Manual The Rum Excise Tax Cover-Over: Legislative History and Current Issues

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Maguire and Teefy , p. The USVI acted entre- preneurially, but Puerto Rico was unwilling to offer Diageo a similar incentive because the cover-over funds were used for decades to supplement various public programs. Rum Excise Tax 33 Table 1. With all the resistance against the distributive shift favoring the USVI, it begs the question of which is the more successful strategy, using the cover-over to fund public programs or to entice FDI?

Currently, Puerto Rico is the only case where an assessment can be done because of the extremely recent shift in cover- over distribution. The endogenous growth theory explains that the infusion of money into an economy is useful only if that money is invested in technological development and growth. Puerto Rico has stated repeatedly that it supplements its annual operating budget with this money, and it is clear that the loss of this money would have a significant effect on its spending.

In examining the effects on the workforce, it also does not seem as though there is much benefit to luring a large MNC to the islands past the shift in cover-over distribution. The argument can hardly be made that using the cover-over to attract foreign investment brings new jobs.

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This is an interesting statement for two reasons. The portion that is not given to the rum MNC and is left to the discretion- ary use of the USVI government will not be much larger than the pre-Diageo cover-over share. Second, although Puerto Rico invested an overwhelming amount of its cover-over monies into public programs, its growth has been stagnant for almost three decades. Both entities are fight- ing over a relatively small amount of revenue generated by the excise tax, with no guarantee of future growth of this fund.

Over the course of the past century, the Puerto Rican government became dependent on the cover-over to sustain its annual operating costs and provide basic social services to its population. By refusing to change its tactics to keep Diageo and the excise tax monies, Puerto Rico signaled what was most important to it, using this money to help the people of the island rather than pay a company to stay and continue generating the revenue.

This strategy could be one of principle, in that Puerto Rico recognizes that it needs assistance budgetary, development, and more. By committing to using that money for public programs rather than as an investment incentive, the island government hoped that Congress which ultimately continues to retain legislative control over the excise tax code would recognize that this money was originally developed as a means toward some sort of dependent development and would possibly be willing to legislate how this money could be used, but the U.

Congress is currently occupied with the economic downturn that is affecting the mainland United States and not necessarily with the stunted development of its Caribbean colonies. In the past 30 years, it has become obvious that a country needs to be able to attract FDI to develop in this globalized economy. Puerto Rico and the USVI are constrained in being able to compete in this type of developing economy. Puerto Rico has had a minimum wage since the Fair Labor Standards Act, although it was not the same minimum wage as on the mainland.

Congress had provided a lower minimum wage for the island that would allow it to remain competitive in the Latin American market. Department of Commerce, , pp. Instead, they are dependent on a legislative body in which they have no vote to be mindful of their political and economic situation. These colonial entities are forced to fight over the scraps of an excise tax and manipulate it in such a way to attract a small bit of investment that will, in turn, bring more of the tax money to their islands, which will then be returned to the MNC.

If the United States is interested in assisting development in Puerto Rico and the USVI, it should commit to real strategies, such as repealing the minimum wage laws to make the colonies more competitive in the global market, investing more in education, and bringing permanent jobs to the islands to keep the educated population at home. Becoming embroiled in this rum war by siding with Puerto Rico or the USVI will not help to solve the crux of the problem, which is chronic dependent underdevelopment. On the other hand, others insist that changing U.

Instead, these critics support the solution of full independence for Puerto Rico. By signing a year deal with Diageo, the USVI did not create new jobs for their population, but instead guaranteed the favored share of the cover-over funds for themselves. While both commonwealths place the utmost importance on the cover-over as their path to greater independence from the U. The cover-over provides some intermediary effects that create the illusion that Puerto Rico is doing well and is economically stable. The Puerto Rican government was quick to note that when the shift in distribution occurs, their tenuous economic situation will be very apparent.

The same can be anticipated for the USVI. They will be receiving the bulk of the cover-over monies until , but a good portion of that will be given to Diageo as part of their agreement. The USVI will be left with a much smaller increase over their pre allotment.

Since the USVI government insists that it will be investing this money in infrastructure and social programs, the Puerto Rican case is a good predictor of how the cover-over will affect growth. Other developing states are able to entice foreign investment by offering cheaper labor and tax breaks, but Puerto Rico and the USVI have to enforce U. In a bill introduced in the U. Senate in early , the federal government sought to restrict how much of the cover-over money could be used to reward foreign investors.

This bill died in committee and has not been reintroduced as the focus in Congress has turned toward other issues on the mainland. Diageo has shifted its production there because of incentives based on future cover-over monies. In the meantime, Puerto Rico is left to deal with the economic consequences of its dependence on U. S invest- ment and the loss of the cover-over tax monies.

Her research focuses on trade dispute resolution as well as U.

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References Adams, S. Can foreign direct investment help to promote growth in Africa? African Journal of Business Management, 3 5 , — Alfaro, L. FDI and economic growth: The role of local financial markets. Journal of International Economics, 64, 89— Allen, G. Rum money ignites brawl between US territories.

National Public Radio [Radio broadcast]. Bauman, N. Drunk on corporate welfare. The Washington Times. World Development, 24 5 , — BBC News. Agglomeration, adjustment, and state policies in the location of foreign direct investment in the United States. The Review of Economics and Statistics, 89 1 , 30— Rum Excise Tax 37 Bosworth, B. Economic growth. Collins, B. Soto-Class Eds.

Broadway, R. Perspectives on the role of investment incentives in developing countries. Shah Ed. Oxford: Oxford Univer- sity Press. Buettner, T. International Tax and Public Finance, 14 2 , — Burtless, G. Labor supply and public transfers. Castillo-Freeman, A. Freeman Eds. Chicago: University of Chicago Press. Collins, S. Introduction and summary. Commonwealth of Puerto Rico. Comprehensive Annual Financial Report. Tax treaties and foreign direct investment: Potential versus performance. Interna- tional Tax and Public Finance, 11 6 , — Dietz, J. Imperialism and underdevelopment: A theoretical perspective and a case study of Puerto Rico.

The Review of Radical Political Economics, 11, 16— Economic history of Puerto Rico: Institutional change and capitalist development. Puerto Rico: Negotiating development and change. Boulder, CO: Lynne Rienner.


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