President Barack Obama’s Fiscal Year 2016 budget proposal, released Monday, would allocate $211 million in rum cover over payments for the U.S. Virgin Islands, along with millions of dollars potentially available in competitive grant funding. The local budgetary impact will be much smaller as most of that money will go to debt service and direct cash payments or subsidies to the territory’s rum producers.
The president’s budget assumes Congress will pass extender legislation keeping the alcohol excise tax cover over to the territory at the top rate of $13.25 per gallon, as it has reliably, if belatedly, done in the past, according to a statement from the Department of the Interior’s Office of Insular Affairs.
Longstanding federal legislation encourages the territory to offer tax breaks in exchange for rum companies to set up here. At the same time, the federal government collects $13.50 in excise tax for every proof gallon of alcohol imported into the United States. By law it returns at least $10.50 per proof gallon to the Virgin Islands and Puerto Rico, in accordance with the level of importation.
Another $2.75 per gallon – bringing the rate of cover over to $13.25 per gallon – must be approved by Congress every two years in tax extender legislation that includes a wide array of temporary tax provisions.
Without that recurring legislation, the rate would drop to $10.50 per proof gallon, taking millions away from the territorial treasury.
Every year the federal government advances the territory the projected excise tax revenues for the year, based on estimates provided by the territory’s local rum producers: Beam Inc., which owns Cruzan Rum, and Diageo PLC, which produces Captain Morgan’s Rum.
The territory received roughly $257 million in advance rum tax payments in FY14. (See Feds Release Full Advance Rum Payment, Reducing V.I. Deficit)
In September, the Department of the Interior’s Office of Insular Affairs accepted the governor’s estimate of the 2015 collections amount of $166.95 million, which was based on the lower per proof gallon rate of $10.50. As a result, if the tax extender legislation is approved yet again in the next Congressional cycle, it will mean more money for the territory for next year’s budget. Obama’s budget proposal assumes the extenders will be passed and the territory will receive the full amount, which will be good news if the Republican-controlled Congress follows suit.
The rum tax revenues underlie most of the government’s capital debt, add to the government’s coffers and heavily subsidize the territory’s rum manufacturers. In 2014, roughly $82 million of the rum revenues went to debt service, for example, and in 2015, a net sum of about $20.5 million out of more than $200 million ultimately covered over to the territory went toward the government’s operating funds.
The funds are part of Obama’s proposed FY16 budget of $643.6 million for the Department of the Interior’s Office of Insular Affairs. The OIA budget includes $103 million in annual appropriations and $540.6 million in permanent and indefinite appropriations mandated by law to the U.S. Territories and the Freely Associated States, according to a statement from the OIA.
“President Obama’s 2016 budget request demonstrates his strong commitment to the U.S.-affiliated insular areas,” said Assistant Secretary for Insular Areas Esther Kia’aina in a statement that outlined some of the specific spending priorities affecting U.S. island territories including the USVI.
“The request supports quality of life in the insular areas by bolstering programs aimed at improving K-12 public school facilities and confronting energy security challenges,” Kia’aina said.
The U.S. Virgin Islands would be eligible for a share of $103 million in annual appropriations to address a variety of technical assistance and operational programs in all the U.S.-affiliated island communities. Some noteworthy items include $7 million to address climate change adaptation and resilience; $4.4 million to pursue sustainable energy strategies; $5 million in school maintenance; $17.5 million in technical assistance for insular area governments; and $27 million in mandatory funding for capital improvement projects.
For other territories, OIA’s proposed budget includes $22.8 million to support American Samoa’s government operations. And OIA estimates Guam would receive $71 million in tax payments from active-duty military and federal retirees on Guam. These payments, known as Section 30 funds after the law authorizing them, are collected by the federal government and transferred to Guam to support public safety, health care, education and other public services and operations.
Obama’s 2016 budget request also includes $228.6 million in payments to the Federated States of Micronesia, the Republic of Palau and the Republic of the Marshall Islands to promote economic advancement and budgetary self-reliance in support of the relationship between the United States and these island nations codified in the Compacts of Free Association. Obama’s budget includes a legislative proposal to enact an agreement with Palau on reforms, $250 million in funding and exclusive U.S. military access to Palau’s waters.
About $31 million is included for Compact Impact grants to American Samoa, Guam, the Northern Mariana Islands and Hawaii to help pay costs from increased demands on health, educational, social or public safety services due to migration from the Freely Associated States, whose citizens are permitted under the Compact to enter the United States to live, work and attend schools.