built with stimulus funds over the past two years.

Second, it would send a broad warning to the business community that no legal commercial agreement is immune from retroactive political tampering at the behest of powerful interests unhappy with its terms. That’s quite a message to deliver at a time when rebuilding our economy tops the national priorities list.

America’s territories are not sovereign states; they are U.S. possessions for which Congress has a constitutional duty of administration. If the United States government is unwilling to protect us, it cannot pretend that “equal rights under the law” is an American principle. Altering agreements that rely on decades-old laws, without substituting another way for the territories to generate revenue, would be an abdication of the United States’ legal and moral obligations to the USVI.

As it takes a sharp pencil to the federal budget, Congress needs to make sure it is cutting waste — not smart business agreements. We have to invest wisely in the United States to get the economy going again and see a real return. That’s exactly what the rum cover-over is allowing the U.S. Virgin Islands to do.

Paul J. Arnold Sr. is the President and Chairman of the Virgin Islands Economic Leadership Council.