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

By Dan Eggen
Washington Post Staff Writer
Tuesday, June 22, 2010; A11

It's the preferred drink of Caribbean tourists and swashbuckling pirates alike, and now it's at the heart of a nasty political dispute: The rum wars have come to Washington.

A fight over federal rum taxes pits Puerto Rico against the U.S. Virgin Islands and is sparking rare public tensions among Hispanic and African American lawmakers in Congress.

Put simply, the argument involves whether tax dollars can be used to lure a Captain Morgan Rum distillery from Puerto Rico to the Virgin Islands, a project highly coveted for the tax revenue it promises.

The Virgin Islands, a relatively poor, majority-black territory of about 120,000 people, has promised nearly $3 billion in tax subsidies to the owner of Captain Morgan if it moves the rum-making operation to St. Croix, the largest of its three main islands. The money will come from rum taxes the U.S. government gives back to the territories; the Virgin Islands will use the rebates to help build a distillery for the company and provide it cash payments for the next 30 years.

Virgin Islands officials say the deal, along with a similar agreement benefiting the Cruzan rum brand, is an economic development coup that will deliver several hundred jobs and millions of dollars in new rum-tax revenue for roads, schools and other projects. "We are keeping companies in America . . . and strengthening our economy," said John P. deJongh Jr., governor of the Virgin Islands.

But Puerto Rico, which stands to lose $120 million in annual rum-tax revenue, is pushing Congress to step in. That side portrays the Captain Morgan deal as a U.S. taxpayer bailout for Diageo, the London-based spirits conglomerate that also owns Dom Perignon, Johnnie Walker and other prominent brands.

The conflict has become so bitter that the organizers of this month's National Puerto Rican Day Parade in New York dropped Diageo as a sponsor after decades of brand support.

"We have never disputed they have the right to leave," said Rafael Fantauzzi, president of the National Puerto Rico Coalition, which helps organize the parade and advocates on behalf of the island territory in Washington. "The problem is that the U.S. Virgin Islands has created a very bad precedent with federal funds. It's supposed to be going to the territories, not to a large, foreign-owned corporation."

Looming over the debate is the issue of race: On Puerto Rico's side are several prominent lawmakers with ties to the territory or to the Congressional Hispanic Caucus, including Rep. Jose E. Serrano (D-N.Y.) and Sen. Robert Menendez (D-N.J.), the lead sponsor of a Senate amendment aimed at quashing the rum deal.

Lawmakers on the side of the Virgin Islands include 18 members of the Congressional Black Caucus, who signed a letter last month opposing Puerto Rico's attempts to undo the agreement.

Donna M. Christensen (D), the Virgin Islands' non-voting member of Congress and a CBC member, said that "it's not necessarily a black-against-Hispanic issue, though I know some people see it that way." Instead, she said, it's a David vs. Goliath tale, noting that Puerto Rico has 4 million residents and a similar number with ties to the island who live on the U.S. mainland.

"The advantage that Puerto Rico has over the Virgin Islands is tremendous, in terms of the money they can raise for campaigns and lobbyists and everything else," Christensen said. "We can never compete with them on that level."

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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