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Monday, June 14, 2010

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

Steven Maguire
Specialist in Public Finance

Jennifer Teefy
Information Research Specialist

Under current law, the excise tax on rum is $13.50 per proof gallon and is collected on rum produced in or imported into the United States. For 2010, $10.50 per proof gallon of imported rum is transferred or "covered over" to the Treasuries of Puerto Rico (PR) and the United States Virgin Islands (USVI). In FY2009, PR received over $431.7 million in revenue and the USVI received over $115.4 million. The law does not impose any restrictions on how PR and USVI can use the transferred revenues. Both territories use some portion of the revenue to promote and assist the rum industry. In the 111th Congress, H.R. 4213 passed by the House on May 28, 2010, would increase the amount covered over to $13.25 per proof gallon—the amount covered over from 2002 through 2009.

The cover-over provisions for rum extend as far back as 1917 for PR and 1954 for USVI. Recently, the United States Virgin Islands has dedicated a larger share of current and future covered-over revenue to help finance public and private infrastructure that would directly benefit the rum industry.

In the 111th Congress, legislation has been introduced to expand federal control over the use of covered-over revenue. Passage of H.R. 2122 (or similar legislation, S. 3208) would result in severe limits on Puerto Rico's and the USVI's ability to finance economic development projects with this revenue source. The legislation is likely in response to the recent economic development initiatives in the USVI financed in part by rum cover-over revenue.

This report provides a history and analysis of the rum cover-over program and current legislative efforts to modify the program. The congressional debate on this legislation could also lead to debate on the broader issue of the cover-over program more generally

Date of Report: June 4, 2010
Number of Pages: 15
Order Number: R41028
Price: $29.95

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