Such Delicious Subsidies: Puerto Rico and the Virgin Islands are engaged in a rum war. How will it turn out? Our taste buds need to know.

by Arin Greenwood on September 9, 2010

photo by Brandon King/Flickr, used under a Creative Commons license

Historically speaking, rum’s been implicated in some dastardly things – brutal hangovers, not to mention slavery.

Rum tariffs have also had serious policy implications – like the American Revolution. Wayne Curtis’s excellent book And a Bottle of Rum: A History of the New World in Ten Cocktails describes how the Sugar Act, passed by the British Parliament in 1764 to raise revenues for the protection of the colonies, led to the Revolution, quite probably: The Sugar Act led to molasses – and therefore rum, a favorite beverage among residents of the colonies – being harder to come by in the New World. Rum being harder to come by in the New World led to rebellion. Rebellion of course led to revolt, which led to the Revolutionary War. Paul Revere is said to have fortified himself with rum on the night of his most famous ride.

Now Puerto Rico and the Virgin Islands are engaged in their own skirmish over rum tariffs, which could have pressing policy and taste implications.

Puerto Rico and the Virgin Islands – both U.S. territories, neither paying U.S. income taxes – are the beneficiaries of a rum excise tax “cover-over,” under which all excise taxes collected on rum imported into the mainland United States are remitted back to these territories.

Where the rum comes from makes a difference as to how much each territory collects. While taxes on rums coming from most parts of the world are shared between Puerto Rico and the Virgin Islands, taxes on rums coming from Puerto Rico are returned only to Puerto Rico; taxes on rums coming from the Virgin Islands are returned only to the Virgin Islands.

Puerto Rico, which began receiving cover-over money in 1917, now has four rum-makers, including Captain Morgan and Bacardi, the world’s two biggest rums; the Congressional Budget Office reports that Puerto Rico received over $371 million in cover-over money in 2008. The Virgin Islands, which was included in the cover-over starting in 1954, has just one distillery for now; cover-over remittances brought the Virgin Islands about $100 million in 2008.

There aren’t restrictions on how the territories can spend the cover-over money – no mandatory alcoholism education classes or road-building mandates or anything like that – and, considering the point of the cover-over taxes is to improve the islands’ economies, it should perhaps not be shocking that much of this money has been used by both territories to subsidize and promote their rum industries. And yet it was shocking to some – especially those in Puerto Rico – when, a couple of years ago, the Virgin Islands decided to spend a lot more for that purpose. Like, billions.

In 2008 the Virgin Islands’s government entered into an irresistibly attractive 30-year agreement with Diageo – the company that makes Captain Morgan – to bring its Captain Morgan operations to lovely, sunny, St. Croix, which is currently home to white sand beaches and an oil refinery.

Under the terms of the 49-page Diageo agreement, Diageo receives a number of huge tax reductions and exemptions; the Virgin Islands government is also paying Diageo molasses subsidies, marketing support payments, and what is termed as “production incentive payments.” The payments will come from cover-over remittances. Critics of the agreement – like Pedro Pierluisi, Puerto Rico’s member of Congress – estimate that Diageo will receive between 40 and 50 percent of the Virgin Islands’s cover-over money; a local law prohibits Puerto Rico from spending more than 10 percent of its cover-over payments toward subsidization of the rum industry.

Trouble has ensued – public relations battles, dueling lobbyists, even legislation – so much trouble that the Virgin Islands has, reportedly, prepared itself for attacks from radical Puerto Rican rum-motivated terrorists.

Diageo has accused Puerto Rico-based Bacardi of ginning up animus against the deal – and of trying to undermine the Virgin Islands’ economy. In response to accusations of Congressional machinations having been implicated in the deal, Diageo released a statement saying:

“No member of the United States Congress played a role in negotiating or approving it. The agreement was created and executed in a fully transparent manner and was debated and voted on by elected representatives in the legislature of the US Virgin Islands. Any assertion or implication to the contrary is inaccurate and erroneous.”

If there wasn’t Congressional involvement in this war before, there is now. Pedro Pierluisi has introduced legislation that would punish “unreasonable” rum subsidies by giving them to the territory that did not give “unreasonable” subsidies. Under this legislation, subsidies over 10 percent of the amount that would ordinarily be covered-over to an island jurisdiction are per-se unreasonable. Both houses of the U.S. legislature are in recess now, and while the legislation has been referred to the House Ways and Means Committee, neither it nor companion legislation in the Senate, introduced by Senator Robert Menendez and referred to the Senate Finance Committee, are on the calendar.

Meanwhile, even while the legislature rests, the Captain moves forward. In August, one of the two new warehouses – where the rum will be aged – was completed; it’s evidently the first LEEDS-certified building in the Virgin Islands.

“The completion of this modern, environmentally-sound rum barrel warehouse facility brings us one step closer to becoming fully operational by January, 2011 at which time we will be producing and aging rum in St. Croix,” said Dan Kirby, Vice President, Operations, Diageo USVI, in a press release.

Beginning in 2012, all Captain Morgan rum destined for the United States will be produced in this plant. Puerto Rico stands to lose some $100 million annually because of the move. The Virgin Islands will gain an estimated $6 billion over the thirty years of the Diageo deal.

The new distillery will change the way Captain Morgan is produced. In Puerto Rico, the rum was produced by a third party. When Diageo bought Captain Morgan, it reportedly wanted to change this arrangement – to produce the rum in-house.

It stands to reason, then, that the rum itself could change. So while we are mainly agnostic on the battle between the Virgin Islands and Puerto Rico – except to note the suspicious smell of any government-subsidized industry, even one scented like fermented molasses – we do want to make sure our imbibatory needs are accounted for when it comes to choosing sides in this battle.

So it is that my partner Ray and I found ourselves at the Falls Church, Virginia tiki bar Clare and Don’s Beach Shack in early September, ready to drink as much rum as we must to thoroughly compare the rums of Puerto Rico and the Virgin Islands, ready to take a stand on who should win this rum war.

We asked our waitress to bring us one shot of every rum from Puerto Rico and the Virgin Islands. She did us one better, by bringing us one shot of every rum the tiki bar serves. Seven shots, in varying shades of brown, yellow, and clear, arrived at our table. Then three were taken away.

“Customers can only have two drinks each on the table at any given time,” said another waitress. “Virginia law. Sorry.”

The four shots left were Mt. Gay, from Barbados; Mt. Gay Extra Old, also from Barbados, Captain Morgan Vanilla Spiced Rum from Puerto Rico, and Captain Morgan Tattoo from Puerto Rico.

We started with the Mt. Gay. It was a watery yellow color. “Very light,” Ray said, taking a sip. “Hardly any flavor at all. Somewhat fruity.” I took a sip. It tasted like raw alcohol. I felt tipsy already.

Next we tried the Mt. Gay Extra Old, which was somewhat lager-colored. “Certainly stronger,” Ray said, trying it. I tried the rum. It tasted like whiskey.

“I think you’re essentially saying it tastes like alcohol,” Ray said.

Food came – onion rings and hush puppies. “This tastes like fat,” Ray said. “Breaded fat. Or fatted bread.” He drank some water and looked thoughtful. “I need to clean my palate,” he said.

Looking almost like a light Chardonnay, Captain Morgan Vanilla Spiced Rum, from Puerto Rico (for the time being!) came next. Ray noted its light flavor, and olfactory pungency.

“It kind of tastes like a flower,” he said. I took a sip, then another. I could hardly taste the alcohol at all, and took another sip.

Captain Morgan’s darker cousin, Heavily Spiced Tattoo, was our next rum. It looked like Coke, smelled like Coke, and tasted like Jack and Coke. Ray was a fan. I drank some more Vanilla Spiced Rum.

Our waitress took away the four half-empty shots and brought out our final three. We tried the Myers Original Dark, from Jamaica, which also looked a lot like a (watery) cola. Ray liked the bite, and its smooth-ish whiskey-ish taste. I thought it tasted like cheap whiskey, which brought back several unpleasant memories from when I was a graduate student in New York City.

Cruzan Mango, from the Virgin Islands, was clear and highly perfumed. Ray thought it was too sweet, but good at hiding the taste of alcohol.

“Yes,” I said. “It’s exactly what I would drink if I were eighteen and looking to get really drunk. I’d get a lot of this.” I didn’t mean it as an insult.

Our final rum was Bacardi Superior, a clear rum from Puerto Rico. I could barely stomach a sip. It was strong like a category 5 hurricane, and just as dangerous.

“Almost like a grain alcohol,” Ray said. “It’s good if you want to get hammered or go blind.”

Our waitress suggested that our remaining alcohol be turned into some fruity punches, so that we’d taste the rums the way rums are meant to be drunk: with the taste hidden. She came back with a Painkiller, a light red punch made of the rums that aren’t from Puerto Rico or the Virgin Islands, and a Goombay Smash, a pineapple festooned milkshake-seeming coconut drink made of the Puerto Rican rums. The Virgin Islands’s mango rum stood alone; its alcohol is already masked enough, and our waitress said it doesn’t mix well.

“I think I want the pineapple,” Ray said, eating the fruit.

“Why,” I said, “Is it not ok to put seven shots in front of us, but it is ok to put seven shots mixed into two – no, three, I guess – drinks in front of us?”

“Regulators,” Ray said, eating the orange slice from the Painkiller.

We tried and liked both drinks. The Painkiller was tasty and virginal like a fruit juice. The Goombay Smash had a nice coconut taste, but also still tasted strongly of alcohol; you knew you were getting a real drink with that drink. I sipped some more mango rum. It was still heavily perfumed, and seemed like it might induce diabetes. We ate some more fried food and evaluated the gustatory spread before us.

We could not say, based on our tasting, if Captain Morgan is likely to join better or worse company moving to the Virgin Islands; if it is likely to improve or get worse. It’s pretty good already, but not terrific, and the Virgin Islands doesn’t produce enough rums now for us to have a good comparison.

“In the final analysis,” Ray said, “Rum: a drink that’s meant to be mixed.”

The Real Final Analysis: Taxpayers may dislike rum subsidies, but probably won’t get more exercised about the subsidies at work in these rum wars than they would about the cover-over program generally. And, given the wide variety of dark, light, plain, spiced, fruited, and harsh Captain Morgan rums on offer, consumers won’t likely notice a difference between the Captain Morgan produced in St. Croix or Puerto Rico; there will still be a rum to suit any palate.

But the rum tariff war could still inspire revolt, which could still inspire revolution. The House this year passed a bill – sponsored by Pierluisi – that authorizes the government of Puerto Rico to conduct a plebiscite giving voters the option to vote on changing Puerto Rico’s relationship with the United States. Independence, you see, is always an option.

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  • dj

    First, the people of US Virgin Islands and Puerto Rico DO pay income tax. However, it does not leave the territory like states. Second, these subsidies are given to the territories to used “to boost their economies as they see fit.” These two territories cannot apply for the federal funding like states do because they are territories. So when people say their tax money is going to companies, it is not true.

    Puerto Rico has a poor relationship with many companies and that is why so many in the past few years have left the island. Diageo tried to negotiate a lease with the government of Puerto Rico, but the government never wanted to sit down with them like many other companies. Puerto Rico have been using this cash cow for decades and have not made a peep until they realized that when Diageo moves to the US Virgin Islands the money will go with them.

    For Congress or any other state to get involved is ludacris. When Boeing left Washington for South Carolina for tax incentive reasons, should congress or Florida get involved? NO!!!! How a state or territory spends it money in a free country is not up to another state.

    The money brought in will not only be for jobs; it will be for infastructure, development and the people. Shame on Puerto Rico and its coherts for trying to put a smaller territory down. If they cared about their money and their people, they would have sat down with the company and negotiated how to keep them. Ask the governor of Puerto Rico, how many companies pulled out of the island in the last few years becuase of their status quo governing.

  • BN

    You know, the article’s cool and all right up until you get to the horribly, disastrously ignorant rum tasting. Lord almighty, a red painkiller? I’m horrified. And I mean, Captain Morgan is a spiced rum – it’s flavored and sweetened. It’s not going to change with the location. That’s like asking whether Coca Cola is going to taste different when they open a new plant. And Mount Gay XO was the only rum in that list that is a sipping rum. There are hundreds of worthy sipping rums in the world.

  • Ken

    Ahh, there’s no politics like island politics. And if you want to taste test true Cruzan rum, then steer clear of the flavored varieties — they’re artificially flavored at a facility in Florida. The Cruzan Light, Dark, and 12-year are produced start-to-finish on the island.

  • Rickvaughn

    According to Wikipedia, re: Captain Morgan’s parent company: “Diageo is a global alcoholic beverages company headquartered in London, United Kingdom. It is the world’s largest producer of spirits and a major producer of beer and wine. Its brands include Smirnoff (the world’s largest-selling vodka), Johnnie Walker (the world’s largest-selling whisky), Josu00e9 Cuervo (the world’s largest-selling tequila), Baileys (the world’s largest-selling liqueur) and Guinness (the world’s largest-selling stout). It also owns 34 per cent of Mou00ebt Hennessy, which owns brands including Mou00ebt & Chandon, Veuve Clicquot and Hennessy.”

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