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Wednesday, November 18, 2009

Subsidies on trial in Caribbean rum rumble

I got my hands on the on contract between Diageo and the government of the U.S. Virgin Islands in which the USVI offers the liquor company a flotilla of subsidies to lure Captain Morgan away from Puerto Rico. My column examines the subsidies, and the Capitol Hill war over them:

The Virgin Islands courtship of Captain Morgan has angered Puerto Rican officials, who have started to push back. The territory's congressional representative, Pedro Pierluisi, introduced a bill in April prohibiting territories from using more than 10 percent of their cover-over for subsidies (a consultant for Puerto Rico tells me it turns about 6 percent of the cover-over into liquor subsidies)....

Puerto Rico's play here is something like bilateral disarmament: We won't bribe companies with hyper-subsidies if the Virgin Islands doesn't. But the predicament points out a hole in a standard free-market argument. It turns out that municipalities competing for business aren't in a race to roll back regulations and lower taxes, but in a race to provide more taxpayer subsidies.

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