The Rum Tax Grift
There’s a little-known tax that’ll make you want a drink when you find out about it. And it’s actually less a tax than a grift. One that’s used to make Americans pay to subsidize the governments of Puerto Rico and the U.S. Virgin Islands.
The grift works like this: Federal excise taxes on distilled spirits are collected on liquor — specifically, rum — that is produced in Puerto Rico, the Virgin Islands, and also internationally. Ostensibly, the revenue is supposed to go to Washington. Instead, the taxes collected from Puerto Rico and the Virgin Islands go back to Puerto Rico and the Virgin Islands. More finely, to the coffers of the governments of those territories, which then use it for their own purposes. The top federal excise tax rate is $13.50 per proof gallon, and, of that sum collected, $13.25 of it is kicked back to the two territories, according to the Heritage Foundation in Washington.
This is called the Rum Cover-Over — and it does exactly that, in that few Americans have any idea this is going on. How could they? Federal tax law is several Moby Dicks long and unlike the latter — which is good literature — no one wants to read through the entirety of the particulars. Thus no one (not even the tax bureaucrats themselves) has any comprehensive understanding of or even awareness of the details of the whole. This has engendered both confusion as well as the opportunity for mischief.
Remember when Speaker of the House Nancy Pelosi said with regard to the authorizing legislation for Obamacare, “You have to pass the bill so you can find out what’s in it”?
It works a lot like that. On purpose. And it’s much worse with “small things” such as the Rum Cover-Over that wheedle mere millions from the pockets of American taxpayers into the pockets of special interests — or the coffers of Puerto Rico and the Virgin Islands that then use their influence to leverage the federal sluice in the direction of their trough.
“Imagine a world where the government returns half of your business taxes each year,” said the American Distilling Institute (ADI), who oppose the Rum Cover-Over because it disadvantages distilleries in America, who pay the full tax. A tax they inevitably must pass along to the people who buy their products. Meanwhile, Americans don’t even get the benefit of lower-cost liquor distilled in Puerto Rico or the Virgin Islands because the tax is applied and folded into the price of the booze that sits on the shelf. But the producers get a refund of almost all of it that they do not pass along to the buyer.
“As a bonus,” explained the ADI, “the government [in Puerto Rico and the Virgin Islands] also pays to market your product and upgrade your factory equipment.”
A sweet deal.
Just not for American taxpayers. Or American drinkers.
President-elect Trump won the 2024 election in part because he promised to do something about the Byzantine wastefulness (and subterfuge) that characterizes everything the federal government touches. Specifically, the time (and money) suck associated with just trying to figure out what federal laws and regs actually require — and what is necessary to comply with them. (RELATED: Tariffs, Cars, and the Whiskey War)
Even the IRS doesn’t know.
There are multiple and varying interpretations of tax law. It’s literally anyone’s guess and for that reason, everyone and every business knows that because there isn’t clarity, they may guess wrong.
At least in the eyes of the IRS.
Getting back to the grift, the opportunities to “slip something” into this bill or that amendment are literally endless. Few — maybe no one, except perhaps those who did the “slipping-in” — will have any idea what’s going on while there’s time to do something to prevent it. Remember: You have to pass the bill to find out what’s in it.
The best way, arguably, to expose this greasy “slipping-in” would be to get rid of all the Byzantine folderol. Instead of excise taxes with arcane kickback provisions, a simple tax on the sale of the booze at the retail level, applied the same to all booze, irrespective of who makes it or where it is made. The federal government ought not be in the business of handing out advantages — and disadvantages — to any private, for-profit business via the tax laws.
Even better, arguably, would be for the same principle to be applied to the tax law generally. As Brian Darling, former counsel to Senator Rand Paul, put it in a recent op-ed piece for the DC Journal:
A simplified way for Americans to file taxes is to give them a postcard addressed to the Internal Revenue Service with three lines. The three disclosures that a tax filer would need to include are wages/compensation, taxes withheld, and taxes owed/refund due. Poll test that idea, and it would be an 80/20 issue. Marry a low flat tax to Elon Musk and Vivek Ramaswamy’s DOGE Plan to reform government, and you can cut spending while reforming the tax code in one swoop.
It’s a fine idea that merits a drink — in celebration, rather than to try to dull the pain.
READ MORE from Eric Peters:
Tariffs, Cars, and the Whiskey War
Longing for the Era of Economy Cars and Real Fuel Efficiency
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