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Rum taxes meant for Puerto Rico, U.S. Virgin Islands may not be working as intended

MARY LOUISE KELLY, HOST:

When you buy a bottle of rum in the United States, there's a federal tax. All told, it adds up to more than $700 million a year. Now, most of that money goes to a special program to support Puerto Rico and the U.S. Virgin Islands. But Jeff Guo from NPR's Planet Money reports the program might not be working entirely as intended.

JEFF GUO, BYLINE: On the tiny Caribbean island of St. Croix in the U.S. Virgin Islands, there is this massive rum distillery. It looms on the horizon. It's got towering chimneys and storage tanks the size of townhouses.

So it's literally giant tanks and pipes and catwalks for, like, all the eye can see.

This is the Captain Morgan Rum Distillery. It single-handedly produces almost a quarter of the rum that Americans drink. And the reason they built it here has to do with what people here call the Rum Wars. You see; there's this decades-old law that says that most of the money from the federal tax on rum has to go to either the U.S. Virgin Islands or Puerto Rico. So if the rum comes from Puerto Rico, Puerto Rico gets the tax money. If the rum comes from the Virgin Islands, the Virgin Islands gets the tax money. But also, if the rum comes from anywhere outside the U.S. - if it's imported from, like, Jamaica or something, Puerto Rico and the Virgin Islands still get that tax money. They split it.

NEVILLE JAMES: Only two islands got this sweetheart deal - Puerto Rico and the U.S. Virgin Islands.

GUO: Neville James was a longtime local senator in the Virgin Islands. He says the idea behind the program is to help these two U.S. territories by giving them a guaranteed stream of income.

JAMES: So we're not 100% dependent on the federal government for appropriations.

GUO: But in 2008, the Virgin Islands made a controversial move. It realized that it could get a bigger share of the federal rum tax if it could lure over a major rum maker from Puerto Rico. So the Virgin Islands cut a deal with Diageo, the company behind Captain Morgan - promised Diageo millions of dollars in subsidies. It even paid for that huge new Captain Morgan distillery on St. Croix, all using taxpayer money. Neville James says Diageo really played the two islands against each other.

JAMES: It's too much money. I don't care how you slice it. That's giving away public money, man.

GUO: And it ignited a textbook example of a race to the bottom because, in response, Puerto Rico raised its own rum subsidies for local producers like Bacardi, which forced the Virgin Islands to give out even more rum subsidies in turn.

JENNIFFER GONZALEZ-COLON: Those were the Rum Wars.

GUO: Jennifer Gonzalez-Colon is Puerto Rico's representative in Congress.

Was there a winner in the Rum Wars?

GONZALEZ-COLON: Diageo.

GUO: The rum company.

GONZALEZ-COLON: Definitely - big winner.

GUO: These days, some 40% of the rum tax money sent to Puerto Rico in the Virgin Islands gets handed over to the rum companies. It used to be less than 10%. Albert Bryan Jr. is the current governor of the U.S. Virgin Islands.

ALBERT BRYAN JR: Sometimes I look at it, and I groan. But like my mom used to tell me all the time, half of something is better than all of nothing.

GUO: He says, still, this rum tax program is the largest single source of revenue for the Virgin Islands. But right now, the Virgin Islands is actually in a budget crisis because, a few years ago, Congress kind of forgot to renew part of the rum tax program. Governor Bryan says, in the territories, you sometimes feel like an afterthought.

BRYAN: To fix our problems, it's not a lot of money. I mean, our - worst - our problems are still in the millions. We're not in the billions yet.

GUO: For now, they're still waiting for Congress to do something. Jeff Guo, NPR News.

(SOUNDBITE OF TITO PUENTE'S "TI MON BO") Transcript provided by NPR, Copyright NPR.

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