Delegate Donna M. Christensen and Puerto Rico Resident Commissioner Pedro Pierluisi urged the U.S. Congress to once again extend the cover-over of federal excise taxes to the territories at $13.25 per proof gallon and not allow it to decrease, cutting into revenues to the territorial governments.
The federal government currently collects $13.50 in excise taxes on each proof gallon of locally produced rum sold throughout the mainland. Of that amount, $13.25 is remitted to the V.I. government, based on a complex formula based on the relative volumes of Puerto Rico and Virgin Islands rum exports.
Christensen introduced legislation a week ago to extend the rum cover-over for two years from $10.50 per proof gallon to $13.25. Congress has traditionally extended the cover-over with little dispute or controversy. But budget cutting zeal in Congress has put more attention on the extension than in some past years.
The rum cover-over has yielded approximately $100 million annually to the Virgin Islands treasury. Its yield is expected to rise with increased production from the Diageo and Cruzan plants. Proceeds are traditionally used to back bonds for capital improvement projects.
“The rum cover-over is part of the fundamental tax relationship between the United States and its territories that goes back over 100 years, before there was even an income tax,” Christensen testified Thursday before the House Ways and Means Subcommittee on Select Revenue Measures, according to a statement from her campaign. “It is not a tax credit or a tax benefit for businesses or individuals. The cover-over does not increase or decrease taxes,” she said. “The tax policy behind the cover-over is not temporary or new.”
Christensen joined other members of Congress before the subcommittee to explain to new members of Congress and the committee what tax extenders like the rum cover-over and others are and what they do for various jurisdictions across the country.
In her testimony, Christensen explained that Congress imposed the tax on products manufactured in the Virgin Islands and Puerto Rico to protect stateside manufacturers from untaxed manufacturers in the territories. “The tax imposed on rum manufactured in the Virgin Islands and Puerto Rico and shipped to the United States is not an ordinary excise tax intended to raise revenue for the United States, but an ‘equalization tax’ intended to regulate commerce between the territories and the United States to preserve a ‘level playing field’ between territorial and mainland distillers,” she said.
“Today the Virgin Islands government issues bonds backed by these rum taxes to finance schools, hospitals and other essential public works in the territory,” she said. “Any funds not encumbered are used to support general expenses of the government and modernize the rum industry.”
Christensen emphasized the role the rum cover-over will “also help mitigate significant revenue losses associated with the recent decision by Hovensa to shut its oil refinery on St. Croix, the largest private sector employee in the territory.”
Pierluisi also spoke of the historic tax relationship between the United States and its Caribbean territories. “The territories are treated unequally under many federal programs and the cover-over program helps to compensate for this fact,” he said.
“The purpose of the program is to provide budgetary support to the territorial governments and historically funding has been used primarily for economic development, healthcare, infrastructure, education and land conservation.” he said.
Pierluisi said the extender has enjoyed bipartisan support and have had a positive impact on both territories. “I hope the subcommittee will take action to prevent the economic harm that would result if (the cover-over) is not renewed.”
