By Senator Tim Moffitt (R-District 48)
It’s no secret the U.S. government is fraught with waste, fraud, and abuse. Still, the headlines about various boondoggles unearthed by Elon Musk’s D.O.G.E. are startling. It’s one thing to know that our taxpayer dollars could be better spent, but seeing it all brought to light is another entirely. As ugly as it is to see how our government wastes money, I believe that sunlight is the best disinfectant. During my time serving as the Chairman of the Alcoholic Beverage Control (ABC) Committee in the N.C. General Assembly, I learned a great deal about how the liquor industry works, and about two special-interest carveouts in the federal tax law that benefit distillers. Today, I want to tell you how addressing them could help federal government recover hundreds of millions of dollars annually.
First, there’s the government program meant to help spur development in the U.S. territories of Puerto Rico and the U.S. Virgin Islands that has, instead, been hijacked by the big-time rum distillers there. The Rum Cover-Over Program was started over 100 years ago to redirect almost all excise taxes (the taxes levied on distilled spirits) on Puerto Rican rum back to Puerto Rico. The idea was later expanded for the U.S. Virgin Islands, and in both cases was meant to benefit local governments and communities. Instead, these funds have been increasingly funneled to help large, multinational rum distillers. In fact, up to 30% of RCO funds (around $250 million annually), ends up in the hands of the big rum companies through tax subsidies. What’s worse, many of these companies are headquartered in foreign countries.
I’m not against the RCO Program as it was originally intended, but I am certainly against how it plays out in practice. We need greater transparency and an end to these giveaways to rum producers. Congress should enact policies that, first, certify the portion of RCO funds that ends up transferred to rum producers. This would give us a better sense of just how much these big businesses are benefitting. Then, we should cap these subsidies; limit them to no more than 5% of rum tax revenue received by each territory. Lastly, there should be a sunset provision that phases out these producer subsidies entirely within five years. This will allow RCO funds to flow, as intended, toward essential programs and services that actually benefit territorial residents.
Similar to the RCO Program is the Section 5010 tax loophole. This little known carveout in the tax code allows hard liquor distillers to pay significantly less in taxes by adding certain non-liquor ingredients to their products—things like high-potency wine and “non beverage flavorings.” By doing so, they can lower their tax rates from the standard $8.10 per gallon all the way down to as little as $5.08 per gallon. This loophole costs the federal government over $300 million every year, and disproportionately benefits large, multinational distillers. What I find most shocking about this is that there are no labeling requirements for these “extra ingredients,” meaning that nearly half the bottle can contain wine and flavorings instead of the spirit written on the packaging.
In this new era of government accountability, I’m calling on Congress to repeal the Section 5010 loophole and reform the Rum Cover-Over Program. I’m especially asking Senator Thom Tillis (R-NC) to take strong action on these issues. By doing so, we can take two more large steps toward true government efficiency.
Tim Moffitt represents District 48 in the North Carolina Senate.