In a little-known skirmish coined the “Rum Wars,” the tranquil Caribbean waters have become the backdrop for an economic tussle between Puerto Rico and the U.S. Virgin Islands – with American taxpayers unwittingly funding the battle. This conflict, fueled by federal tax policies dating back over a century, was the focus of a recent episode of NPR’s Planet Money podcast.

The crux of this fiscal saga lies in a peculiar tax arrangement known as the rum cover-over. Crafted by Congress to aid the development of the territories, the program works by directing nearly all federal taxes collected on the sale of rum back to Puerto Rico and the U.S. Virgin Islands.

The arrangement, intended to foster economic independence and growth, amounted to a staggering $700 million in 2021 alone. But instead of bolstering the local economies as envisioned, this scheme has sparked a bidding war for rum production dominance. This is because territories receive funding proportional to their rum production, incentivizing a race to attract and retain major distilleries.

The tensions emerged in 2008 when the U.S. Virgin Islands enticed Captain Morgan to relocate its production from Puerto Rico to St. Croix. The U.S. Virgin Islands offered Captain Morgan and its parent company, Diageo – one of alcohol’s largest behemoths – a deal ripe with incentives funded by tax dollars. This agreement included covering the distillery’s construction costs and substantial annual subsidies, essentially paid for by American taxpayers through the federal rum tax.

This move exemplifies how strategic maneuvers by territories and corporations have transformed a beneficial support mechanism into a subsidy for big liquor companies.

Puerto Rico, in response to losing Captain Morgan, was compelled to increase its subsidies to retain other major distilleries like Bacardi. This cycle of competition has led to an environment where the territories have diverted an increasingly large share of the federal rum tax revenue to the pockets of multinational liquor corporations. This situation raises poignant questions about the original purpose of the tax arrangement and its evolution into a corporate subsidy at the expense of American taxpayers and the citizens of Puerto Rico and the U.S. Virgin Islands.

The consequences of the “Rum Wars” extend beyond the fiscal to the philosophical, challenging the very nature of economic incentives and the role of government in supporting industries. As territories and companies navigate this lucrative but controversial terrain, the overarching narrative unfolds – a narrative where strategic economic battles, underpinned by taxpayer funds, enrich large corporations under the guise of territorial support.

This economic game of cat and mouse underscores the complexity of economic policy and its unintended consequences, spotlighting the need for careful reform. As the Caribbean rum industry continues to flourish, we find ourselves in rare agreement with NPR: it is long past time for Congress to reimagine the century-old rum cover-over so that it benefits the Americans in these territories and not global liquor barons.