Colorado is home to some truly excellent rum makers, including Montanya, Ballmer and Bear Creek. Unfortunately, Colorado’s small local producers are forced to compete on an artificially created uneven playing field against large foreign-owned distilleries and brands due to federal tax policy under the Rum Cover-Over (RCO) Program and Section 5010 tax loophole — both of which are distorting markets and hurting Colorado businesses to the benefit of large foreign producers.

The RCO program began more than a century ago in 1917 with a simple and understandable purpose. Puerto Rico had recently become a United States territory and in an effort to fund economic development within this new territory, the federal government instituted the RCO program which redirects nearly all the federal excise taxes collected on Puerto Rican rum and sends the money back to the Puerto Rican government with little to no restriction or guidance on how that tax revenue is to be used. Congress added the U.S. Virgin Islands to this program in 1954.

Unfortunately, this program led to unintended consequences. Puerto Rican and Virgin Islands rum producers began demanding greater and greater subsidies from local governments paid out of the RCO Program excise taxes. Producers even pitted the two territories against each other with threats to move operations to the other territory if additional subsidies were not forthcoming.

Now, instead of going toward public services in these territories, large portions of this tax revenue is funneled back to rum makers in the form of generous tax subsidies — some estimates placing them at up to 30% of the revenue collected or $250 million annually. Often, these recipients are foreign-headquartered businesses that merely locate distilleries in these territories to take advantage of the tax benefits. What’s worse, there is very little transparency around the RCO Program (which is why we must guess at exactly how much these companies are benefiting at the expense of taxpayers).

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Our Colorado distillers would love to enjoy the massive subsidies Puerto Rico and the Virgin Islands provide for foreign distillers, but they cannot. Instead, they must compete on store shelves against highly subsidized competitors subsidized by the taxes collected by their own federal government.

The solution is simple: RCO subsidies should end to allow fair competition between distillers in Puerto Rico, the Virgin Islands, and throughout the United States. A good beginning would cap producer subsidies from the RCO Program at 5% of rum tax revenue received by each territory, phasing out the subsidies entirely over the following years. To do this, we will need to require real transparency to know where the RCO program revenue is actually going. Ultimately, we should want to see RCO funds used as intended: to help U.S. territories stand on their own two feet and support the needs of their residents.

The RCO Program isn’t the only example of bad tax policy artificially distorting markets for distilled spirits in the U.S. Another issue is the Section 5010 tax loophole. This innocuous-sounding provision allows hard liquor producers to reduce their excise taxes by adding extra ingredients — like “non-beverage flavorings” or high-potency wine — to the alcohol they produce. The savings can be substantial. Distillers who use these additives pay as little as $5.08 per gallon liquor tax rate, down from the standard $8.10 per gallon rate.

We should not reward distillers who debase their products. It’s time the government ended the Section 5010 loophole. Doing this, and reforming the RCO program, will provide Colorado’s hardworking distillers a fair chance to compete in an open free marketplace without favored players subsidized by the federal government’s excise taxes. So I’m calling on Sens. Michael Bennet and John Hickenlooper, along with the entire Colorado congressional delegation, to roll up their sleeves and get this done. Sen. Hickenlooper revolutionized Colorado’s craft brewery industry, creating thousands of jobs just as Colorado’s small batch distillers are doing now. But they would like to do it, and could do it better, without competing against crony capitalism beneficiaries in the form of the direct and indirect subsidies given to large foreign producers paid out of federal excise taxes collected to benefit Puerto Rico and the Virgin Islands.

Bob Marshall represents District 43 (Highlands Ranch) in the Colorado House of Representatives. He is a member of the House Finance Committee, Tax Oversight Committee and served in the Large Business and International Tax Litigation Division of the IRS. He holds a J.D. (magna cum laude) from Cornell Law School with a specialty in business law and regulation and a LLM in tax law from the University of San Diego Law School where he graduated first in his class.