Booze Pirates Fleece Puerto Rico With the Help of Congress

Posted on Feb 3, 2010

By Marcus Stern, ProPublica

(Page 2)

Like all Washington fights, this one has been a boon to lobbyists.

Last year, Diageo used its in-house lobbyists ($2.25 million), plus lobbyists at DLA Piper ($770,000) and Breaux-Lott ($10,000). The Virgin Islands used Callwood Associates ($270,000).

Puerto Rico is relying on its own internal lobbying arm in Washington, the Puerto Rico Federal Affairs Administration. The Conservation Trust of Puerto Rico, which will lose millions of dollars in annual funding for its land acquisitions if the Diageo deal stands, has hired Policy Impact Communications ($120,000) and, most recently, Quinn Gillespie & Associates ($40,000).

The Virgin Islands defends the deal by stressing the huge favorable impact it will have there. That argument was bolstered recently by a report (PDF) issued by the Congressional Research Service that said the Pierluisi bill “would result in severe limits on Puerto Rico’s and the USVI’s ability to finance economic development projects with this revenue source.”

The Virgin Islands insists that Diageo would have moved its operations elsewhere if the Virgin Islands hadn’t offered the $3 billion rum-tax break and other incentives.

And the Virgin Islands argues that it’s too late to undo the Diageo deal, because the Virgin Islands already has used the anticipated revenue to back $200 million in bonds to pay for Diageo’s new distillery.

Puerto Rico’s supporters point out that Puerto Rico has its own bonds backed by anticipated rum-tax money. The governor has laid off 17,000 public employees because of the sagging economy, and they say the loss of the rum-tax money will mean more layoffs.

Serrallés says transferring so much of the rum-tax rebate as a subsidy to Diageo and other rum makers will undermine congressional support for a vital assistance program that dates to 1917.

“These guys (the Virgin Islands) are prepared to give $3 billion, $4 billion to rum makers over the next 30 years,” he said. “Congress is going to say, ‘These people (the territories) can’t control this program. It’s all ending up in the hands of the rum makers.’ ”

But if members of Congress are worried about that perception, it’s not evident yet.

Most of the rum-tax rebate is renewed automatically each year, without any action by Congress. But a small portion—less than 8 percent—must be approved by Congress.

Last month, that portion came up for a vote before the House, buried inside a much larger tax bill. If any lawmaker had concerns about the Diageo deal, that was a good time to speak up. Nobody did.

Now the tax bill goes to the Senate, where there is speculation it will be attached to the politically popular jobs bill. Buried inside such attractive legislation, the rum tax is likely to again slip through without debate.

ProPublica is an independent, nonprofit newsroom that produces investigative journalism in the public interest.

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