Future Retirement Success
  • Politics
  • Business
  • Investing
  • Stocks
  • Politics
  • Business
  • Investing
  • Stocks

Future Retirement Success

Investing

The Hidden Cost of Your Federally Subsidized Rum: The Rum Cover-Over Program

by November 14, 2023
November 14, 2023
The Hidden Cost of Your Federally Subsidized Rum: The Rum Cover-Over Program

Adam N. Michel

As Congress considers year‐​end legislation, the rum cover‐​over program has resurfaced, sparked by the beer industry’s critique of the program’s design. It’s a good opportunity to highlight the macabre cronyism created by this little‐​known program that directly subsidizes a large portion of the rum consumed in the United States and around the world.

Under federal law, distilled spirits are subject to an excise tax, which can be as high as $13.50 per proof‐​gallon. Most of the taxes collected on rum produced in Puerto Rico and the US Virgin Islands are returned to the respective governments. 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 transfer of approximately $700 million a year in excise tax revenue from the US Treasury to the territories is called a “cover‐​over.”

The $10.50 cover‐​over has been increased temporarily to $13.25 on a recurring basis since the late 1990s, usually as part of a year‐​end tax extenders package. The pulsed‐​up amount lapsed at the end of 2022. Now, there’s a fight between the brewers and the rum distillers over whether to return to the higher cover‐​over.

The fight is tied up in a broader disagreement caused by poorly designed differences in how beer and spirits are taxed, creating disparities in the tax treatment of hard seltzers. The best policy would be for Congress to repeal the cover‐​over program (if not all federal excise taxes).

In the mid‐​2000s, the millions of dollars of cover‐​over revenue sparked a rum‐​subsidy war between the two territories when the Virgin Islands lured Diageo (owners of Captain Morgan) away from Puerto Rico. In 2010, Javiar Vazquez asserted that the subsidy—which included money for building a new distillery, income and property tax breaks, direct payments to cover operating expenses, and a portion of annual cover‐​over revenue—“is so huge that the net cost to Diageo to produce rum is zero.”

So as to not lose their share of rum tax proceeds, Puerto Rico responded with its own subsidies. According to the Center for Investigative Journalism, the cover‐​over program has padded the profits of Cruzan, Don Q, Club Caribe, and Bacardi, the last of which admitted the subsidies did not help create new jobs on the island. The subsidies also extend up the rum supply chain, subsidizing molasses production and sugar cane harvesting. 

The design of the cover‐​over program has forced Puerto Rico and the US Virgin Islands into a lose‐​lose competition in which they manipulate their rum industries to maximize federal subsidies—most of which are plowed back into the subsidy wars. US mainland rum distillers also lose as their large incumbent rivals receive lavish funding for production in the territories.

Though initially framed as vital fiscal aid for the struggling territories, the cover‐​over program’s operation tells a different story. The cover‐​over payments tend to destabilize local government budgets due to fluctuating cover‐​over amounts and constant lobbying for additional production subsidies. The subsidies can cost more than the benefit from the cover‐​over, and create problems when production moves. For example, when Captain Morgan moved to the Virgin Islands, it left a hole in the Puerto Rican budget as the cover‐​over revenue followed the production.

At the very least, Congress should not renew the temporarily higher cover‐​over amount in a year‐​end package. The program’s uncertain and sporadic reauthorization over the past several decades has only exacerbated Puerto Rico and the US Virgin Island’s fiscal challenges.

0
FacebookTwitterGoogle +Pinterest
previous post
Sector Spotlight: Sector Rotation and Macro Insights for the Economic Cycle!
next post
Breaking Down Taiwan’s Arms Backlog, Part 3: Comparing the Trump and Biden Administrations

You may also like

Cato’s new Globalization Quiz Tests Your Knowledge (and...

September 26, 2023

Friday Feature: Hope Education Consulting

April 11, 2025

It Is Not Too Late to Rethink the...

November 2, 2023

Concerned About Learning Loss? Let Funding Follow Students

December 11, 2023

There Is No Good Reason to Revoke Birthright...

January 23, 2025

Milei Has Deregulated Something Every Day

December 9, 2024

Three Scenarios for Turkey’s Election: The Good, the...

May 8, 2023

The Misleading Correlation Between Teen Vaping and Teen...

October 18, 2024

CBDC Legislation Recap

July 6, 2023

Two Types of Debanking: Operational and Governmental

February 4, 2025

    Get free access to all of the retirement secrets and income strategies from our experts! or Join The Exclusive Subscription Today And Get the Premium Articles Acess for Free

    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Disabling Trump’s “Tariff Button”

      June 5, 2025
    • ‘Sick puppy’ Tim Walz should never have been on Dems’ 2024 ticket, Trump says

      June 5, 2025
    • Federal judge orders Trump to restore funding to Clinton-era agency gutted by DOGE

      June 5, 2025
    • Musk says Trump would have lost 2024 election without him as ‘Big Beautiful Bill’ feud continues

      June 5, 2025
    • Ex-Biden adviser calls Jean-Pierre ‘kinda dumb,’ deletes tweet, says she’s not a ‘genius-level Black woman’

      June 5, 2025
    • ‘Coming for us’: Expert sounds alarm on CCP’s mission to ‘kill Americans’ after FBI makes shocking arrests

      June 5, 2025

    Categories

    • Business (8,148)
    • Investing (2,010)
    • Politics (15,535)
    • Stocks (3,128)
    • About us
    • Privacy Policy
    • Terms & Conditions

    Disclaimer: futureretirementsuccess.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2025 futureretirementsuccess.com | All Rights Reserved