- The Washington Times - Tuesday, October 6, 2009

The outcome of a legislative tussle over rum taxes between Puerto Rico and the U.S. Virgin Islands remains in doubt, but there is already one clear winner — the House’s top tax writer, Rep. Charles B. Rangel, a New York Democrat who is pocketing campaign cash from both territories.

At issue are competing bills that could make or break a deal that lured rum producer Captain Morgan from its longtime home in Puerto Rico to a new facility in the Virgin Islands with the promise of billions of dollars in subsidies to the liquor company paid out of U.S. rum taxes.

Puerto Rico wants to drastically limit the amount of U.S. rum tax money the islands can give directly to the liquor industry, while the Virgin Islands wants to make permanent the rum-tax rebates to the territories, a change that would bolster its 30-year agreement to subsidize the production of Captain Morgan.

Mr. Rangel, a 20-term incumbent and chairman of the powerful House Ways and Means Committee, insists he is not being influenced to pick a winner in the island fight.

“My favorite is the one that carries the most votes,” Mr. Rangel said of the two bills being vetted by his committee.

Mr. Rangel, who faces a separate investigation by the House ethics committee for allegedly failing to report millions of dollars in extra income and business transactions, said he was not even being strongly lobbied on the bills.

“Besides Puerto Rico, you are the only one who has asked about it,” he told The Washington Times.

But the U.S. Commonwealth of Puerto Rico isn’t just asking Mr. Rangel about the legislation.

It has shot up to second in the ranking of places from which Mr. Rangel collected campaign contributions in the current election cycle, according to data compiled by CQ MoneyLine.

Donors in Puerto Rico poured $36,600 into Mr. Rangel’s war chest, an amount surpassed only by the $138,400 from donors in his home state of New York.

In four of the five previous years, the Virgin Islands ranked in the top 10 sources for contributions to Mr. Rangel. Puerto Rico didn’t make the list in any of those years.

Contributions to Mr. Rangel from the Virgin Islands totaled more than $167,00 between 1999 and 2008. More than half of that - $84,800 - was given during the 2007-08 election cycle, just as the islands sealed the deal to relocate Captain Morgan and give the liquor company about $2.7 billion in tax credits and other subsidies over 30 years.

Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington (CREW), said such campaign contributions are not illegal unless there is a quid pro quo, or an agreement by the member for specific legislative action in exchange for the money.

Still, she said she had no doubt the contributions were intended to sway Mr. Rangel. Otherwise, Puerto Rico and the Virgin Islands would have been contributing to the lawmaker long before the rum tax issue came to the fore.

“It’s depressing, but it is not illegal,” she said. “One would hope members of Congress would not be influenced by campaign donations, but they obviously are, or else people wouldn’t be making campaign donations.”

Puerto Rico and the Virgin Islands receive most of the $13.75 tax levied on each gallon of rum imported from their territory, a total of about $470 million a year returned to the islands in what is known as a tax “cover over.”

The payments did not get much attention until recently, when the Virgin Islands won the relocation deal by agreeing to spend much of its share on huge subsidies - including paying for a $165 million rum distillery it built on St. Croix - to Captain Morgan’s owner, London-based Diageo. Diageo is the world’s largest alcoholic beverage company, with brands that also include Smirnoff, Johnnie Walker, Baileys, J&B, Jose Cuervo, Tanqueray, Guinness and Crown Royal.

Captain Morgan, a spiced rum named after 17th-century British privateer Sir Henry Morgan, is the second most popular rum brand in the world behind Bacardi, also a Puerto Rican rum. About 90 percent of Captain Morgan sales are in North America, according to Diageo.

Bacardi and Puerto Rico’s other local rums didn’t flinch at the Diageo deal. The diminished competition on the island is expected to help their businesses.

Puerto Rico’s bill would impose a 10 percent cap on the amount of rum tax revenue the islands can spend on direct subsidies to rum producers. It would undermine the financing plan for the Virgin Islands’ Diageo deal, but both sides say it would not stop the move by Captain Morgan.

Puerto Rico’s delegate to Congress, Democrat Pedro R. Pierluisi, sponsored the bill, which has seven co-sponsors, including Reps. Jose E. Serrano, Nydia M. Velazquez and Ways and Means Committee member Joseph Crowley, all New York Democrats with sizable Puerto Rican constituencies.

By contrast, the Virgin Islands-backed bill would make the payments to the islands permanent and secure ongoing financing for the Diageo subsidies. Currently, just $10 of the $13.75 per gallon tax is dedicated to the islands. The remaining $3.50 sent to the rum-producing territories is reauthorized regularly by Congress.

The U.S. Treasury ends up with only 25 cents per gallon from the rum tax. The rebates to the islands are intended to support economic development and social programs, goals the Virgin Islands says will be achieved when Captain Morgan creates between 150 and 300 jobs on the island.

“It’s about our economic development pillar that has been there forever,” said Monique Watson, spokeswoman for Democrat Donna M.C. Christensen, the Virgin Islands’ nonvoting delegate to Congress, who introduced the bill.

Diageo takes a similar view, saying the public-private partnership with the Virgin Islands is exactly the sort of economic development Congress envisioned when enacting the rum tax refund to the territories more than a half-century ago.

“The USVI-Diageo partnership is well-balanced,” the company said in a statement. “Diageo commits to manufacture its premium brand, Captain Morgan, on St. Croix for at least 30 years; the operation of Diageo’s state-of-the art rum distillery, coupled with more than $6 billion in cover over revenues generated by the new distillery, injects irreplaceable long-term stimulus into the USVI economy; and the USVI provides Diageo with lawfully enacted incentives to promote rum production.”

Puerto Rico Gov. Luis Fortuno, speaking with The Washington Times late last month during one of his frequent visits to Washington, said the 10 percent cap on subsidies would prevent more of the rum tax from being diverted from island residents to foreign business interests.

“Otherwise, we’ll just enter into a fight, a turf war, over how much money I’m going to give the next company, instead of supporting the local population and the government,” he said.

CREW’s Ms. Sloan said the real scandal in the link between campaign contributions and congressional policy is how run of the mill the practice is in Washington.

“No one bats an eye,” she said. “They all claim that there is no connection [between contributions and legislation], which is obviously a lie.”

• S.A. Miller can be reached at smiller@washingtontimes.com.

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