Senate Sweetens Rum Subsidies

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The governor will have the power to unilaterally increase the V.I. government’s cash subsidy to rum distilleries to up to 46 percent of their federal excise tax bill on V.I. production, thanks to legislation approved Wednesday at the request of Gov. John deJongh Jr. The legislation gives the V.I. governor the authority to give benefits at the same level that Puerto Rico has granted its governor the authority to give.

The legislation was requested by Cruzan Rum officials, who testified in committee hearings that the company was rapidly losing all its bulk rum sale contracts to Puerto Rico, threatening the distillery’s survival. (See Related Links below)

The V.I. government penned an agreement with Cruzan in 2009 dedicating remitted rum tax revenues to pay for bonds to expand Cruzan and build a wastewater treatment plant, and setting up a schedule of gradually declining subsidies, starting at 40 percent of bulk rum-related revenues and then dropping to 18 percent. In 2012, deJongh proposed – and the Legislature approved – keeping it at that level, and Cruzan Rum President Gary Nelthropp testified that Puerto Rico was subsidizing its rum producers at 25 percent, and if the territory did not immediately match that level of cash infusion, Cruzan would lose sales and the territory would lose revenue.

Nelthropp made essentially the same case again, testifying before the Senate committee of the whole, June 13, saying Puerto Rico was subsidizing its rum producers more, so the territory needed to match it or Cruzan would go under.

“We – Cruzan and the U.S. Virgin Islands – have lost over 6 million proof gallons of annual rum production to Puerto Rico in just over two years. By offering superior incentives to its producers, Puerto Rico is reaping the rewards of Cruzan’s former business as we speak,” Nelthropp testified.

The legislation gives the governor power to increase benefits to 46 percent upon a "finding of necessity and require the governor to notify the Legislature with 30 days of such an agreement.”

Many of the senators said they were unhappy at giving yet larger cash subsidies, but that losing all the tax revenue and also Cruzan Rum was worse.

"If we don’t do this and no rum is sold, we won’t have money for the budget and we won’t have money to pay our bonds," said Sen. Donald Cole. He said he is prepared to give 46 percent, and the V.I. Government still gets 54 percent of the revenue.

Several senators pointed to the generous terms given to Diageo to attract it to the territory as the ultimate root of the difficulty.

"There is a rum war going on and we started it. The only thing to do is create a level playing field," said Sen. Craig Barshinger. He suggested Congress should end the spiraling of cash subsidies. "We are going to work with Puerto Rico and go to Congress and say we are going to limit the amount of cover-over revenue that can be shared" with the distilleries, Barshinger said.

Voting for the bill were Barshinger, Cole, Sens. Shawn-Michael Malone, Judi Buckley, Diane Capehart, Kenneth Gittens, Clifford Graham, Alicia "Chucky" Hansen, Myron Jackson, Terrence "Positive" Nelson, Nereida "Nellie" Rivera-O’Reilly, Clarence Payne and Sammuel Sanes. Voting no were Sens. Tregenza Roach and Janette Millin Young.

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