A Rum Cover-Over may sound like a tasty new cocktail, but it’s something much more complicated. You may have been hearing about it in news and discussions about Puerto Rico’s financial situation and options for improving it.
The Rum Cover-Over is a type of excise tax. Excise taxes are like sales taxes, but they’re paid by the manufacturer or distributor of a product, not by the person buying the products. They’re based on the quantity of goods, where sales taxes are based on the amount of money paid.
So a sales tax on a $10 bottle of rum may be sixty cents or a dollar (depending where you live), and the sales tax on a $20 bottle of rum will be twice as much. It’s added to the cost of the rum by the retailer, and passed on to the government.
Most of the excise taxes on a bottle of rum will be the same no matter how much the rum costs, and the company that pays the excise tax is expected to take it into account when setting prices, so it is not added on along with sales tax when you buy that rum.
Excise taxes go to the federal government, and they’re often used for special purposes. For example, cigarette excise taxes may pay for tobacco education programs.
The excise taxes for a bottle of rum made in Puerto Rico or the U.S. Virgin Islands goes back to the place where the rum was made. That’s called a Rum Cover-Over, and you definitely can’t put a straw in it. Puerto Rico and the U.S. Virgin Islands also receive excise taxes on rum made in other countries and sold in the U.S. The amount of excise tax from foreign rum that each place receives depends mostly on how much rum each place produces.
This is a grant from the Federal government meant to subsidize the territorial governments because the islands are underdeveloped. The idea is to provide funds for needed investments on the islands, such as schools or roads.
However, Puerto Rico and the Virgin Islands gradually began to woo rum distillers by offering them a piece of the action. The Virgin Islands offered a subsidy to a distillery, paid for from the Rum Cover-Over, and Puerto Rico felt they had to offer a higher subsidy, as the two locations competed for rum distilleries.
The results for the islands have been harsh. The Virgin Islands wooed the makers of Captain Morgan rum from Puerto Rico a few years back, costing Puerto Rico some $43,000,000 in Rum Cover-Over funds. The Virgin Islands made such an attractive deal that nearly half their Rum Cover-Over funds went straight to the distillers. The distillers? They make their rum essentially for free.
The amount of the Rum Cover-Over varies from year to year, so it can’t be a predictable part of Puerto Rico’s budget. And there is a limit to the amount of the Rum Cover-Over Puerto Rico is allowed to use for subsidies to distillers. Puerto Rico has had the Rum Cover-Over since 1917, and there are plenty of details in the history of the Cover-Over not covered (or covered over) here, but you can read all about it in the Congressional Research Service Document on the subject.
Next time you hear someone mention the Rum Cover-Over, you’ll know what they’re talking about.