What is this Rum Tax Thing in the Bailout?

October 13, 2008

On page 279 of the 451-page bailout bill was this provision:

(a) IN GENERAL.-Paragraph (1) of section 7652(f) is amended by striking "January 1, 2008" and inserting "January 1, 2010".
(b) EFFECTIVE DATE.-The amendment made by this section shall apply to distilled spirits brought into the United States after December 31, 2007.

The cited law reads as follows:

26 U.S.C. 7652(f)
Limitation on cover over of tax on distilled spirits
For purposes of this section, with respect to taxes imposed under section 5001 or this section on distilled spirits, the amount covered into the treasuries of Puerto Rico and the Virgin Islands shall not exceed the lesser of the rate of-
(1) $10.50 ($13.25 in the case of distilled spirits brought into the United States after June 30, 1999, and before January 1, 2008), or
(2) the tax imposed under section 5001 (a)(1), on each proof gallon.

What all this means is that the federal government imposes an excise tax on distilled spirits, including rum, at $13.50 per proof gallon. For some time, the federal government has rebated to the governments of Puerto Rico and the Virgin Islands (but not other spirits-producing states) a share of the federal excise tax collected on rum imported from those two jurisdictions. (It is essentially an accounting shift to pay for the cost of government there, a benefit not extended to any state.) The amount of the rebate occasionally changes and is renewed every two years. This year, the renewal was stuck into the bailout bill.

The rebate is distortionary in that provides an incentive for these two governments to encourage rum production. (This public-private partnership to build a new rum distillery in the Virgin Islands is one example of shifting resources from better uses toward rum production.) But such benefits to rum producers are indirect, and it wouldn't be accurate to describe this as a tax rebate for rum producers or consumers. They pay the exact same excise tax as is imposed on other spirits; this provision shifts around where the money ends up.

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