Senator Ron Wyden (D-OR) has had a vision of tax reform for years. No, not the GOP-backed Tax Cuts and Jobs Act of 2017 signed into law by President Trump on December 22nd, but rather tax reform dedicated towards the alcohol industry, and primarily producers of craft beer, distilled spirits, wine, and cider.
The Craft Beverage Modernization and Tax Reform Act (“CBMTRA”), which has been juggled around congress since 2015, has experienced highs and lows. It appeared to be gaining momentum towards the end of 2016, before suddenly stalling out, and I have shared in the emotional roller coaster all along the way.
The bill was reintroduced to Congress in January of this year, but essentially laid dormant. Just when it seemed like the bill had no future, Senator Rob Portman (R-OH) inserted the language of the CBMTRA into the current Tax Cuts and Jobs Act of 2017. The move was an interesting one, as Sen. Wyden and Sen. Portman are on seemingly opposite ends of the political spectrum, and many viewed it as an attempt to garner Sen. Wyden’s support for the tax bill – which never happened. As we know now, that support was not necessary, and the bill has been signed into law.
So what is in the final version of the bill? The provision gaining the most attention in the industry is the reduction in federal excise tax for beer, effectively cutting the current rate for small producers (those who produce less than 2 million barrels per year) from $7 per barrel to $3.50 on the first 60,000 barrels produced domestically. The impact of such a tax reduction cannot be overstated. Simply put, this is a dramatic move engineered to help a growing segment at a pivotal moment. Keeping in mind that breweries must also pay state excise taxes, which vary greatly, this move should free up substantial capital to allow for expansion and more growth. In addition, the changes would allow the much coveted “bond-to-bond” transfer of bulk beer between breweries of non-common ownership. I will attempt to spare many of you of the legal jargon, but this essentially means that breweries will be able to join their wine and spirits brethren who can sell and transfer large quantities of product between each other without payment of federal excise tax. As of right now, breweries can only do this if the shipping and receiving brewery have common ownership.
The tax cuts are not limited to breweries either – in fact, distilled spirits producers, wineries and cider makers would receive tax relief as well. There is currently no small producer tax rate or credit for distilleries – all distilleries, regardless of size, must pay federal excise taxes of $13.50 per proof gallon. Again, this of course does not account for the varying rates of state excise taxes. For the federal taxes alone, this accounts for $2.14 per 750 ml bottle of 80 proof spirits.
Keep in mind that the “Whiskey Tax” was the very first federal excise tax, and was imposed by President Washington to help pay the debts of the Revolutionary War. This was so controversial at the time, that it spawned the Whiskey Rebellion, which served as a significant marker in the history of our government’s ability to collect taxes. To provide further context, the federal excise tax on distilled spirits has not been reduced since the Civil War. For you non-history buffs, prohibition was repealed 84 years ago (1933) and the Civil War ended 152 years ago (1865).
However, in that same vein, it is important to understand the history of public opinion as it relates to tax policy. According to the polling aggregation website FiveThirtyEight, the 2017 tax bill is historically unpopular. The differential of favorability for the 1981 Reagan era tax cuts was +25% (51% approved, 26% disapproved). For the 2001 Bush tax cuts, the differential was +12% (49% approved, 37% disapproved). For Trump’s 2017 tax cuts, the public opinion is -19% (33% approved, 52% disapproved). To put that in perspective, the 1993 Clinton tax hike had a public opinion differential of -10% (33% approved, 44% disapproved).
Indeed, many of the craft industry members affected by the CBMTRA tend to fall on the progressive and liberal side of politics, and were conflicted with the GOP-backed tax bill in the weeks leading up to its passage. As an attorney serving the craft beer and spirits industry, I have found that my clients, regardless of political affiliation, generally support the tax relief as it relates to their industry and the corporate tax break as well – many have even hired lobbyists on the issue.
Unfortunately, their consumer base may not fully acquiesce. The other night, I had a beer with a good friend who tends to fall on the liberal side of many issues, including economic policy. This friend is a big fan of craft beer and especially small businesses. When I asked about her opinion on the tax break, she admitted that she loved and supported the craft beverage movement (especially in our home city of Cincinnati), however she just didn’t feel like the industry needed the tax relief right now.
These experiences seem to represent a larger chasm within the industry between consumers and producers. Bob Pease, the president and CEO of the Brewers Association—a not-for-profit trade association dedicated to small and independent craft brewers—issued the following statement regarding the passage of the Craft Beverage Modernization and Tax Reform Act that is part of the Tax Cut and Jobs Act:
“This is a monumental day for small and independent craft brewers. America’s small, Main Street brewers—6,000 strong and located in every state and virtually every congressional district in the country—are incredibly pleased Congress has recognized that they have great growth potential. Our expectation is that small brewers will use their savings related to the recalibration of the federal excise tax on beer to invest in their breweries, expand their operations, create more jobs and hire more American workers. We are very appreciative that Congress has enacted these bipartisan, strongly supported measures.
“For the better part of a decade, the Brewers Association has played a central role advocating for tax relief for small brewers. We appreciate all the support and hard work from every corner of the country that brought this to fruition. This is a significant step forward representing over $142 million in annual savings for small brewers. We will continue to build on today’s success to bring even greater economic growth for craft brewers and the communities they serve.”
I can tell you firsthand that there is unprecedented optimism within the industry in light of these changes. Whether these changes will fulfill the promises of the administration will only be revealed in time. In the meantime, I recommend we all do our part by enjoying the holidays and enjoying our favorite beverage from a job-creating industry that is on the grow.