It has become commonplace anymore that any consumer of spirits has basically become inured to the federal fees applied to their preferred potable. The numerous “sin taxes” in various forms have been around probably since the creation of tax collecting, and has become something of a self-generating revenue stream; the government financial oppression drives us to drink, and it boosts their revenues as a result!
With any tax, as we well know, the creation of its collection is far too easy, and the repeal of such is damned near impossible. The ability to vacuum up more funds is too great, and the desire of a politician to spend money is too strong. We are hoping the Musk-Ramaswamy DOGE effort to eradicate wasteful spending is promising (though political cynicism has me sitting back and waiting for evidence.) If there is anything they want to add to their hit list, let me suggest the bat-guano nuts enterprise that is the Rum Cover-Over.
What I am discussing here is essentially a rum subsidy, but one that is very specific in nature that has morphed into something corrupt in practice. Just what is this Rum Cover-Over (RCO) anyway? This was a tax subsidy established in 1917 for the U.S. territory of Puerto Rico, then added the Virgin Islands in 1954, as a means of propping up those local governments that were struggling with economic pressures. A valid purpose initially, sure, but as with practically any government effort - especially those involving tax revenue - it unsurprisingly has become problematic.
This is both a complex issue and at the same time, an easily identified problem. We start with alcohol taxation. One of the methods of gathering revenue from distiller products is through the “proof gallon.” This is a measurement that taxes the alcohol content, roughly $13.50 per gallon, through a measurement at 50 percent alcohol by volume, with the payout higher or lower depending on the ABV content. Spirits at the common measure of 40 percent-80 proof, for example, are taxed at 0.8 of the rate.
The RCO comes into play this way: The U.S. government collects these proof-gallon taxes from all distillers, Puerto Rico and the USVI are exempted, and those governments receive full rebates. However – since the 1980s, the islands also share roughly 75 percent of the proof-gallon taxes collected by other international distillers of rum. The payouts to the islands get measured by the ratio of rum produced between them, and this is where the corrupted practice comes into play.
The Puerto Rican Statehood Council tries to smokescreen this subsidy this way: “The Rum Cover-Over is a type of excise tax. Excise taxes are like sales taxes, but they’re paid by the manufacturer or distributor of a product, not by the person buying the products.” Sure, and you can pull this leg and it will play “Jingle Bells.” The consumer will always pay. This is no different than looking at the prices of older bourbons, as an example.
A primary reason aged spirits are so much costlier is the distiller pays a tax annually on the barrels they have warehoused. A 12-year-old label is going to have a built-in expense that is four times higher than a standard bottle with a 3-year-old barrel life. Quite the racket for the feds; the distillers pay every year on a product for which they already paid. Now, factor in the “angel’s cut,” the amount of evaporation that naturally takes place in barrel-stored spirits, and you have not only a costlier product but less of it, making it even more expensive. Those are costs passed on to the consumer. For this reason, efforts to curtail what is essentially a bourbon property tax of sorts have been implemented.
Over time what has become a common practice with the RCO is that it has morphed into a subsidy for the distillers. The two territories, looking at not just maintaining but growing their cash flow every year, rely on the rum producers to put out more oftheir products. Both governments began subsidizing the rum producers, first by instituting advertising campaigns (such as “The Rums of Puerto Rico” effort), and then by placing a cap on molasses prices. This gives the companies such as Bacardi in Puerto Rico, and Cruzan in the USVI, an advantage over other distillers, stateside and abroad.
And it only got worse.
In 2003, looking at the balance sheet showing Puerto Rico receiving around 80 percent of the RCO funds - the USVI lured over the PR distiller Diageo to begin creating its popular Captain Morgan brands within its territory. It coaxed the company to relocate with what is beyond a sweetheart deal: USVI paid for a new distillery, guaranteed low molasses prices, a 90 percent reduction in property taxes, subsidizing 35 percent of advertising, and granting the company over 47 percent of the RCO revenue collected. It has been measured that the operating costs for Diageo are near zero.
Soon after, the USVI also then had to mollify its Cruzan distillery with similar incentives, as the company was crying poor, instead of “pour.” In Puerto Rico, they too began coddling their major brands. Bacardi - which had moved operations to PR in 1960 during the Castro revolution and pulled out of Mexico to dodge U.S. tariffs - soon was a recipient of grants and largesse, as was Destilería Serrallés, the makers of Don Q Rum. Any other American brands, as well as those in other Caribbean nations, are now effectively paying taxes to the five largest rum producers.
Between operational costs and the tax rebates, these distilleries are at a distinctive market advantage, in both distribution and shelf pricing. This comes as a result of a tax program meant to provide these U.S. territories with money for infrastructure and servicing the people, now seeing roughly half of those revenues paid out in the form of corporate welfare.
And those territory officials are always pushing to raise the tax rate on proof-gallons in order to boost their revenues, and those of the rum conglomerates.
It is well beyond time to announce “last call” on this Rum Cover-Over scam.
