In hopes of ensuring Cruzan Rum’s competitiveness, market share and continued revenue stream to the government’s coffers, the V.I. Legislature voted Friday to increase government subsidies to the distillery based on its bulk rum production to match those provided by Puerto Rico to its distilleries.
The legislation, requested by Gov. John deJongh Jr., amends the territory’s 2009 agreement with Cruzan dedicating remitted rum tax revenues to pay for bonds to expand Cruzan and build a wastewater treatment plant. The 2009 agreement sets up a schedule of gradually declining subsidies. For Cruzan’s bulk rum, that subsidy was 40 percent of bulk rum-related federal excise tax revenues through 2010, reduced to 31.5 percent in April of 2011 and reduced again to 18 percent at the beginning of this month.
Under the schedule approved Friday, the bulk rum subsidy will decrease from 31.5 percent to 25 percent, rather than the 18 percent provided in the 2009 agreement. And this enhanced incentive will remain in effect through 2018, so long as Cruzan meets detailed bulk rum sales goals, rising from 7.4 million gallons this year to 9.5 million gallons in 2018.
Without the changes, Cruzan would lose millions of gallons of bulk rum sales, costing the territory millions of dollars in cover-over federal excise tax revenues, Cruzan’s corporate owners and administration officials testified during a recent Committee of the Whole hearing in Frederiksted.
According to Cruzan Rum President Gary Nelthropp, competitors knew Cruzan’s bulk rum incentive rate would be going to 18 percent and as a result, Puerto Rico suppliers have been provided a rate of at least 25 percent by the government of Puerto Rico.
Puerto Rico’s Seralles distillery, which manufactured Captain Morgan and other rum for Diageo until Diageo built its facility on St. Croix, has been directly competing for, and wooing major bulk rum customers away from Cruzan, because the difference in subsidy levels means Cruzan cannot match their prices, Nelthropp and others with Cruzan and parent company Beam Global Spirits say.
"Looking at the Virgin Islands over the last 40 years we have lost our watch industry and our dairy industry," said St. Croix Sen. Sammuel Sanes, urging support of the bill. "None or few were owned by Virgin Islanders, but they employed hundreds. When people think about St. Croix, they think about Cruzan Rum. … Are we going to sit back and let Cruzan Rum fade away like those other industries?" Sanes said.
Sen. Nereida "Nellie" Rivera-O’Reilly, a St. Croix senator who has been critical of the administration and of its wooing Diageo with generous tax subsidies, also spoke in support of the measure. O’Reilly said it is difficult for a small territory like the U.S. Virgin Islands to compete with Puerto Rico, with its nearly four million people and vastly larger government resources. Ultimately, the two territories need to cooperate rather than compete, she said.
Meanwhile, "We are going to vote for this because we have to protect our cover-over revenues, because they provide close to one-third of our budget now," O’Reilly said. "People have to understand how serious this is."
Sen. Louis Patrick Hill painted a similarly stark picture, saying if the territory did not match Puerto Rico "we are essentially saying that 70 percent of their business will go elsewhere, whether Puerto Rico or wherever. And we will have the remaining 30 percent and see how long that lasts."
Sen. Neville James, who vigorously opposed the deJongh administration’s 2008 tax benefit proposal to woo Diageo to the territory and opposed the 2009 agreement with Cruzan, expressed strong opposition to this change in subsidy levels too.
"Today is the reason why we did not support the Diageo deal, because we have opened a can of worms apparently in perpetuity," James said. "We are supposed to match what we believe Puerto Rico is supporting their rum industry but we don’t really know. … It is sad that Congress put in place a program for us to meet the needs of the people and now we are recycling that money back."
Voting yea on the measure were: Hill, O’Reilly, Sanes, Sens. Craig Barshinger, Carlton "Ital" Dowe, Shawn-Michael Malone, Usie Richards, Ronald Russell, Patrick Sprauve, Celestino White, and Alvin Williams. Voting nay were James, Sen. Alicia "Chucky" Hansen, Terrence "Positive" Nelson and Janette Millin-Young.
It now goes to deJongh for his signature, which, as the governor requested the measure, is not in question.