Uncle Sam Bails Out Captain Morgan

The $850 billion rescue of U.S. banks contained billions in hidden tax breaks for a British rum maker, Burger King and the builders of Nascar racetracks.

By Ryan J. Donmoyer
Bloomberg Markets, August 2009

In June 2008, U.S. Virgin Islands Governor John deJongh Jr. agreed to give London-based Diageo Plc billions of dollars in tax incentives to move its production of Captain Morgan rum from one U.S. island -- Puerto Rico -- to another, namely St. Croix.

DeJongh says he had no idea his deal would help make the world’s largest liquor distiller the most unlikely beneficiary of the emergency Troubled Asset Relief Program approved by Congress just four months later.

Today, as two 56-foot-high (17-meter-high) tanks for holding fermenting molasses will soon rise from the ground on the Caribbean island of St. Croix, the extent to which dozens of nonbank companies benefited from last October’s emergency financial rescue plan is just beginning to come to light.

The hurried legislation adopted by a Congress voting under the threat of sudden global economic collapse led to hidden tax breaks for firms in dozens of industries. They included builders of Nascar auto-racing tracks, restaurant chains such as Burger King Holdings Inc., movie and television producers -- and London’s Diageo.

“It’s kind of like the magician’s sleight of hand,” says former House Ways and Means Committee Chairman William Thomas, a California Republican who ran the committee from 2001 to 2007 and oversaw all tax legislation. “They snuck these things in a bill that was focused on other things.”

Congress inserted the tax benefits for companies other than banks in a fog of confusion and panic after the House of Representatives rejected the first attempt to fund the bank support effort urged by then President George W. Bush and Treasury Secretary Henry Paulson.

Rubber Stamped

Lawmakers rubber-stamped the package of arcane, if innocuous-sounding, tax items with one eye on the calendar. An election was only a few weeks away, and legislators were desperate to return home to campaign for their own re-election.

A year later, lawmakers and the public are just now discovering some of the curious subsidies tucked into TARP and the government’s other massive intervention programs. Four months after TARP took effect, President Barack Obama pushed through a $787 billion bill intended to pump up the nation’s economy.

That legislation included $20 billion in tax breaks for companies that produce energy from wind and other alternative sources as well as $1.6 billion in relief related to the tax treatment of canceled debt for Sprint Nextel Corp., the third- largest U.S. mobile-phone-service company, and other firms.

Like TARP, the stimulus bill was passed quickly, with little scrutiny.

‘Backroom Deals’

“You had this remarkable brief period with no transparency, filled with backroom deals being made and an absolute blackout of information,” says Jim Lucier, a senior political analyst at Capital Alpha Partners LLC, a Washington firm that tracks legislation for hedge funds and institutional investors.

Referring to TARP tax breaks, he says, “It’s ridiculous and it’s a product of the legislative sausage-making machine.”

Max Baucus, the Montana Democrat who chairs the Senate Finance Committee, spent much of 2008 searching for a way to enact the tax provisions, says Russ Sullivan, the committee’s staff director. Baucus recommended to Majority Leader Harry Reid of Nevada that the tax breaks be included in the October bailout bill, Sullivan says.

Baucus made the pitch after Paulson’s first push to get the bailout bill approved was defeated by the House on Sept. 28. That action precipitated a 778-point fall in the Dow Jones Industrial Average that afternoon.

No Controversy Expected

The tax breaks, Baucus told senators at the time, wouldn’t be controversial because most renewed current law and would bring Senate support for the bill, Sullivan says.

The largest added measure would spare more than 25 million U.S. households from a scheduled increase in the alternative minimum tax -- a special levy that eliminates many deductions when they become too high relative to income -- for one year by temporarily indexing the tax for inflation.

Baucus didn’t know until months later, Sullivan says, that one of those added provisions would steer about $2.7 billion to Diageo over the next three decades. That’s because Diageo wasn’t even mentioned in the bill and lawmakers didn’t realize they were ratifying deJongh’s deal by extending the underlying tax policy that made the agreement possible in the first place.

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