WASHINGTON

U.S. Virgin Islands Gov. John J. deJongh told Senate Finance Committee leaders Thursday that the Congressional Research Service has dealt a “serious blow” to Puerto Rico’s arguments in the battle of the two territories over rum and taxes.

In a letter to Finance Chairman Max Baucus, D-Mont., and ranking member Charles Grassley, R-Ind., DeJongh said the report, issued on Jan. 20, “refutes misinformation promoted by Puerto Rican officials and validates the USVI’s economic development agreements with rum makers Diageo and Fortune Brands.”

He pointed out that the CRS found that according to the law’s original intent, the USVI can use its rum cover-over revenue as its local legislature deems appropriate, and that a bill proposed by Resident Commissioner Pedro Pierluisi “would limit both territories’ autonomous power to allocate cover-over funds for economic development purposes.”

The USVI governor also asserted that excise taxes returned to the territories on rum sold in the states under the program are paid by the rum producers, not by American taxpayers.

In its report, the CRS was critical of Pierluisi’s bill that would limit to 10 per cent the subsidies that the U.S. Virgin Islands, as well as Puerto Rico, could give rum producers from federal taxes on rum sold in the states.

The CRS said the resident commissioner’s attempt to limit the subsidies “could be seen as inconsistent with the intent of the [rum] cover-over as expressed in the legislation…Congress explicitly stated that the government receiving the covered-over revenue was charged with its disposition, not the U.S. Congress.”

The legislation was filed in an effort to halt deals that the USVI made with British liquor giant Diageo and Fortune Brands that Puerto Rico considers harmful to its rum-producing industry. Diageo, which produces its Captain Morgan brand rum in Ponce, has decided to move the production to St. Croix. It has received a host of incentives from the USVI, including a rebate of some 50 percent of the cover-over that St. Thomas receives on U.S. rum sales.

Puerto Rico says it only puts 6 percent of the cover-over it receives into promotion for the companies producing rum on the island. It says the some 50 percent in the tax incentives and subsidies offered by the USVI to corporate giants like Diageo are “a misuse of taxpayer dollars”

Bur DeJongh claimed in his letter that the tax on the stateside-sold rum is an “equalization tax” imposed on products manufactured in the USVI and Puerto Rico and shipped to the United States.

He said the tax on the territorial producer is triggered when the product enters stateside commerce. “It is not a sales tax imposed on U.S. consumers,” the governor wrote. “It is not intended to raise revenue for the U.S. Treasury. It is intended only to protect U.S. producers of like products from territorial manufacturers who, because of our political status, are exempt from federal taxation.”

Puerto Rico stands to lose at least 320 jobs and some $6 billion during the 30-year duration of the USVI-Diageo agreement, which is set to start in 2012.

According to DeJongh, the rum deals the USVI are making “will increase government revenues, and lessen our dependence on ad hoc federal appropriations…”