Tax credits flowing to a new rum distillery in St Croix, US Virgin Islands, will put billions in US tax dollars into the giant British liquor producer of Captain Morgan rum, according to a Chicago Tribune report.
Under the agreement, London-based Diageo PLC will receive tax credits and other benefits worth US$2.7 billion over 30 years, including the entire US$165 million cost of building a state-of-the-art distillery on the island of St Croix in the US Virgin Islands.
Virgin Islands officials say the arrangement complies with the letter and spirit of the tax law and will help the US territory’s sagging economy.
Captain Morgan is now produced in Puerto Rico, a US commonwealth, and critics say the subsidy for the new distillery in the Virgin Islands and the other benefits are so generous that they practically guarantee a profit on every gallon of rum produced there by Diageo, the biggest distilled spirits maker in the world.
“The US taxpayer is basically being asked to line the pockets of the world’s largest liquor producer,” Steve Ellis, the vice president of Taxpayers for Common Sense, a nonpartisan watchdog organization, is quoted by the newspaper as saying.
With the exception of Ellis and a handful of lawmakers, however, the deal has attracted little opposition in the US Congress or elsewhere.
Treasury Secretary Timothy Geithner has said he does not have authority to block or investigate the project.
According to the Chicago Tribune, the key to the deal is a special tax collected on every bottle of rum sold in the United States – some $470 million a year.
The tax was first imposed in 1917, and most of the money is funnelled back to the governments of rum-producing US territories in the Caribbean to help create jobs, pay for local government services and promote consumption of rum.
Puerto Rico, which requires that 90 percent of its rum tax money be used for the public welfare on the island, says it has had as many as 300 workers making Captain Morgan and many if not all those jobs will disappear if Diageo moves its operations to the Virgin Islands.
“It’s insulting that the money we give is essentially paying for a foreign corporation to move from one US location to another, while cutting jobs,” Ellis said.
Virgin Islands officials, on the other hand, say the deal, while consuming a good portion of its rum tax dollars, will bring from 40 to 70 jobs and some much needed financial stability to its suffering economy.
Meanwhile, the Washington lawyer who helped Diageo negotiate the Virgin Islands agreement, John Merrigan of the DLA Piper firm, said government inducements are often provided to attract a new employer to a location needing economic development.
And according to Diageo official, contrary to Puerto Rico’s claim that the deal will result in a net loss of jobs, it actually saved jobs. The company would probably have moved its operations to Guatemala or Jamaica or another country if the Virgin Islands hadn’t offered the favourable terms, Diageo said.
The Virgin Islands government will finance the new $165 million distillery by issuing bonds that will be paid with future rum tax dollars. In addition, the 30-year agreement provides almost $2 billion in marketing subsidies and a break on property and income taxes, though the company will accept reduced subsidy payments until the construction debt is repaid, Merrigan said.
Legislation to limit the agreement was offered in April by Puerto Rico’s non-voting representative in Congress, Rep Pedro Pierluisi.
But his proposal, which would cap subsidies to the industry at a maximum of 10 percent of total rum tax revenues, has picked up only a handful of co-sponsors.
And House Ways and Means Chairman Rep Charles Rangel has refused to intervene in the dispute, citing his longstanding support for the rum tax programme, which gives territories the right to determine how the funds will be used.
In the end, said Javier Vazquez, executive director of the Puerto Rico Industrial Development Company, the two Caribbean territories could get into a trade war over who can give rum makers the biggest rewards. Bacardi, another huge producer, still has a large operation in Puerto Rico.
