Among the various provisions in the recent fiscal cliff deal was a two-year extension of the rum cover-over program that sends federal revenue from rum excises to the governments of Puerto Rico and the U.S. Virgin Islands. The program was originally designed to provide development aid to these U.S. territories, but in recent years it has become a tool of industrial policy and corporate welfare.

I wrote about the program back in May last year:

As it does with all distilled spirits, the federal government charges an excise tax of $13.50 per proof gallon of rum sold in the United States. This equates to roughly $2 per bottle. Under the cover-over program, almost all of that money is directly granted to the U.S. Virgin Islands and the Commonwealth of Puerto Rico using a complex formula so that each receives a share of the money based on how much rum it produces relative to the other. The tax is collected from sales of all rum imported to the mainland, even from other countries.

In 2009 the U.S. Virgin Islands figured out how to increase its haul under the program by luring Captain Morgan maker Diageo to relocate its production facility there from Puerto Rico with a promise to share the loot. Diageo now has a 30 year deal to produce rum in the Virgin Islands backed by subsidies that cover almost the entire cost of production.

The use of the funds this way and the program’s extension have two major consequences.

First, the ensuing rum war between U.S. Virgin Islands and Puerto Rico to secure a larger portion of the cover over funds has crippled the ability of producers in other Caribbean island nations to compete in the global rum market. The potential for an embarrassing WTO challenge grows greater now that the program has been extended.

Second, Diageo now has a strong incentive to lobby Congress to keep the program in place. As the invaluable Tim Carney reports today in the Washington Examiner, Diageo hired ex-senators Trent Lott and John Breaux to lobby their former colleagues on the issue. The recent extension is merely a sign of more to come.

The program is worth about $450 million per year to the governments of these Caribbean territories. Giving a slice of that to rum producers brings in the lobbying power to keep the program in place, even as it drastically distorts the rum market at the expense of everyone else.