It’s that time of year! The post-election so-called “lame duck” session of Congress is once again upon us, and Capitol Hill is abuzz with a burst of near-frantic activity. Lame duck is the brief period when an ending Congress convenes to pass appropriations measures and complete undone legislation. It occurs between Election Day and the swearing-in of newly elected members of the House and Senate that convenes the next Congress.
Of course, in such instances, many members are not coming back, so it’s always a good time to evade accountability for actions and votes. As such, these sessions of Congress have become notorious for the passage of bloated spending bills and legislation that could not pass during a regular session, where scrutiny and accountability is actually a thing. Mostly.
Anyway, one of the items potentially being raised during this lame-duck period we find ourselves in is an extension of something called the “Rum Cover-Over.” Simply put, it’s a loser and should absolutely not be extended. Stick with me here.
All distilled spirits are subject to an excise tax that can be up to $3.50 per proof-gallon. When it comes to rum, the cash collected is returned to the governments of Puerto Rico and the U.S. Virgin Islands. This cash return was originally marketed as a way to aid struggling U.S. territories in need of resources to provide basic services for residents. Good intentions, indeed, but like so many such things, it has morphed into a big subsidy for the manufacturers of rum in those two territories and is not, in fact, used by the governments to provide services. According to the Center for Investigative Journalism, as far back as 2007, 40% of the money sent to the territories goes back to three corporations that manufacture rum – and more power to those companies for securing the subsidy, but the tax provision was not geared towards subsidies for corporations. In short, Rum Cover-Over has become nothing more than a crony provision where the purchasers of rum are taxed and the proceeds don’t go to the U.S. treasury but again are ultimately split between the corporations that manufacture rum and the territories.
According to Adam N. Michel of the Cato Institute in an explanatory blog post published back on Nov. 14, 2003, “more than three-quarters of the US tax collected ($10.50 per proof-gallon) on rum produced internationally is split between the two territories based on their share of domestic production.” The Cover-Over increased to $13.25 as part of tax extenders legislation since the late 1990s but expired at the end of 2021. So there has been a long-standing push to restore the higher rate. As Michel argues, and I agree, the best policy here would be to abolish all federal excise taxes on spirits to remove this abused tax provision from the tax code.
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One big problem with this tax provision is that there is an incentive for Puerto Rico and the U.S. Virgin Islands to increase rum production in a way that greatly harms continental rum producers. The Heritage Foundation explained in a Budget Blueprint for FY 2023 titled "Repeal the Rum Excise Tax Cover-Over," “the unintended consequences of the cover-over program have led both Puerto Rico and the U.S. Virgin Islands to manipulate their economies to maximize federal subsidies. The ensuing subsidies race distorts the economy by placing continental U.S. rum producers at a disadvantage, fuels local corruption, and destabilizes local government budgets due to constantly fluctuating cover-over values.” Using Congressional Budget Office data, they calculated that Puerto Rico receives and will receive “$3.8 billion in mandatory outlays during the FY 2023–FY 2032 period for Puerto Rico’s portion of the cover-over” and the Virgin Islands “would cause approximately $3.3 billion in mandatory outlays during the same period.” A repeal would save taxpayers $7.1 billion in mandatory outlays during that ten-year period. This is a staggering amount of money that either should be returned to consumers by abolishing the excise tax or used to pay down debt if retained by the U.S. Treasury.
It seems like low-hanging fruit to spike this provision and not add an extension for the Rum Cover-Over in the Lame Duck session. Next year, as part of a broader tax reform effort, Congress can get to work on the abolition of all excise taxes on distillers and alcohol as a whole. That would solve the problem while protecting rum consumers from paying a silly tax that is not serving its original purpose.
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