U.S. Virgin Islands to Receive $31 Million Less in Rum Tax Payments for 2025

Decrease in Rum Cover-Over Payments

On Thursday, the U.S. Department of the Interior announced that the U.S. Virgin Islands will receive approximately $31 million less in rum cover-over payments for 2025 compared to the previous year. The projected rum tax rebate for 2025 amounts to $181,068,638, a reduction of $30,970,946 from the $212,039,584 the territory received in 2024. This marks a $14 million drop from the 2023 allotment.

How the Rum Tax Works

Under the Revised Organic Act, the Virgin Islands receive a transfer of excise taxes on rum manufactured in the territory and exported to the mainland U.S. These taxes are “covered over” to the Virgin Islands each year. The Virgin Islands government provides an advance estimate of these excise duties to the Office of Insular Affairs, enabling payment to be made by September of the same fiscal year.

Calculation and Payment Adjustments

Payments are calculated based on estimated sums from rum excise taxes in the Virgin Islands and actual receipts collected by the federal government. For fiscal year 2025, the advance payment is based on a $10.50 per proof gallon rate, a figure that has remained largely unchanged since 1984. The rate was temporarily increased to $13.25 in 1999, but this higher rate required annual congressional approval.

Following the devastating Category 5 hurricanes in 2017, the Bipartisan Budget Act of 2018 reinstated the $13.25 per gallon rate for five years. However, that rate expired at the end of December 2021, reverting the rate to $10.50.

Impact on Virgin Islands Budget and GERS

The per-gallon rate is particularly important due to its role in stabilizing the Government Employees’ Retirement System (GERS). In February 2022, a law was passed to use rum cover-over funds to support GERS, which was predicted to go bankrupt by October 2024. However, GERS administrator Angel Dawson expressed concern about the reduction in payments, estimating that this year’s cover-over payment will be $47.4 million less than last year.

Dawson highlighted the importance of these funds for GERS, which is expecting $158 million on October 1 as part of a “funding note” backed by the annual cover-over revenue. He warned that continued shortfalls in funding could jeopardize the system’s ability to pay retirees between 2037 and 2039, despite current projections that GERS will remain solvent until at least 2036.

GERS Investment Performance and Concerns

Despite the challenges, GERS has seen an improvement in its investment returns, growing by 31% from $400 million in September 2022 to $524 million in July 2024. However, Dawson noted that if the full amount promised under the funding note had been received last year, GERS’s assets would have been at least $34 million higher. He emphasized that the lost investment revenue due to these shortfalls has had a significant impact on the system’s financial health.

Calls for Comment

Requests for comments on the Department of the Interior’s announcement were made to Delegate to Congress Stacey Plaskett and Governor Albert Bryan Jr., but no responses have been received.

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The article image is courtesy of BenScripps on Canva