Prior approval of the rum tax cover-over payment left some questioning the future of the program and might lead to a rehashing of the Rum Wars. The cover-over allows for some U.S. territories to receive a tax rebate on sales of rum produced in their region. However, inconsistencies and corporate influence have left local governments of U.S. territories unsure about how much they will receive each year.

All alcohol is subject to federal taxes. The cover-over program returns a percentage of that money to the local governments of places like Puerto Rico based on the taxes collected from rum produced in their region and sold in the continental U.S. 

The U.S. Department of the Interior’s Office of Insular Affairs (OIA) announced the approval of $226 million to the USVI and $70 million to Guam as part of the rum cover-over program. However, last year the USVI received approximately $284 million, leaving a deficit of about $58 million.

The History of Rum Tax Cover-Over

The cover-over provisions for rum date back to 1917 for Puerto Rico under the Jones Act during President Wilson’s term in office. Then, during President Eisenhower’s administration, the USVI was added to the scheme under the Revised Organic Act of 1954. When USVI was added, it was argued that the people of the USVI would have greater control over their finances, rather than receiving the annual appropriation bill.

In the same year, Cruzan and Brugal began producing rum in the USVI. The logic behind these choices was that Puerto Rico and the USVI could better support themselves through increased industry and entrepreneurship. 

In 1984 with the passage of the Deficit Reduction Act, under the leadership of President Regan, increased the federal tax rate on spirits from $10.50 per proof-gallon to $12.50 (currently $13.50). At the same time, a cap was imposed on Puerto Rico and the USVI which left these territories with the previous $10.50 rate.

Normally, the tax-rate increase would have expanded the cover rate automatically, but Congress asserted that it questioned whether the cover-over was proper since none of the 50 states received the same type of rebate.

Contemporary Influences on Cover-Over Rates

Congresswoman Stacey Plaskett, the U.S. representative for the Virgin Islands, stated that “through various ‘tax extender’ pieces of legislation, those in Washington fighting for the interests of the Virgin Islands and Puerto Rico have been able to temporarily increase the cap to first $12.50 and then to $13.25 for short periods of time (usually one, two or three-year periods).”

In reaction to the aftermath of Hurricanes Irma and Marie, the Bipartisan Budget Act of 2018 was passed which enacted a 5-year increase of the cover amounting to $13.25. This most recent increase expired in December of 2021. In a statement, Plaskett said, “the [Bipartisan Budget Act] gave the Virgin Islands and Puerto Rico the unprecedented funding to rebuild the territories.” 

In March of 2021, prior to the expiration of the Bipartisan Budget Act cover increase, Congresswoman Plaskett and Puerto Rico Resident Commissioner Jenniffer González Colón attempted to gain traction for legislation that would remove the requirements for the federal rum tax refund program to be reapproved by Congress every two years. 

González Colón remarked, “The rum cover-over has been an invaluable tool for spurring economic development and creating well-paid jobs both in Puerto Rico and in the U.S. Virgin Islands.”

The Rum Wars

The issue of rum cover-over has been further complicated by the so-called Rum Wars. For a long time, the majority of cover-over went to public services. However, in 2008, Diageo brokered a deal to move the production of Captain Morgan from Puerto Rico to St. Croix of the USVI. As part of the deal, the USVI would subsidize Diageo by providing 47.5 percent of cover over revenues along with tax breaks and other incentives for 30 years, totaling $2.7 billion which included a $165 million distillery.

At the time Puerto Rico had already enacted a law to restrict assistance to the rum industry to 10 percent, but only about 6 percent was being given to the industry. Therefore, the Diageo deal initiated a major shift in how federal money was being spent and for a time created a rift between Puerto Rico and the USVI. 

As a reaction, in April of 2010, U.S. Senator Robert Menendez of New Jersey introduced the Reinvesting in U.S. Territories, Not Foreign Corporations Act in order to prevent the over-subsidizing of private liquor producers by limiting cover-over spending to 10 percent. 

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Menedez argued, “We need to assure U.S. taxpayers that the vast majority of taxpayer dollars going to the territories under this program are being used to rebuild schools, roads and hospitals and protecting the environment, instead of being passed off to multi-national corporations,” said Menendez. “This is about ensuring that taxpayer money is reinvested in the working people of the territories, not foreign corporations.”

The House Representative for the Virgin Islands at the time, Donna M. Christensen, in response said, “As Diageo is not going to return to Puerto Rico, this bill can only be seen as a way to punish the company and to create an unfair advantage for others in the industry.”

Around the time of the Diageo deal, Fortune Brands acquired Cruzan Rum. The multi-national company reached a deal, similar to the Diageo arrangement, in order for Cruzan not to leave St. Croix. This also involved a 30-year commitment and included financing for the construction of a wastewater treatment plant and a 46.5 percent cut of cover over tax revenue collected on the company’s rum. These subsidies significantly reduce net costs meaning huge profits for the companies.

Partisan Reluctance 

Politicians, like U.S. Representative Clay Higgins of Louisiana, have campaigned on repealing the rum tax cover-over. Higgins states, “Over the past decade, subsidies have increased in both territories – being used for direct financial assistance, marketing, and development of supporting infrastructure. This disparity has left rum producers in the continental United States attempting to compete on an uneven playing field.” 

Legislation Left in Limbo

More recently, the Build Back Better legislation was meant to remove the limit on taxes that may be transferred to each territory. However, this entire section did not make it through Senate and therefore was not addressed.

As it currently stands, Puerto Rico and the USVI both feel they are not receiving enough tax revenue from rum cover-over. At the same time, companies have been able to leverage multi-billion dollar deals because local governments fear losing a revenue source that they have relied on for over a century. This situation has allowed brands like Captain Morgan and Cruzan to remain some of the cheapest on the selves, but are the American people of the U.S. Virgin Islands and Puerto Rico left holding the majority of the bill?

If you want to support these regions then you can purchase rums that are locally produced like Bones Virgin Islands Rum and Don Q. 

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