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The Big Switch At Captain Morgan

For years, Captain Morgan rum has been produced at the Distileria Serralles (DonQ Rum) distillery in Puerto Rico. Production is moving in 2012 to a new distillery St. Croix owned by Diageo. This makes a huge difference in revenues to Puerto Rico and St. Croix.

I'll explain it as I understand the situation, and if your understanding is better/different I hope you will correct me in the comments.

The US government has a tax rebate plan to bring revenue to US territories based on a business incentive. All of the rum sold in the US is taxed (no matter where it is from) and that tax goes back to the US territories to the countries at the ratio in which it is produced in those countries. So if Puerto Rico produces 50% of the rum sold in the US and St. Croix produces 30%, then not only do these territories receive a tax rebate from the rum they've sold to the US, they also get an additional 50 or 30 percent of the tax from other rums sold in the US.

The program has been in place for many years. The reasoning for it is explained well here.

Because of this plan and the volume of rum produced in these territories, the tax incentives are very important to the territories. Thus, the territories provide incentives to the distilleries that make the rum to encourage them to stay there. Previously Puerto Rico had provided something like five percent of the returned tax to the company to provide incentive for them to stay there. Then St. Croix got the clever idea that in order to entice Captain Morgan to be produced there, they would give them something in excess of 40 percent of the taxes back as an incentive to relocate there. For them, it was all new money.

For Puerto Rico (and for the Serralles distillery), this represents a huge loss in income and employment. For St. Croix, it represents a large increase. For the American taxpayer, it represents a disgusting increase in corporate welfare. Diageo profits in the billions even without the incentive, but you can hardly blame them for taking it.

Now other companies have demanded to be reimbursed in the same amount as Captain Morgan from their governments with the threat of relocating (and got it).  I would imagine that soon all American territory distilleries will get the same ridiculous 40 percent rate.

Some proposed solutions to the problem were to cap the amount that could be given back to these companies at a certain percent, or to have the revenue be divided by the population of the territories rather than the proportion of rum produced in them. So far these measures have failed. I would guess that when all the distilleries are receiving a forty percent rebate that congress willl get wind of the amount of corporate welfare and the whole program will be scrapped as a cost-savings maneuver. And then the US territories would lose 100% of their money that could have gone for roads and schools and health care for their citizens as it was intended.

 

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