The Real-life Pirates of the Caribbean: An Economic Observation.

The Bailout, Excise Taxes, Rum, and How Puerto Rico Got Screwed

The Bailout
As you may recall, a few weeks ago, Congress passed an $800+ billion dollar bailout for the financial markets which included what was termed as “sweeteners” to grease along its passage. The following morning, the news outlets reported that a major recipient of this pork were rum producers on the island of Puerto Rico and the U.S. Virgin Islands to the tune of $192 million dollars. The tax break was in essence, a restoration of the funds given back to the local governments in the form of excise taxes. It did not sound like your typical “corporate handout” but if you look closer you will see that this “pork” actually hurts Puerto Rico and the USVI rather than help them.

The Excise Tax
Generally speaking, an excise tax is levied by a government on the producer of a certain product and not levied against the consumer per se. The money collected by the government in the form of this tax is then used to “protect” the consumer against the physical and/or moral corruption the use of the product may cause to the populace. Excise taxes are heavy on products such as alcohol, tobacco and gambling. Sometimes referred to as a “sin tax” or “Pigovian tax” its intention is more to raise funds to deal with the consequences of the proliferation of the product in the society and to a certain degree hopes to work as a deterrent to the use of the product.

Rum Excise Tax
For almost a century, the excise tax collected on rum producers in Puerto Rico and the US Virgin Islands have been returned to the islands’ government for their discretionary use. In order to keep the rum producers happy, some of these funds were used as credits for the rum companies themselves, such as the Puerto Rican government’s “Rums of Puerto Rico” advertising campaign on the mainland. (View website). Up until recently, Puerto Rico and the USVI collected about $13.25 per proof gallon sold, or almost one-half billion dollars annually. At the end of 2007, the amount returned to the islands was lowered to $10.50/ppg. The bailout sweetener reinstated the return of excise tax funds retroactively to the original level of $13.25/ppg and extended it until the end of 2009.

Spread out over 10 years, the tax refund reinstatement will cost about $192 million dollars.

Getting Screwed
The kicker is in the details. Having an extra $192 million dollars is pretty nice given the current hard economic times of Puerto Rico and the Virgin Islands. Now why would rum producers lobby Congress to reinstate the level of excise tax returned to the islands? Obviously, it has to be that the rum producers are good corporate citizens and wish nothing but health and happiness for the people of the land that bases their production facilities, right? Wrong!
As it turns out, Diageo, the makers of Captain Morgan (#2 selling rum in the world) and other spirits, worked out a deal with the Virgin Islands government to have a brand new plant built in St. Croix to the tune of $500 million dollars, in effect, abandoning Puerto Rico for a more lucrative treasure chest. The USVI’s government will also generously pick up the tab for 90% of Diageo’s income tax and exempt it from paying any property taxes for the next thirty years. Oh and did I mention, a $2.1 billion dollar marketing subsidy, as well as, a subsidy on molasses? Where is the USVI getting all this money? Yeah, that’s right… the EXCISE TAX! Diageo’s Captain Morgan mutinous move to St. Croix will cost Puerto Rico an estimated $6 billion dollars in lost revenue. In other words, the excise tax reinstatement is going straight back into the rum producers’ pocket. It appears to be a very slick move indeed. But wait, there’s more. Do you think that the Bacardi Corporation, the world’s largest rum producer, plans to sit on their hands and not take advantage of this golden opportunity to extort the Puerto Rican government for greater givebacks? In short, the $192 million dollar “tax break” will have a much deeper and costlier effect. In order to keep the Bacardi plant on the island, Puerto Rico will be forced to grant more tax breaks to the corporation and other rum producers. Simply put, the excise tax, which is meant to protect the people from the ill consequences of rum consumption will now be used to subsidize the rum itself.
This is a bounty even Captain Morgan himself would have been proud of. “Arrgh”

Read more on this subject: Marcus Stern in

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