Virgin Islands

The United States’ other insular territory in the Caribbean is the Virgin Islands, a very different sort of place from Puerto Rico, and the only place under the U.S. flag where people drive on the left. It is much smaller, with a resident population of only 110,000, mainly on the three islands of St. Thomas, St. John and St. Croix, purchased by the United States from Denmark in 1917. They were settled by Dutch and Danes and had a polyglot colonial society with one of the oldest Jewish communities in the Western Hemisphere. The islands’ most famous son is Alexander Hamilton, who grew up on St. Croix. The Virgin Islands have lived primarily off tourism and refineries. The Hovensa refinery on St. Croix, half-owned by the Venezuelan government, is the largest refinery in the Western Hemisphere and one of the ten largest in the world. These industries have produced high incomes for a few employees but have not provided the basis for a steady economy. Tourism, hurt by hurricanes in the 1990s, was up sharply in 2004, when cruise ships returned to St. Croix after a two-year hiatus because of high crime. But Hurricane Omar’s indirect hit in October 2008 and the global economic recession that began in 2007 badly hurt tourism. Still, St. Thomas remains the No. 1 cruise ship port in the world, with nearly 400 ships coming in each year.

Investment businesses are attracted to the Virgin Islands by tax breaks established by Congress and the Virgin Islands government. Individuals and businesses that qualify under the Economic Development Authority pay a maximum of 3.5% in income tax, which has yielded revenues of about $100 million a year to the island government. To qualify, taxpayers must live and do business in the Virgin Islands. Since 2004, Congress has been gradually tightening restrictions on who can claim residency, and the Internal Revenue Service has been increasingly performing audits of those who abuse the tax loophole. This has cost the island tens of millions.

This loss of revenue is a serious problem. The Virgin Islands government has been running structural deficits estimated at between $50 million and $100 million out of a budget of about $600 million. Another problem is the crushing burden of a $1 billion bond debt, which requires $45 million in debt service. One-third of workers on the islands are employed by government, which has been teetering on the brink of financial collapse.

Salvation may come through rum. In October 2008, House Ways and Means Chairman Charles Rangel, D-N.Y., put into a the $700 billion bailout of the financial services industry a renewal of the Caribbean rum rebate which sends $13.25 of the $13.50 per gallon federal excise tax on rum back to the producing territory. And in July 2008, Diageo announced that it would move its Captain Morgan production from Puerto Rico to the Virgin Islands in return for a $250 million bond to finance the distillery.

The U.S. Virgin Islands plays a small role in the presidential selection process. It held a Democratic presidential primary on February 9, 2008, in which Illinois Sen. Barack Obama beat New York Sen. Hillary Rodham Clinton 90%-8% (the actual vote count was 1,772 to 149) and got all three pledged delegates. Republicans held a tiny caucus in a local restaurant that April, after Sen. John McCain had already locked up the nomination; all delegates chosen supported him. The U.S. Virgin Islands played a role in electing Michael Steele as Republican National Committee chairman in February 2009. The 15 delegates from the territories all backed Steele, who said he would pay close attention to them, and they gave him his margin of victory.