USVI And Puerto Rico Competing For Jobs Through Tax Policy

(MoneyWatch) 
Update -- As part of the reaction by Puerto Rico to the planned move of a rum distillery to the USVI its representative attempt to change the law relative to the use of the "cover-over" revenues used by the USVI and Puerto Rico from their rum production. The law would prevent the USVI from using more then ten percent of the funds to support the rum industry. The USVI was planning on using this revenue to pay back the bonds used to fund the construction of the distillery. As with many proposed laws the Congressional Research Service (CRS) reviewed it and its implications.

The CRS opinion only stated that the law was probably inconsistent with the law establishing the "cover-over" program. It also came to the conclusion that passing the law would most likely have a severely negative effect on the USVI's economy.

The USVI due to recent economic troubles had turned to the new rum distillery as a way to generate jobs and economic activity. The company owning it was planning on leaving Puerto Rico anyway and this move at least keep the jobs and tax revenues in the U.S. Obviously the USVI government is very happy to read the results of the CRS report.

As reported on BNET: Food this week the two American Territories of the Virgin Islands (USVI) and Puerto Rico are currently having a war of words and Congressional legislation over the planned move of the Diageo and Fortune Brands rum distillery. Both territories received a payback of the excise tax on rum produced there from the Federal Government. This provides revenue to the relatively undeveloped territories and makes up for the fact that they do not receive the same kind of funding the States do.

The core of the dispute is that the USVI is taking out bonds that will be paid back through the excise tax revenue to help build Diageo the necessary facilities. This new distillery will lead to over sixty direct jobs and hundreds of indirect ones in the Virgin Islands according to the Governor's office. Puerto Rico claims that three hundred direct and five thousand indirect jobs will be lost. Puerto Rico is obviously concerned with the loss of the economic contribution. Diageno was actually coming to the end of a contract with Puerto Rico and was thinking of leaving that island for another site possibly outside the U.S. The USVI can claim that at least this plan keeps the jobs inside the United States.

Puerto Rico has been countering the plans of the Virgin Islands by attempting to get legislation passed in Congress that limits the revenue the USVI will get from the excise tax "cover-over" program. This would make it hard for the bonds to be paid back as the general revenue and budget of USVI is limited. There is no real guarantee right now that this plan will work and the legislation will be passed.

The dispute illustrates how states and other government entities in the United States use economic enticements and tax breaks to lure businesses to set up within their borders. Certainly if a business does not have to locate itself in a particular place it can attract bids from different governments to help them be more profitable. It is not just between local governments but even different nations do this. The argument for these efforts is to grow the local economy providing jobs, tax revenue and money for investment.

The tax treatment of the rum produced in the territories is another example of this. It is because both Puerto Rico and the USVI get the "cover-over" revenue that this dispute is happening. If one of the two entities didn't get this there wouldn't be the money available for the new construction and investment. Of course Puerto Rico could be faced with losing the jobs and money anyway if Diageo up and moved to a Latin American country or another Caribbean island. As the USVI Governor, John P. deJongh, Jr, said "the "status quo" would have been a multinational company moving operations to a foreign country. That's not good for American workers or their local government. Instead, the USVI is keeping the company in the United States, locking in its jobs for three decades and generating revenue that will benefit the United States' poorest territory."

The impact of a decision made several decades ago as a way to spur investment in the U.S. territories is now due to the global economy causing friction and disputes between two of them. A friction that may lead to changes in U.S. law that in the end will hurt the U.S. and the territories economies and inhabitants.

Photo of Governor John P. deJongh Courtesy of His Office.