Panel clears PR extenders, but rum cap still stuck

The proposal by U.S. Sens. Bob Menéndez, D-N.J., and Jeff Bingaman, D-N.M., would have imposed a cap on the incentives granted to rum makers in Puerto Rico and the U.S. Virgin Islands funded through the program, ensuring that most of the hundreds of millions of dollars the program pumps into the two territories is spent on public infrastructure and other important activities that benefit the public welfare.

The issue was contained in a proposed amendment to the Family and Business Tax Cut Certainty Act of 2012 to support essential government operations in the USVI and Puerto Rico. However it was rebuffed by Senate Finance Committee Chairman Max Baucus, D-Mont., who argued it was outside the scope of the proposed legislation, according to CARIBBEAN BUSINESS sources.

Baucus, however, did pledge to Menéndez and Bingaman that he would support a reform that would “strike the right balance” at the “first appropriate date,” the sources added.

The legislation summarizes a previous bill by Menéndez, which the Senate also declined to push forward. The original proposal was filed by Resident Commissioner Pedro Pierluisi, but that proposal also languished in the U.S. House of Representatives.

Menéndez fumed over the $2 million the USVI is paying British liquor giant Diageo for each job it creates in the jurisdiction through its new St. Croix distillery.

“Some of us will not cease in pursuing this. We’re talking about millions meant for the residents of the territories that are, in essence, going to a private sector entity,” he told Baucus, according to CB sources. “I am sure that if I go to the floor and do a series of speeches on this we will have the nation’s attention in terms of cost to them as taxpayers.”

Bingaman also chimed in. “The status quo is not acceptable. These deals are siphoning off revenue needed by these territories to fund public services. This is terrible precedent we need to deal with.” Baucus then pledged to support the search for a solution, according to CB sources. “It’s obviously a problem that’s got to be resolved. We’ve got to find something to reform the program.”

The legislation does extend important tax and funding programs for Puerto Rico.

The domestic manufacturing rebate lowers to 32% from 35% the tax rate that U.S.-based manufacturers operating on the island pay. The intent of this legislation is to keep Puerto Rico on a level playing field tax-wise with the rest of the U.S. for domestic manufacturers operating on the island. The Congressional Joint Committee on Taxation estimates the benefit would be worth $312 million through 2013 for the companies. The U.S. Treasury Department, however, estimates the benefit at just $160 million over that time period.

The other proposal suspends for two years the $10.50 per proof gallon limitation on the amount of excise taxes on rum covered over to Puerto Rico and the USVI. Under the proposal, the cover over limitation of $13.25 per proof gallon is extended through 2013. This is worth roughly $75 million annually to the government.