The highest rates of childhood poverty in the United States are in the Virgin Islands and Puerto Rico, where half of all children under age 5 live below the poverty line. The Territories also share America’s highest unemployment rates, facing deficits so large that Puerto Rico alone has laid off at least 17,000 public employees. Considering the island’s population of 4 million, that’s the equivalent of giving a pink slip to everybody in Dallas.
Yet in the face of crushing poverty in both places, Congress is about to permit $2.7 billion in federal assistance be diverted instead to a British liquor conglomerate, as an incentive to move the Captain Morgan rum distillery from one Territory to the other.
The word “trillion” having become commonplace, it’s easy to lose sight of just how much is really at stake. The $2.7 billion being diverted to Diageo, PLC, would provide four years of college for nearly 200,000 students, room and board included, or pay unemployment benefits for more than 780,000 workers for one year. $2.7 billion is more than the $1.8 billion Diageo paid for Captain Morgan, and on a per-gallon basis, the subsidies are twice what it costs to distill the rum.
This lavish package of benefits was concocted two years ago, when the Virgin Islands approached rum companies throughout the Caribbean with an irresistible offer: Relocate here, they said, and we’ll give you half the rebates we receive from Washington of the federal excise taxes on your rum.
Rebates of the $13.25 per-gallon rum excise tax represent a principal form of federal assistance to the Territories, with funds apportioned based on each territory’s production. Captain Morgan, the world’s second largest-selling brand, will generate nearly $6 billion in federal excise taxes over the next three decades. Since Captain Morgan is currently distilled in Puerto Rico, excise tax rebates for the product last year generated $470 million for the Island — a considerable sum, especially considering that per capita federal assistance to the Territory is about half what it would receive if it were a state.
If allowed to go forward, the Diageo deal will see half those revenues instead given over to a private corporation, in the form of marketing and manufacturing subsidies.
It will set in motion a bidding war between the Territories, as each is forced to make ever greater offers to the rum companies, just to get them to relocate or maintain facilities. The victims will be America’s poorest citizens.
With so much at stake, Diageo has mounted a massive lobbying effort to protect the deal. The company spent a reported $2.25 million on its in-house lobbying team, then brought in DLA Piper for $770,000 to handle this and other issues. The firm of former Democratic Finance Committee Chairman John Breaux of Louisiana and former Republican Majority Leader Trent Lott was also recruited, at an undisclosed sum.
Initially, Diageo depicted the issue as a local dispute between neighboring U.S. Territories, a cynical gambit that appeared to pit the predominantly black U.S. Virgin Islands against Puerto Rico, whose population is overwhelmingly Hispanic. As opposition to the deal has gained momentum, Diageo has claimed a conspiracy by its competitors to drive it from the United States.
The real fight isn’t between Territories or competing rum producers. Rather, it’s a clash between America’s poorest citizens — in both Territories — and multinational corporations who would exploit their poverty to leverage bigger and more expensive relocation deals.
There’s no question both Territories have a legitimate interest in economic development, and yes, many places extend incentives for companies to relocate. The Captain Morgan deal, however, is corporate welfare on steroids, a package of benefits so sumptuous that it contradicts the humanitarian purposes for which the excise tax rebates were created in the first place.
Puerto Rico’s non-voting representative in Congress, Pedro Pierluisi, along with New Jersey Sen. Robert Menendez (D), have proposed a 10 percent cap on the amounts either territory could remit back to the distillers. Florida Sen. George LeMieux (R) has proposed a different approach, one that will distribute future excise tax rebates on a per capita basis.
Despite both parties’ boisterous expressions of concern about spending and corporate bailouts, however, both Democrats and Republicans have so far turned a blind eye. Meanwhile, a senior-level Obama Interior Department official has praised the “ingenuity and foresight” of those who concocted the deal.
What’s ultimately at stake is the future of the rum excise tax rebate program itself. With billions being funneled to foreign corporations, the Diageo deal risks the possibility that Congress might cancel the program altogether.
Before that happens, Congress and the White House should intervene.
There are 8 million Americans of Puerto Rican descent, 4.1 million living (and voting) on the mainland. We are a swing constituency for both political parties — and we’re watching.
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