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Rum Money Ignites Brawl Between U.S. Territories

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Diageo is relocating production of its Captain Morgan rum to the Virgin Islands. i

Even if you've never tasted Captain Morgan rum, you've probably seen the quirky commercials and heard the tag line: "They got a little captain in them. Got a little captain in you?" Diageo is relocating production of Captain Morgan from Puerto Rico to the Virgin Islands, which offered the company $2.7 billion in incentives to make the move. Shea Walsh/AP hide caption

toggle caption Shea Walsh/AP
Diageo is relocating production of its Captain Morgan rum to the Virgin Islands.

Even if you've never tasted Captain Morgan rum, you've probably seen the quirky commercials and heard the tag line: "They got a little captain in them. Got a little captain in you?" Diageo is relocating production of Captain Morgan from Puerto Rico to the Virgin Islands, which offered the company $2.7 billion in incentives to make the move.

Shea Walsh/AP

Two U.S. territories, Puerto Rico and the Virgin Islands, are engaged in a high-stakes battle — over rum. It involves Congress, hundreds of millions of dollars in tax revenue and a well-known pirate.

Some liquor industry competitors and officials in Puerto Rico are accusing Diageo, the maker of Captain Morgan rum, of using business tactics worthy of the legendary pirate.

Diageo is relocating production of Captain Morgan — one of its most successful brands — from Puerto Rico to the Virgin Islands. In exchange, the Virgin Islands is giving Diageo an estimated $2.7 billion in various incentives over the next 30 years.

Rafael Fantauzzi, president of the National Puerto Rican Coalition, a lobbying group, says that's twice what it will actually cost Diageo to produce rum at the new facility. "Which is outrageous," Fantauzzi says. "And it's extremely irresponsible of even the U.S. Virgin Islands to give so much money away to a foreign-owned company, instead of using it for their own vulnerable people."

The 'Cover Over' Fund

The "money" in question is an obscure fund distributed every year to the Virgin Islands and Puerto Rico — a fund called the "rum cover-over." About a half a billion dollars yearly, it's money collected as an excise tax on rum sold in the U.S.

For decades, most of the rum excise tax money has been returned by the federal government to Puerto Rico and the Virgin Islands — "covered over" in archaic tax speak.

By moving production of Captain Morgan rum to the Virgin Islands, Diageo may end up costing Puerto Rico billions of dollars in lost revenue over the next 30 years.

So, Fantauzzi says, Puerto Rico has taken the fight to Washington.

"We have to see Congress do the right thing, which is [to] put some limits on the utilization of these federal funds," Fantauzzi says.

Backing Puerto Rico in the fight is Bacardi, which worries that the sweet deal will give its competitor, Diageo, an unfair advantage in the battle for American rum drinkers.

Puerto Rico has been lining up friends in Congress, including both of Florida's senators, to press for legislation that would effectively nullify Diageo's deal with the Virgin Islands.

Meanwhile, the territory's delegate to Congress, Donna Christensen, has been doing everything she can to stop the Puerto Rican-backed legislation. "Congress should not get involved in it because this is a dispute between two jurisdictions," she says. "They would not get involved if a company decided to move from New York to Michigan."

A New Front

The deal with Diageo is not just good for the company. It would also bring in hundreds of millions of dollars in revenue to the Virgin Islands — money Christensen says would allow the territory to expand its economy.

The Virgin Islands is much smaller than Puerto Rico, with fewer businesses and also fewer high-powered friends in Washington. Even so, until recently it had a trump card in New York Rep. Charlie Rangel. For months, he blocked Puerto Rico's efforts to stop the deal from his perch as chairman of the House Ways and Means Committee.

Now that Rangel has stepped down from that post because of an ethics investigation, a new front may be opening in Puerto Rico and the Virgin Island's ongoing rum war.

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