Federal Aid Distilled into Liquor Co. Profits

On each gallon-proof of liquor produced outside the U.S. mainland and imported there, a $13.50 tax is collected. When the liquor is made in Puerto Rico and the Virgin Islands, all but 25 cents of that tax goes back to the two territories as economic aid. Typically that means $400 million for Puerto Rico—where Diageo and Bacardi make their rum—and $80 million for the Virgin Islands, home to Cruzan. But now the Virgin Islands have figured out a way to siphon off some of Puerto Rico's business. It has offered Diageo half the rum tax money to move production to the Islands and stay for three decades (a deal 10 times sweeter than Diageo gets from Puerto Rico). Diageo would also get a 90 percent discount on income tax, pay no property tax, and a $165 million distillery. Puerto Rico, which stands to lose $6 billion from the deal, is trying to get a bill through Congress to make the Virgin Islands match its limit on the rum tax rebate at 10 percent. But the bill won't make it out of committee, thanks to lobbyists being paid millions to keep it from doing so. In fact, it's the lobbyists who could come out of this deal the best. Diageo paid its in-house lobbyists $2.25 million, plus another $780,000 to outside firms. The Virgin Islands paid lobbyists $270,000. Puerto Rican interests have spent $160,000.