The beer lobby is taking aim at a tax benefit for Puerto Rico and the U.S. Virgin Islands up for renewal this year that they argue unfairly subsidizes their rum-producing competitors, amid an escalating dispute with the spirits industry over how to tax new alcoholic beverage options.
The transfer of rum tax collections to the U.S. territories enjoys support on both sides of the aisle in Congress and would be a strong contender for a potential year-end tax package. But the squabble between beer brewers and liquor distillers is putting some new heat on the “rum cover-over.”
“The rum cover-over program has turned into a handout to large liquor companies,” a voiceover narrates in the Beer Institute’s minute-long ad on the issue. “Congress should take a hard look at this program and reform it to ensure that the people of Puerto Rico and the U.S. Virgin Islands get the assistance they need.”
The video is part of a “Stand with Beer” website that the Beer Institute — which represents the largest U.S. beer producers — launched this summer to tout its own benefits to the U.S. economy and question tax breaks that aid distilled spirits companies.
The U.S. collects taxes on rum like it does other spirits produced domestically or imported. But in a unique arrangement, it sends most of that revenue to the U.S. territories, which dominate the domestic rum market. Puerto Rico and the Virgin Islands split the tax collections based on their annual rum production levels.
Nearly all of the rum taxes the federal government charged — $13.25 per proof gallon out of $13.50 collected — were sent to the territories until the end of 2021. Then that bigger benefit lapsed back to $10.50 per proof gallon.
Restoring the higher revenue transfer, which the Joint Committee on Taxation has said would deliver over $200 million extra annually to the island territories, is a top contender if lawmakers can agree on a bipartisan “extenders” package this year.
Lawmakers behind a bipartisan proposal to revive the higher transfer say the cover-over is critical for economic development and supporting services like health care and education in the territories.
The sponsors — Sens. Bob Menendez, D-N.J., and Bill Cassidy, R-La., along with Resident Commissioner Jenniffer González-Colón, R-P.R., and Del. Stacey Plaskett, D-V.I. — also propose a new measure that would require a portion of the revenue to be sent to the Puerto Rico Conservation Trust, a private nonprofit dedicated to protecting the island’s natural areas and resources.
The Beer Institute doesn’t oppose the cover-over program as a whole. But they want curbs on how Puerto Rico and the Virgin Islands can spend the tax revenue.
“With so much money going back to the rum business interests, the residents of Puerto Rico and the U.S. Virgin Islands lose out,” the group’s ad says. “Instead of building schools, roads and bridges with your American tax dollars, large liquor companies are getting richer.”
Some like-minded lawmakers, including Louisiana Republican Rep. Clay Higgins and Senate Finance member James Lankford, R-Okla., have criticized the rum cover-over. They argue much of the money sent to the territories now ends up being used as subsidies for distillers or puts continental U.S. rum makers at a competitive disadvantage.
In his “federal fumbles” series, Lankford highlighted the cover-over as unfair to taxpayers and the territories’ economies because of the amount of money that’s increasingly gone to rum companies.
In 2017, Higgins introduced legislation to repeal the cover-over entirely, with backing from the American Distillery Institute and American Craft Spirits Association, and groups like the right-leaning Heritage Foundation have targeted it for elimination.
Fight for market share
Until the late 2000s, the vast majority of cover-over revenue was going to the territories’ general funds.
That changed when the Virgin Islands offered Diageo Plc, the London-based maker of Captain Morgan, incentives to leave Puerto Rico and instead distill its products on St. Croix, a move that would directly boost the territory’s share of cover-over revenue. That deal included subsidies for building the new distillery, income and property tax breaks — and a big slice of annual cover-over revenue.
Not long after, the Virgin Islands also agreed to subsidies for Fortune Brands, now owned by New York-based Beam Suntory Inc., for distilling its Cruzan rum there based on rum tax revenues. Meanwhile, Puerto Rico began delivering a hefty share of its cover-over revenue to its big rum makers, mainly Bacardi but also Don Q producer Destilería Serrallés and Club Caribe, according to a 2017 report by the San Juan-based Center for Investigative Journalism.
While the subsidies have drawn rebukes, attracting and keeping distillers stands to give the territories significant benefits. If rum producers leave, that territory’s share of the cover-over revenue falls, which would still impact local government services.
Still, lawmakers’ criticism combined with the beer industry’s new campaign could spark some friction, though it’s still likely the cover-over would have enough support if lawmakers can agree on a bipartisan set of tax provisions to extend in the coming weeks.
Ways and Means Chairman Jason Smith, R-Mo., has cited the provision as one with bipartisan support that could be extended. The panel’s top Democrat, Richard E. Neal of Massachusetts, said he hadn’t heard of any new resistance to extending the higher cover-over.
“It’s being discussed. It’s like everything else,” Neal said. “It’s more right now like an art form. It’s part of a series of ‘what if’ questions.”
The beer industry’s new strain of resistance to the rum cover-over stems from a larger tax dispute that’s embroiling beer and distilled spirits companies.
The Beer Institute’s campaign is a response to the distilled spirits industry’s efforts to secure lower tax rates for some products by having them taxed like beer, according to a spokesperson for the group. That fight has escalated recently with the rise of canned cocktails.
While hard seltzers like White Claw and Truly are taxed like beer, ready-to-drink beverages made with spirits like vodka, tequila or whiskey generally fall under distilled spirits tax rates. High Noon — launched in 2019 by E&J Gallo Winery — is a prime example of a seltzer drink that boasts its “real vodka” content and has rocketed to popularity. Other major players, like Jack Daniel’s Tennessee Whiskey, have rolled out ready-to-drink cocktails this year.
Beer companies argue the products are fundamentally different even if their alcohol content is similar. The Beer Institute spokesperson said production processes and costs differ, beer is perishable while liquor products are not, and that beer is heavier to transport.
The group’s new website touches on the state-level fight that has heated up the last couple of years, citing “wins” pushing against legislation to benefit canned cocktails in states including California, Texas and Minnesota. It also warns of “threats” in North Carolina, where there’s a proposal to cut taxes for ready-to-drink cocktails, and Pennsylvania, where there’s been a push to allow canned cocktails to be sold at retailers that can offer beer and wine.
While it isn’t directly part of the canned cocktail feud, the rum cover-over is a key “handout” that the Beer Institute is targeting on its new website. The group had previously stayed publicly quiet on the issue.
The Distilled Spirits Council has described the beer industry’s campaign as a misleading attack on liquor producers spurred by flagging sales. Revenues from spirits sales surpassed beer for the first time in 2022, according to the group, and ready-to-drink canned cocktails were the fastest growing spirits drinks that year with $2.2 billion sold.
In many states, spirits-based drinks end up paying far higher taxes than malt, sugar or wine-based canned beverages. The tax rate is 55 times higher in Washington and 50 times higher in Wisconsin, for example, based on data from the council.
“It’s clear the beer industry is desperate after years of losing market share to distilled spirits,” Distilled Spirits Council President Chris Swonger said in a statement. “Despite the fact the beer industry has for decades enjoyed significant distribution and tax advantages — with a tax rate that is more than two times lower than spirits — they are still losing consumers.”
The tax battle has no shortage of lobbying weight behind it. The largest brewing companies are part of the Beer Institute, including Budweiser and Michelob Ultra maker Anheuser-Busch InBev, Coors and Miller Lite parent Molson Coors Beverage Co., and Heineken USA, which also produces Dos Equis and Tecate.
The Beer Institute reported spending $680,000 on its in-house lobbying in the third quarter of this year including on the tax treatment of brewers and differentiation of alcohol tax rates. That’s on top of lobbying it did through D.C. shops including $50,000 of spending on Cornerstone Government Affairs, which employed a former Ways and Means tax counsel and chief of staff to a former panel member to address tax issues impacting beer makers.
There’s major lobbying heft behind the rum cover-over too. The Distilled Spirits Council includes companies that produce rum in Puerto Rico or the Virgin Islands like Bacardi and Cruzan parent Beam Suntory. The group spent $840,000 in the third quarter including lobbying on the cover-over and federal excise taxes.
Other groups that reported lobbying on the cover-over between July and September include governments of the Virgin Islands and Puerto Rico, the Puerto Rico Conservation Trust, Bacardi North America, Beam Suntory, Diageo North America, Serrallés and Louisiana-based Sazerac Co. which makes several rums including Parrot Bay.
Beam Suntory notes that it lobbies on “issues focusing on territory use of rum cover-over revenues” and “legislation to limit U.S. territories use of economic development incentives.”