Cruzan Rum will lose millions of gallons of bulk rum sales, costing the territory millions of dollars in cover-over federal excise tax revenues, unless the territory increases cash subsidies to match Puerto Rico, Cruzan’s corporate owners and administration officials told the Senate Friday.
Senate critics of the subsidies raised concern about Puerto Rico and the U.S. Virgin Islands bidding against one another, in a spiral of ever-lower tax collections, with Sen. Neville James suggesting the U.S. Congress should step in to address this problem.
The senate met in Committee of the Whole in Frederiksted to hear testimony on an administration to modify the government’s 2009 agreement with Cruzan to match Puerto Rico.
The federal government currently collects $13.50 in excise taxes on each proof gallon of V.I. 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.
Several agreements with Cruzan Rum and with the newer Diageo distillery on St. Croix allocate portions of those revenues to pay construction bonds for Cruzan and Diageo, as well as directly subsidizing marketing and molasses purchases with cash subsidies. In exchange, Diageo agreed to come to the territory and committed to stay for at least 30 years, and Cruzan similarly committed to remain in the territory.
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. For Cruzan’s bulk rum, that subsidy was 40 percent of bulk rum-related revenues through 2010, reduced to 31.5 percent in April of 2011 and reduced again to 18 percent at the beginning of this month, Cruzan Rum President Gary Nelthropp testified Friday.
"Given the transparency of our agreement our competitors knew Cruzan’s bulk rum incentive rate would be going to 18 percent. As a result, Puerto Rico suppliers have provided a rate of at least 25 percent by the government of Puerto Rico," Nelthropp said.
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 stealing major bulk rum customers away from Cruzan, in part because the difference in subsidy levels means Cruzan cannot match their prices, Nelthropp and others with Cruzan and parent company Beam Global Spirits, told the Senate.
Adding to its competitive difficulties, Club Caribe is constructing a new distillery right now in Puerto Rico, which will increase production capacity in the region, Nelthropp said. The construction of the Diageo distillery also increased production capacity, with the Seralles distillery it replaced continuing to produce bulk rum.
"This smaller reduction in our rate is intended to match the rate available to competing bulk rum producers in Puerto Rico – simply leveling the playing field," said Finance Commissioner Angel Dawson. If it is passed, 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, Dawson said.
Dawson emphasized that while the rate would be lower, if Cruzan loses substantial sales because it cannot compete, tax receipts will be lower, even if the tax rate is higher.
"(T)he bottom line, from the territory’s standpoint, is 75 percent of something is a lot more than 82 percent of nothing," Dawson said.
Several senators noted that there have been several changes to subsidy levels to distilleries both here and in Puerto Rico since Diageo was given generous tax breaks and subsidies to attract it to the territory several years ago, expressing concern about the appearance that the two territories were progressively bidding themselves out of tax revenues.
"The way I see it now is a cycling of monies back to the rum companies," said James, a member of the minority caucus who has been an outspoken critic of the Diageo agreement since it was proposed in 2008. "We have companies using jurisdictions against each other, having us fighting against each other to offer more benefits. … We need Congress to step in to establish parameters," James said.
No votes were taken at the information gathering session. The bill will be debated and voted upon during a legislative session scheduled for April 19 on St. Thomas, according to Senate President Ronald Russell.