The Problem with Taxing Caribbean Rum

You’d think that when confronting the fiscal cliff, Congress would be able to stay focused on the task at hand. But who can resist a bit of rum?

The fiscal cliff bill included all sorts of provisions that had little to do with avoiding fiscal catastrophe. My favorite is the one that extends a rum tax that’s almost a century old.

Since 1917, the United States has levied an excise tax on rum imported into the country. That generates hundreds of millions of dollars a year. If the rum comes from U.S. territories Puerto Rico and the U.S. Virgin Islands, the tax revenue goes right back to those territories, where officials use much of it to subsidize rum production.

It’s a neat fiscal trick that currently subsidizes the production of rum giants like Bacardi and Captain Morgan. That production equals jobs in Puerto Rico and the Virgin Islands.

But you could argue that the subsidy gives those giants an unfair competitive advantage in the global marketplace. Which is what rum exporting nations elsewhere in the Caribbean have been saying, since well before the fiscal cliff debate really got going in Washington. They argue that subsidizing multinational corporations like Bacardi and Britain’s Diageo (owner of the Captain Morgan brand) will simply put smaller rum producers out of business.

You don’t have to be rum drinker to think that would be a shame. How did you feel the last time you heard about a new big box outlet driving a Mom-and-Pop store out of business?

Full disclosure: I’m an occasional rum drinker. And my preferred sugar cane-based beverage comes from neither Puerto Rico nor the Virgin Islands. It comes from Nicaragua, and it’s called Flor de Caña. Our guest on the program today, rum expert Edward Hamilton, recommends it, too.

I’m not sure that the company that makes Flor de Caña qualifies as a Mom and Pop operation. The Compañia Licorera de Nicaragua is part of one of the largest corporations in that Central American country.

But my point is it would be a shame if, thanks to U.S. subsidies, the rum industry were reduced to just a few big box-type multinationals, while smaller producers in places like Nicaragua or Jamaica or Barbados struggled.

That wouldn’t be good for a region that has few successful industries to rely on.