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Thursday, May 12, 2011

Pierluisi Introduces New Bill to Reform and Protect the Rum Cover-Over Program

WASHINGTON, DC- In a renewed effort to reform and protect the rum cover-over program, Resident Commissioner Pedro Pierluisi today introduced legislation that would prohibit the government of Puerto Rico and the government of the U.S. Virgin Islands from providing subsidies to rum producers that exceed 15% of the federal excise tax revenue the territory government receives each year.

The legislation, entitled the “Investing in U.S. Territories, Not Corporations Act of 2011,”
would ensure that at least 85% of cover-over revenue received by each government will be used to provide critical services to the people of the territories, rather than to enrich major corporations.

“Using funds provided under the federal cover-over program to give excessive subsidies to companies is completely indefensible. It destroys the purpose and integrity of this important program, which was intended to help the territories provide essential government services, like health care, infrastructure development, education, and land conservation,” said Pierluisi.

Also today, Senator Robert Menendez (D-New Jersey) introduced legislation identical to the Resident Commissioner’s, in order to maximize the chances that the proposed reforms to the cover-over program will become law.

“Everybody knows that we have to reform the cover-over program to ensure that taxpayer money is being invested in vital public services for the U.S. territories, such as building roads, hiring teachers, and providing health care. This bill would ensure that both territories will have more money for these integral services to create jobs and help the lives of working families, instead of that money being used to provide excessive subsidies to large, profitable corporations,” said Senator Menendez, a member of the Senate Finance Committee, which has jurisdiction over this issue.

In 2008, during the administration of Governor Aníbal Acevedo Vilá, Diageo, the world’s largest producer of spirits and the owner of the Captain Morgan brand—announced it would move its operations from Puerto Rico to the U.S. Virgin Islands in 2012. Diageo chose to relocate on the condition that it would be provided with subsidies—paid for with federal cover-over revenue—in an amount equal to 47.5% of the cover-over revenue the USVI would receive from the U.S. Treasury in connection with Diageo’s move. As a consequence of these excessive subsidies, Puerto Rico is expected to suffer billions of dollars in economic damage, as well as the loss of hundreds of jobs.

In addition, and as expected, the Diageo deal has already generated a “race to the bottom.” In the wake of the Diageo deal, the USVI entered into a equally generous deal with Fortune Brands—a multi-billion dollar conglomerate that produces Cruzan rum.

Under the cover-over program, rum produced in Puerto Rico and the USVI and imported into the United States—as well as rum imported into the U.S. from foreign countries—is subject to an excise tax of $13.50 per proof gallon. Under current law, $13.25 of that amount is granted to the treasuries of the territories, based on each territory’s proportion of rum production.

In addition to capping annual subsidies at 15%, Pierluisi’s bill would ensure a fair and
reasonable allocation of federal cover-over revenue between the two territories. Specifically, the bill would direct the U.S. Treasury Department to allocate cover-over revenue to each territory in proportion to that territory’s production, provided that Puerto Rico’s share will not be less than 65% or greater than 70% and the USVI’s share will not be less than 30% or greater than 35%.

“This is an essential provision. Puerto Rico has over 97% of the population of the two
territories. In recent years, Puerto Rico has received about 80% of annual total cover-over revenue and the USVI has received about 20%. However, the allocation of federal cover-over revenue between the territories will change dramatically starting in 2012 when Diageo begins production in the USVI, with Puerto Rico’s share potentially decreasing to around 50%,” explained the Resident Commissioner.

“Under current law, the amount of cover-over revenue a territory government receives is based entirely on the amount of rum that is produced in that territory. This rule has turned the territory governments from allies into adversaries, as each government competes to offer more generous deals to rum producers. And every dollar spent to subsidize a rum company is one less dollar that goes to help the people of Puerto Rico and the U.S. Virgin Islands. My bill would end this destructive process,” added Pierluisi.

In addition, the Resident Commissioner’s legislation would guarantee accountability and transparency in the rum cover-over program, by requiring each territory to submit an annual report to the U.S. Treasury detailing the amount and type of assistance it is providing to its rum producers.

The Resident Commissioner’s legislation to reform and protect the rum cover-over program is co-sponsored by Representative Darrell Issa (R-California), the chairman of the powerful Committee on Oversight and Government Reform, as well as by Representatives José Serrano (D-New York), Don Young (R-Alaska), Michael Grimm (R-New York), Ileana Ros-Lehtinen (R-Florida), Dan Burton (R-Indiana), and Walter Jones (R- North Carolina).