The Orwellian named ‘Inflation Reduction Act’ (IRA) jammed through Congress on a party-line vote hits working Americans the hardest. It raises the average per capita tax burden by thousands of dollars on ordinary people. At the same time, the IRA empowers the Internal Revenue Service (IRS) to go after small businesses and entrepreneurs. President Biden’s plan to hire 87,000 additional IRS agents is meant to deter political engagement of working-class Americans. The elites want it to be too costly for you to stand up for yourself – resistance is frowned upon.
Americans are right to view their elected officials with disdain. Working people always get caught with the bill while the elite-class gets special breaks. The elites get bailouts while store clerks, hard-hats, and small business owners deal with high inflation and declining economic growth.
Ordinary Americans loathe special interest tax provisions and carve outs where government picks ‘winner and losers.’ The tax system in the United States is unfair, and it’s been made worse. The system is rigged, and the tax regime favors the rich over the working class.
With the IRA as a backdrop, Congress is expected this fall to take up a set of expiring tax provisions in a bill traditionally called the ‘Tax Extenders Bill’. The legislation contains an obscene crony-proviso intended to enrich the already powerful and wealthy. Don’t get me wrong – wealth is good. However, special interests getting rich by leveraging the tax regime is a problem. It’s cronyism.
The provision – named the ‘Rum Cover-Over’ – is corporate welfare. The set-up was established in 1917 to assist Puerto Rico and the U.S. Virgin Islands in creating commercial development and greater economic independence. I think it’s safe to say it failed in its mission. Regardless, mission creep has morphed the program into a multi-billion-dollar corporate welfare scheme for a handful of large rum distillers.
I love rum. Someday I’d like to open a pub named ‘The Dew Drop Inn’ and serve rum. However, if I do, I won’t ask someone else to pay for it.
Today, an estimated 40-50% of federal cover-over tax dollars are diverted from territorial governments and used to subsidize two large, international hard liquor distillers to the tune of hundreds-of-millions of dollars per year. In a 2014 report, the Tax Foundation issued a finding that the $13.25 per proof-gallon of federal excise tax collected from rum produced in these territories are transferred right back to the territories creating a ‘cover-over’. The Foundation argues “the unintended consequences of the cover-over program have led both Puerto Rico and the U.S. Virgin Islands to manipulate their economies to maximize federal subsidies. The ensuing subsidies race distorts the economy, creates perverse incentives, and destabilizes local government.” The Tax Extenders allows a cap on the tax to be lifted resulting in increased amounts of cash going to the territories boosting the perverse incentive.
Remarkably, the Rum Cover-Over program has not gone unnoticed by the press. The New York Times reported back in 2010, that this tax has created a battle between “two United States islands, Puerto Rico and the Virgin Islands, over a tax that the federal treasury collects on rum,” because “the Virgin Islands persuaded the world’s largest distiller, which said it was leaving Puerto Rico, to move to St. Croix by offering a staggering $2.7 billion in tax incentives.” That move entitled “the Virgin Islands to collect billions in rum tax revenue from Washington.” Puerto Rico was not pleased, because they use 90% of the Rum Cover-Over kickback for public projects and social services. The Virgin Islands promised about half the money they received to the distiller creating an incentive for Puerto Rico to respond and do the same.
Congress should eliminate the program or reform it. Congress could cap subsidies to rum companies at 10% of the money coming back to the territories. That might reduce the incentive to run up production to get more cash, because the producers will not make as much off the taxpayer. Remember, it is the taxpayer who pays this excise tax when the seller of rum adds in the excise tax during a sale. A percentage of the cash collected from rum produced in these territories from the taxpayers end up going to the distillers on the islands. It’s bad policy for taxpayers.
The goal of the ‘Inflation Reduction Act’ is as straightforward as it is cynical: transfer billions from hard working Americans to bankroll special interest projects. What’s more, it empowers the IRS with 87,000 new tax agents for the purposes of targeting average taxpayers. Perhaps Congress could reestablish some trust and goodwill by taking a closer look at special interest tax provisions meant to benefit a handful of wealthy rum distillers.
Is it a difficult lift for Congress? Let’s hope not. We can talk about it one day over a couple of mojitos at ‘The Dew Drop Inn.’ Cheers.
Jerry Rogers is a RealClear editor and the host of the 'Jerry Rogers Show' on WBAL NewsRadio. Follow him on Twitter @JerryRogersShow.