by MIKE BURNS
Elon Musk and his D.O.G.E. crew have been hard at work sniffing out waste, fraud, and abuse in our government for the last couple of months. It’s a lot of work for such a small team. I like to think I might help the cause by suggesting some fresh fodder for Musk’s chainsaw. With this in mind, I humbly nominate two rarely talked-about nuggets of government waste for the Trump administration to address: the Rum Cover-Over (RCO) program and Section 5010 tax loophole. Both have to do with the taxes on rum, and both amount to massive corporate handouts that do nothing to benefit American taxpayers.
First, let’s look at the Rum Cover-Over program. Federal law subjects all distilled spirits to excise taxes. This includes the rum produced in the U.S. territories of Puerto Rico and the U.S. Virgin Islands. Thanks to the RCO program, these two territories receive almost all of this money back from the federal government, ostensibly for economic development purposes. In reality, however, the governments of these territories pay out much of this money in the form of tax subsidies to the major rum distillers.
There is a serious lack of transparency with the RCO program, such that there is virtually no accountability for how much of the RCO funds go to benefit these private companies rather than local communities. It is estimated that up to 30% of these funds, about $250 million annually, get funneled to the rum industry. Do the makers of Captain Morgan and other big rum brands really need this corporate welfare? The answer, of course, is no. Instead, we should reform this program so it functions as it was originally intended. That means requiring greater transparency regarding how RCO funds get distributed, capping rum producers’ subsidies to 5% of the rum tax revenue received by each territory, and eventually phasing out such subsidies all together.
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It’s basically USAID for big foreign distillers.
There’s a similar “gimme” enjoyed by big rum companies, as well as other liquor distillers; this one is called the Section 5010 loophole. This tax carveout allows distillers to significantly reduce how much they pay in taxes by incorporating certain other ingredients into their products—things like high-potency wine and “non-beverage flavorings.” By using these ingredients, distillers can reduce their excise tax rate from the standard $8.10 per gallon down to $5.08 per gallon. This costs the U.S. government more than $300 million annually. And, perhaps even more disturbing, there are no requirements to detail these ingredients on the bottle’s label. As a result, nearly half the bottle of liquor on your store shelf could actually be wine and other flavorings rather than distilled liquor.
We need to repeal the Section 5010 loophole, just like we need to reform the RCO program. Doing so would result in a more level playing field for alcohol producers, more accurately align tax rates with the actual composition of alcohol products and reduce cushy tax advantages enjoyed by foreign alcohol producers. This is no doubt why groups like the Heritage Foundation and others have called for such reforms. Just between the RCO Program and Section 5010, we have hundreds of millions of dollars in potential annual savings. That may not be enough to solve all of our federal government’s fiscal problems, but it sure doesn’t hurt. I hope our South Carolina Congressional Delegation will lead the way on these issues.
ABOUT THE AUTHOR…
Mike Burns serves House District 17 in the S.C. General Assembly.
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