I get a lot of liquor press releases every day. Usually they’re about new products or horrible, horrible cocktails designed for marketing efforts. Today’s batch includes a release that’s all about trade and taxes:
MERCEDITA, Puerto Rico–Destilería Serrallés released the following statement from Roberto Serralles, Vice President, in response to a 13-page invective issued by Diageo yesterday claiming a conspiracy to “kill” the Captain Morgan Rum production deal between Diageo/U.S.V.I.
“Destilería Serrallés has consistently highlighted the dangers of permitting that unreasonable and excessive rum subsidies be given to any corporation. Our main focus has been, and continues to be, for Congress to hold hearings and to study the merits of HR 2122. This legislation seeks to responsibly regulate the rum cover-over program by placing an-across-the-board 10% cap on subsidies to the rum industry. This is exactly how Puerto Rico has self-regulated itself for over 40 years. All we are asking is that the playing field is kept level, that fair competition prevails, and quite simply, that everyone plays by the same rules,” said Roberto Serralles, on behalf of Destilería Serrallés. “Assertions to the contrary are just delusional conspiracy theories.”
This is the latest salvo in a long-running battle between industry giants Bacardi and Diageo and by extension Puerto Rico and the US Virgin Islands. Understanding the conflict requires delving into some bizarre aspects of the tax code, so let’s break it down. (And if you want to read Diageo’s lengthy statement, click here.)
For background, there are three main spirits industry players involved in this dispute. Destilería Serrallés is a Puerto Rican distillery owned by Bermuda-based Bacardi and best known for its DonQ rum line. Diageo is a British-based spirits company whose many brands include Captain Morgan spiced rum. Diageo contracts with Serrallés to distill the base spirit for Captain Morgan. The contract expires at the end of 2011 and Diageo announced three years in advance that it would not renew the contract. [Correction 2/25/10: Serrallés is independent, not owned by Bacardi. Bacardi's involvement is alleged by Diageo.]
Virgin Islands Governor John deJongh, Jr. successfully courted Diageo to open its own distillery on St. Croix. Among the incentives offered by the USVI are a brand new distillery funded by public bonds and marketing money to promote Captain Morgan; in exchange, Diageo promises to stay in the territory for 30 years and hire local workers. The Wall Street Journal places the value of these subsidies at $2.7 billion over the 30-year deal.
So far this sounds like fairly standard competition between jurisdictions to offer sweetheart deals to corporations, but it gets more complicated. At issue is a strange US tax provision called the rum cover over. This law requires that most of the rum excise taxes collected in the US be remitted to the governments of US rum-producing territories. They receive the funds in proportion to how much rum they produce. Importantly, it doesn’t matter what countries the taxed rum comes from. If you buy Puerto Rican rum, the revenue goes back to US territories. If you buy Jamaican rum, the tax money still goes to US territories. Territories benefit no matter where rum sold in the United States originates.
This is what has created such perverse competition between Puerto Rico and the Virgin Islands. Puerto Rico knows it’s not going to be distilling Captain Morgan much longer, but where Captain Morgan ends up is of huge importance to Puerto Rico. If Captain Morgan goes to a foreign country PR will still reap the benefits of the rum cover over. But if Captain Morgan goes to the Virgin Islands, USVI will become a proportionally larger distiller and get a correspondingly greater share of excise tax revenues; this is the money USVI is counting on to pay back the public bonds it issued for Diageo.
According to the Miami Herald, the loss to Puerto Rico could be as high as $6 billion over three decades. Thus the territory has enlisted legislators to block the Virgin Islands deal, resulting in a heated battle between the territories and the liquor giants.
It’s hard to put any of the parties involved on a pedestal. Serrallés itself receives significant subsidies from the rum cover over program, about 6% of Puerto Rico’s take (again according to the Herald). Nor is it really fair for Puerto Rico to begrudge the Virgin Islands greater allocation of excise tax revenues, given that the alternative is Puerto Rico taking lots of money for rum it doesn’t even produce if Diageo moves to a foreign country.
The real problem is our insane tax code that sends revenue to territories for rum they may not produce and with no strings attached. Thanks to the rum cover over provision, US taxpayers may soon be funneling their money through the Virgin Islands government directly to Diageo. If you’re Diageo you call that a “historic and innovative public-private initiative.” If you’re a libertarian you call it corporate welfare.
My inclination is to side with Bacardi/Serrallés on this one and support a 10% cap on rum subsidies. Or better yet, we could eliminate rum subsidies entirely, a proposition neither Bacardi nor Diageo is likely to support.
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Following the lead of New York’s David Paterson, Massachusetts Governor Deval Patrick has proposed new taxes on tobacco, candy, and soft drinks. Cigars may be hit especially hard:
It would also increase taxes on smokeless tobacco and cigars, generating $15 million for the state. (Administration officials said a $2 cigar that now costs $2.76 would jump to $4.46.)
As cigarette taxes hit their maximum and states lose revenue to SCHIP, they’re going to turn to other forms of tobacco. This will leave cigars especially vulnerable. They can’t be smoked quickly like cigarettes, making them much harder to consume under smoking bans. Nor do they enjoy the cartel protections of the Master Settlement Agreement.
Note also that Boston is scheduled to force its six remaining cigar bars out of business.
[Via the Stogie Guys.]
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The real anti-beer action could be taking place in DC:
Joe Six-Pack may have to hand over nearly $2 more for a case of beer to help provide health insurance for all.
Details of the proposed beer tax are described in a Senate Finance Committee document distributed to lawmakers before a closed-door meeting Wednesday. Senators are focusing on how to pay for expanding health insurance for an estimated 50 million uninsured Americans, a cost that could range to some $1.5 trillion over 10 years. [...]
While many of the revenue raisers involve obscure provisions of federal law, most consumers can relate to a beer tax.
Taxes on wine and hard liquor would also go up.
And there might be a new tax on soda and other sugary drinks blamed for contributing to obesity. A tax of 3 cents per 12-ounce drink would raise about $50 billion over 10 years, according to congressional estimates. Diet drinks, however, wouldn’t be taxed.
Thanks to Jason Kuznicki for the link.
Previously:
The wages of sin taxes
Oregon hates its bar industry
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It’s easy to get discouraged fighting the often losing battle for consumer freedom on tobacco issues, but this article made my day:
Pipe and cigar smokers along with those who buy snuff and chewing tobacco in Hawaii are getting a four-month, $400,000 state tobacco tax holiday because of an error in a tax law written by the state Legislature.
House Bill 895 was vetoed by Gov. Linda Lingle, who said it was filled with technical mistakes. The Legislature overrode the veto, and now some of those mistakes are becoming apparent.
“It contains major technical flaws that defeat the purpose of the legislation and will make it virtually impossible to implement,” Lingle wrote in her veto message.
The inadvertent tax holiday was caused by a mistake in the bill that did not specify the tax on tobacco products other than cigarettes during the period from enactment until Sept. 30.
That error, according to legislative researchers, will result in a $400,000 loss in revenue.
And that’s just the beginning of the law’s problems. If you live in Hawaii, stock up this summer!
[Via Cigar Jack.]
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The folks at Blue Oregon love love love paying taxes. “It’s an honor and a privilege to do so,” wrote Carla Axtman on Monday. Today Steve Novick goes even farther and willingly pays more than he is required to:
In completing my tax forms, I decided to make a symbolic statement of concern about what’s going to happen to our state: I didn’t take the $50 tax credit for political contributions, even though I made several times that amount in political contributions. I’m not exactly rolling in dough these days - I made a little over $40,000 last year - but I figured the state needs the $50 more than I need to be subsidized for making political contributions I would have made anyway.
As a libertarian I’m glad to see Steve spending his income however he sees fit. I’ll also give him credit for putting his money where is mouth is and voluntarily raising his own tax bill; I wish other tax advocates were equally consistent.
But that said, this is a very weird thing to do. Steve wants to see children educated, the elderly cared for, addicts treated, and the sick provided with health care. These are all noble goals. They’re not, however, goals that only the government can achieve. Charities address these needs too, and by contributing $50 to them Steve could ensure that his donation is directed to the right ends.
Instead he donates to politicians who share some, but perhaps not all of his views, who might get elected and who might succeed in putting his agenda into action. Then he gives them even more money that might or might not get spent wisely. At the end of this process, I wonder how much of his political contributions actually end up benefiting the people he wants to help?
Steve gets near the truth when he says that the Oregon tax credit for campaign contributions is “subsidizing the political contributions of the relatively wealthy.” It’s a subsidy for the politicians too, transferring money from the state treasury to their own campaigns. It’s a neat trick: the relatively wealthy get to feel good about donating to their favored politicians and the politicians get more money to crow about the good things they’ll accomplish in office.
The downside of having such an active government is that we tend to forget about civil society’s private solutions to public problems; the importance of people wielding the levers of power looms too large in our view. Steve’s extra $50 in taxes is, as he says, a “small symbolic gesture.” I’d humbly suggest that a more effective gesture would be cutting out the political middlemen and donating that money to a cause that directly addresses his concerns.
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Portland is said to have the highest number of breweries per capita in the United States. Oregon also has one of the country’s lowest beer tax rates. Coincidence?
We may soon find out. A bill in the legislature would raise the tax on beer from $2.60 per barrel to nearly $50. According to Tax Foundation data, that would give Oregon by far the highest beer tax in the nation. The money will be used largely to fund drug prevention and recovery programs. It’s a shame we can’t legalize drugs and tax them directly, but why should beer drinkers bear the cost?
Even if you think higher taxes on alcohol are justified on Pigovian grounds, this is a horrible year to impose them. Oregon has one of the nation’s highest unemployment rates right now. This bill would hurt one of the state’s few thriving industries while discouraging consumption at a time when governments are struggling to raise it.
If the state is desperate for money, there’s a very simple way to obtain it and encourage people to spend more: repeal the smoking ban that went into effect last month. Video poker and lottery sales are down $3 million per week compared to January 2008. The ban isn’t the only cause, obviously, but it’s likely a significant one.
Unfortunately, Oregon isn’t the only state using budget woes as an excuse for picking imbibers’ pockets. Nick Gillespie notes that Kentucky is raising taxes too. Expect to see more of this as the year goes on.
[Thanks to Jan and Patrick for bringing this to my attention.]
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No, seriously. This is fiscal stimulus:
Amid a financial crisis that is cutting jobs and eroding growth, there is finally good news for Russians.
The head of the new state alcohol agency — gleefully dubbed the Ministry for Vodka by the press — is advocating cutting taxes on vodka to make the country’s national tipple more accessible, the Izvestia daily reported.
Igor Chuiyan, the former head of state alcohol monopoly Rosspirtprom, has been appointed head of the new federal agency for alcohol market regulation, or Rosalkogol for short.
Without citing its sources, the paper said he advocates slashing the tax on a litre of pure alcohol from the current 190.8 rubles ($A9) to 100 rubles $A4.50).
This would mean that the tax on half litre of vodka would be cut to around 20 rubles from the current rate of 38 rubles, it said.
There’s a health motivation for the tax cut too. The article reports that high taxes have created a large black market in counterfeit vodkas and resulted in dangerously adulterated products.
That’s not a problem here in the US, but there’s a case to be made that the most effective fiscal stimulus would be cuts in our most regressive taxes, like consumption taxes or the FICA/Medicare payroll deductions. Ed Glaeser argues the point here (previously linked on Friday’s sidebar).
[Via TMN.]
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I’ve posted a couple links on the sidebar about New York’s new tax frenzy, but hadn’t felt compelled to dedicate a post to it until I saw this:
If the proposed budget were to be approved, New York cigar smokers would be forced to pay 50 cents per cigar. The current tax is about 34 cents.
It used to be that we could have an argument about whether there’s any justification for the tax, whether each cigar really is somehow causing 50 cents worth of external harm. But as Rogier van Bakel notes, this is just one of 137 new or increased taxes proposed by Governor David Paterson and there’s no rhyme or reason to the list. Among the other targeted products and services:
MP3s and other downloads
Haircuts, manicures, and beauty services
Movies, concerts and sporting events
Beer
Non-diet sodas
Gasoline
Clothing and shoes under $500
And many more. When the government abandons all pretense at rationale and just taxes things willy-nilly, I don’t even know how I’m supposed to respond. Luckily, New Yorkers do, and I can guess which finger they’ll be holding up to the governor this year.
[As with most cigar stories, hat tip to the Stogie Guys.]
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The InBev buyout of Budweiser is going through. Paul Krugman catches my favorite observation in a story from the WSJ:
“I’ll tell you one thing,” said the 21-year-old concrete worker during his lunch break at The Brick of St. Louis bar, in the shadow of this city’s storied Anheuser-Busch Cos. brewery, “if Budweiser is made by a different country, I don’t drink Budweiser anymore. I’ll go back to Wild Turkey.” (Wild Turkey, a Kentucky bourbon, is owned by French drinks giant Pernod Ricard SA.)
Dan Mitchell looks sees in the buyout a lesson for the US tax code:
Rather than engage in demagoguery against foreign investment, maybe Senator Obama and his colleagues should fix the tax code so that U.S. companies are not disadvantaged in global markets. America’s high corporate tax rate, combined with a pernicious policy of taxing worldwide income of American-based firms, makes it very difficult for those companies to compete.
Belgium, by contrast, has a lower corporate tax rate. More important, it has a territorial tax system — the common-sense notion of taxing only income earned inside national borders. As such, it makes sense — from the perspective of all shareholders — for Anheuser-Busch to be taken over by InBev rather than the other way around. Indeed, that is why American companies almost always become the subsidiary rather than the parent when there is a cross-border merger.
Fans of real Belgian beer should plan to knock a few back this Monday, July 21, Belgium’s Independence Day. Brasserie Beck in DC is celebrating with half-price drafts all day on 18 different beers. The list is online at the restaurant’s stupid, unlinkable Flash site.
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Apparently the smoking ban in New South Wales is turning away more casino business than the government anticipated, leading to a shortfall of tax revenue:
Clubs alone have lost about $400 million in revenue over the last 12 months, largely because of drops in poker machine revenue.
Comparisons between budget statements 2007-08 and 2008-09 reveal Treasury estimated they would receive $1061 million in pokie taxes, but instead received $1006 million - a shortfall of $55 million.
The latest budget shows that Treasury does not expect clubs and hotels to pick up again until 2010-11.
By comparison, Star City - where smoking is still permitted in the high rollers’ room - collected about $8 million more in pokie revenue than predicted in this year’s budget.
This is exactly why here in the US we have Iowa hypocritically exempting casinos from its new smoking ban, with Michigan possibly poised to do the same. When smoking dependent businesses lose revenue, well that’s just too bad. But when the state risks losing taxes, it’s happy to give itself a competitive advantage.
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Jacob Grier is a freelance writer, barista, mixologist, and magician in Portland, OR. He writes, eats, and drinks a lot. His articles have appeared in The Washington Post, Reason Online, The Oregonian, and other publications.
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