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Puerto Rico, Virgin Islands go head to head on rum, fueling tensions in Congress

Some backers of Puerto Rico, meanwhile, accuse the Virgin Islands and its supporters of fanning ethnic tensions. "Diageo consultants are the ones that are making this a racial issue so no one can touch it," Fantauzzi said.

Diageo and the owner of Cruzan, Illinois-based Fortune Brands, defend the agreements as model public-private partnerships that will bring jobs and infrastructure to the Virgin Islands. Together, the companies have spent more than $3 million on Washington lobbying since the start of last year, including work on the rum-tax issue, records show.

Bacardi, which produces rum in Puerto Rico and opposes the deal as an improper use of U.S. tax dollars, has spent about $1 million on lobbying during the same period. The various parties employ dueling communications professionals at Edelman (for the Virgin Islands), Burson-Marstellar (for Bacardi) and Ogilvy (for Puerto Rico) to wage their public relations battles.

Tax rebate system

At the heart of the dispute is a 93-year-old system of tax rebates administered by the federal government, which collects a $13.50-per-proof-gallon excise tax on all rum sold in the United States and then returns $13.25 of that to the two U.S. territories. The Virgin Islands would see its revenue under the program nearly triple, to about $250 million a year; another $150 million or so would be given to Captain Morgan and Cruzan as subsidies, officials said.

The two sides disagree on whether Diageo had already decided to leave Puerto Rico before the Virgin Islands deal came together. Virgin Islands supporters note that Puerto Rico would benefit financially if the company moves to a non-U.S. Caribbean location, since federal excise taxes from rum made outside the two U.S. territories are divided between them. Diageo has accused Bacardi of making "a calculated decision to try to drive a competitor out of the United States" to preserve such payments, a charge that Bacardi and Puerto Rico deny.

Backers of Puerto Rico say the playing field is tilted because Puerto Rico abides by a self-imposed 10 percent limit on subsidies to the rum industry, a standard that it wants Congress to require for the Virgin Islands as well. Pedro R. Pierluisi (D), Puerto Rico's resident commissioner in the House, says that without such a limit, the arrangement is akin to the federal government giving money to one U.S. state to lure jobs from another.

"If we allow Diageo and Fortune Brands to get a subsidy to this level, we will probably have no choice in Puerto Rico but to raise the ante as well," he said.

Congressional action

The Virgin Islands has held off the challenge from its larger neighbor so far. The House passed a jobs-related bill last month without adopting an amendment sponsored by Pierluisi. The fight is now in the Senate, which will decide in coming days whether to adopt Menendez's proposal.

Steve Ellis, a spokesman for Taxpayers for Common Sense, invokes the Captain Morgan advertising slogan to argue that the deal is wasteful. "We're all going to 'have a little captain in us,' " he said, "because we're all going to be subsidizing a Captain Morgan's distillery in the Virgin Islands."

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