This article first appeared in the August 2019 issue of CRAFT SPIRITS magazine.
The notoriously muggy swampiness of Washington, D.C. probably puts the nation’s capital pretty low on many people’s lists of places to visit during the dog days of summer. So it’s a testament to the commitment and fortitude of America’s craft spirits producers and their industry allies when nearly 150 of them show up in the District of Columbia in late July to convince lawmakers to back the industry’s top legislative priority.
Luckily, the oppressive, triple-digit heat wave that engulfed most of the Mid-Atlantic and Northeast eased at the start of the American Craft Spirits Association and Distilled Spirits Council (DISCUS) Public Policy Conference. But even as the heat and humidity dissipated, the air was still thick—thick with a sense of déjà vu, that is. Many of those in attendance were delivering a similar message last year—and the year before. And the fight rages on.
It’s a critical moment for the craft spirits industry—one that could mean the difference between continuing the current robust growth trajectory or watching the momentum grind to a halt.
At the end of 2017, Congress passed the Craft Beverage Modernization and Tax Reform Act (CBMTRA), as part of the broader Tax Cuts and Jobs Act of 2017. The CBMTRA was the first major legislation in modern history to directly support and grow America’s craft distillers by reducing the Federal Excise Tax (FET) from $13.50 to $2.70 per gallon for the first 100,000 proof gallons removed from bond. It also helped craft spirits producers achieve parity with small wineries and craft breweries. Small distillers previously paid 5.4 times more FET than craft brewers and 16.4 times more FET than small wineries for equal quantities of beverage alcohol.
“This is the very first time since Prohibition that distilled spirits have enjoyed any kind of tax relief,” says ACSA CEO Margie A.S. Lehrman.
But there’s always a catch. The FET cut came with an expiration date: December 31, 2019, a little over four months from the publication of this issue.
‘Very Concerned’
For much of the past year, ACSA has been gauging craft spirits producers’ concerns about the expiring FET cut through a series of interactive polls in the Monthly Mash newsletter. Unsurprisingly, nearly three-quarters of distillers expressed concern about the prospect of those reductions going away at the end of this year. Nearly half said they were “very concerned.”
Uncertainty is never good for business and poll results reflect that notion as well. Nearly two-thirds of respondents said that the big question mark over the fate of the FET reduction has made it difficult for them to form solid business plans. Three-quarters of those distillers say the impact on their business planning is significant.
That’s an obvious concern, since the difference between paying $2.70 per gallon and $13.50 per gallon could translate to tens of thousands and even hundreds of thousands of dollars. That could mean putting off a necessary expansion, buying new equipment or hiring (and potentially having to lay off) staff. Companies also might be forced to cut employee benefits.
“This is an extremely capital-intensive business, more so than beer or wine where you can sell your wares quite quickly after production,” says Joe Heron, founder and owner of Copper & Kings American Brandy Co. in Louisville, Kentucky. “We need to lay inventory down for a minimum of four years for our brandies. The reduction in FET is a significant cash flow enhancer in terms of capacity, staffing and enhancing the distillery experience in terms of event and community spaces.”
Distilleries, Heron notes, would have to absorb all of those added costs, as passing them on to the market is not an option. “Consumers are not able to take an increase in cost at retail,” Heron asserts. “So it would result in less investment, immediately, in every way.”
S.362 & HR 1175
The two U.S. senators behind the 2017 CMBTRA, Sen. Roy Blunt (R-MO) and Sen. Ron Wyden (D-OR), have reintroduced a version of the bill, S.362, which, as of this writing, had gained the support of 68 co-sponsors—two-thirds of the entire chamber.
Meanwhile, a similarly bipartisan 2019 bill, HR 1175, emerged in the House of Representatives, sponsored by Rep. Ron Kind (D-WI) and Rep. Mike Kelly (R-PA), has attracted more than 270 co-sponsors. When the 2017 bill went to the floor at the end of 2017, it did so with more than 300 co-sponsors. A key objective of last month’s Public Policy Conference was getting many of those uncommitted legislators off the fence.
“Reducing the tax burden on craft beverage makers has freed up more capital for them to grow and create jobs in communities across the United States,” says Sen. Blunt, who notes that distilled spirits overall are responsible for 26,000 jobs in his home state and $1.9 billion of economic contributions.
Blunt points to the 26,000 jobs the overall spirits industry has created and $1.9 billion distilled spirits have contributed to the economy in his home state alone. “Permanently reducing excise taxes on distillers will make the industry even stronger,” adds Blunt. “I’m encouraged by the broad, bipartisan support we’ve seen for the Craft Beverage Modernization and Tax Reform Act.”
Of course, Wyden’s home state has long been known as the epicenter of craft beverage production of all kinds, so it’s fitting that he’s been one of the biggest champions for the cause.
“People around the world enjoy Oregon wine, craft beer, cider and spirits—providing not only a serious source of home-state pride but also a huge boon to our state’s economy,” Wyden says. “That’s why I’ve long fought to permanently modernize burdensome rules and establish fair taxes for craft beverage producers in Oregon and around the country. The Craft Beverage Modernization and Tax Reform Act would allow these innovators to further grow and thrive. Fortunately, the legislation enjoys bipartisan support and I’m looking for every opportunity to get the job done.”
The saga of the CBMTRA has been fraught with obstacles. When the industry was working on getting the original version of the bill passed in 2017, the United States Congress, Joint Committee on Taxation, fairly late in the game, assessed that the legislation would result in about $1.6 billion in lost revenue from the U.S. Treasury. That was considerably higher than federal officials initially had indicated, which caught CBMTRA proponents off guard. “I would say they came up with a very high number,” offers Jim Hyland, ACSA Public Policy Adviser and president of the Pennsylvania Avenue Group. “We always thought it would be in the neighborhood of $300 million from the figures that have come out.”
The joint tax committee’s overestimate may have contributed to the decision to slap the December 2019 expiration date on the 2017 bill, as many lawmakers may have concluded that federal coffers would take too big of a hit from permanent FET relief. “Originally, I think it was a bit overscored,” says Mark Shilling, past president of ACSA and current chair of the Association’s Legislative Affairs Committee.
Since then the number has come in at just over $400 million, about a quarter of the late 2017 projection.
“The loss in revenue over time is much less,” notes Steve Johnson, chair of the ACSA Political Action Committee (PAC) and president and CEO of Vermont Spirits Distilling (Quechee, Vermont). “If we had known that at the time, we could’ve gotten [a permanent reduction] through two years ago.”
In the 20 months since CBMTRA’s passage, federal number crunchers have become a bit more familiar with how the spirits industry functions—thanks in no small part to efforts from groups like ACSA and its PAC.
“From what I understand, the folks who play a role in doing the math have learned a lot more about the industry and how pricing works, how taxes work,” Shilling points out. “You can’t look at beverage alcohol and just assume that the way it’s taxed works the same way it does for other consumer products. I think they’ve learned a little more about how to look at it and how to do the math.”
One of the biggest challenges for the craft spirits industry, Shilling notes, is that federal officials often view beverage alcohol as one single, monolithic entity, which affects the way it’s taxed.
“They look at everything—beer, wine and spirits—as one big number,” he says. “They don’t take the time to look at the individual categories and see what the impact is individually. If you break out distilled spirits, I think that our portion of that [impact] is not nearly as significant an impact as the other [alcohol beverages].”
Behind the Numbers
The lower figure should serve to bolster the craft spirits industry’s case for a permanent extension. In fact, much of that lower number can be offset further if the craft segment continues on its current growth trajectory. Last year at this time there were about 1,835 craft distilleries in the U.S., according to the Craft Spirits Data Project (CSDP), a joint economic impact study that ACSA annually conducts in partnership with Park Street and the IWSR. When the 2019 CSDP report is unveiled in September, that number is expected to be around 2,000—that’s a new distillery opening nearly every day, on average. And that means more companies paying taxes.
“It’s incumbent upon us to go back and educate the people who do this for a living what the real impact is from tax collections,” Hyland says. “And that doesn’t even take into account new hires, new investments, new sales—all of which bring revenue back into government coffers.”
And there’s been a great deal of all of those—new hires, new investments and new sales—thanks to the FET cut.
Last year, after CBMTRA went into effect, ACSA polled craft distillers on the benefits they would derive from excise tax relief. While most respondents expected the $10.80 per gallon savings to help their businesses in multiple ways, ACSA asked them to identify their number one benefit. “Hire more staff,” was the top objective, with about 20% saying that’s what they’d be putting the money toward. Other priorities included moving to a larger facility or expanding the existing facility, buying new equipment, boosting the marketing budget and paying down debt.
Some of the distillery representatives in D.C. last month were living examples of FET relief in action. Among those was Maureen Reed, corporate marketing manager at KO Distilling in Manassas, Virginia, who articulated to members of Congress and their staff how the tax reduction helped create jobs like hers.
“FET reform gives distillers more parity with the rest of the alcohol industry,” she notes, “and has allowed KO Distilling to invest in a new still and a new rickhouse, continue to support Virginia agriculture and tourism and even hire four new employees—myself included.”
While most agree that these are the sorts of stories lawmakers need to hear, permanent FET relief is going to require a lot more than words. They’ll also need visuals.
“The best way for success for this legislation is to invite [representatives and senators] in to the distillery,” advises Johnson. “If they want a picture taken, great. [Show them] this is where we were a couple of years ago and this is where we are now, here’s what’s going on. See it all, see it work.”
As you read this, Congress likely still is in summer recess. That means, in more cases than not, lawmakers are back home in their districts, available for more face time with their constituents than when they’re in Washington.
“There’s nothing better than getting them on site at a distillery to discuss the issues,” Hyland offers.
But even if it’s not possible to get lawmakers to commit to a visit, ACSA has urged members to stay in contact with legislators in both Congressional chambers to convince them to co-sponsor S.362 and HR 1175 (if they aren’t already). And the Association encourages distillers to donate to the PAC, to ensure that ACSA has a seat at the table with some of Washington’s biggest decision makers.
Getting legislators off the fence largely is about educating them—and not just on the merits of FET relief, but on some of the misconceptions that might be adversely influencing opinions. For instance, many members of Congress aren’t aware of the 100,000 proof gallon cap on the $10.80-per-gallon tax cut, leading them to believe that it will benefit large, multinational producers disproportionately.
“The growth is in the small [producers] that still haven’t hit the cap,” Shilling explains.
There’s also a bit of confusion on Capitol Hill regarding parity with other craft alcohol producers. Prior to CBMTRA, craft breweries and wineries each had some form of tiered tax structure separating them from the mega-producers within their respective industries and, if the 2017 relief expires, they’ll revert to those previous levels. Since the passage of CBMTRA was the first time craft distillers have received any sort of tax break, small spirits producers would revert to paying the same amount per gallon that large companies—whose resources are exponentially greater than those of craft producers—contribute.
“This is it for us, this is the only one,” Shilling points out. “We’re trying to catch up to beer and wine.”
Another common misconception is that the bill only benefits producers. While it’s true that distillers, brewers and wine makers are the ones getting the tax cut, the money they’re saving is supporting the farmers who grow the grain and fruit, packaging suppliers, equipment manufacturers, cooperages and other trading partners along the supply chain. More money to invest in one’s operation means more support for other entrepreneurs and artisans helping their own local economies. It also means more charitable giving.
“That tax money is being reinvested not just in the distillery, but to the community,” Shilling says. “We’ve just got to keep hammering that home with [Congress].”
What Lies Ahead
With four months left before the 2017 FET reduction expires, there have been some positive signs that it will live beyond its expiration date.
“I’m optimistic,” says ACSA President Chris Montana, owner of Du Nord Craft Spirits in Minneapolis. “I think we can get up to the same level of support we had last Congress—even better.”
Montana adds that the quality of the meetings he’s had with Congress has been encouraging, but he cautions that there’s still a lengthy road ahead.
“The challenge is that even though we have this bipartisan bill, it still has this process, it still has to make it through the sausage-making,” he notes.
It’s also a matter of finding the appropriate piece of legislation to attach the FET relief provisions, similar to how the CBMTRA was passed as part of the broader Tax Cut and Jobs Act of 2017.
Early this summer, the House Ways and Means Committee revealed that it is considering legislation to extend the $2.70-per-gallon rate through 2020. While a one-year extension may not be the desired ultimate outcome, it does buy distillers a little more time to continue telling their stories and demonstrate why permanent relief makes the most sense. However, even the one-year extension is far from a done deal and distillers must continue pushing on all fronts for any outcome, whether that be a one-year extension, a three-year extension or permanence.
In May, the United States Senate Committee on Finance announced that it had set up a series of bi-partisan task forces to address more than 40 tax provisions that have expired or are set to expire. Among those was the Individual, Excise, and Other Temporary Tax Policy Task Force, charged with examining six of those temporary tax policies, including the FET reduction on beverage alcohol. In an encouraging development on Aug. 13, the Task Force—co-led by Sen. Pat Roberts (R-KS) and Sen. Robert Menendez (D-NJ) and including Sen. Steve Daines (R-MT) and Sen. Maggie Hassan (D-NH)—indicated that it not only would like to see the two-year FET cut extended, but ultimately made permanent. Further, Task Force members are all co-sponsors of the CBMTRA. Lehrman considers this a positive development and another step towards making the relief permanent. However, she cautioned that “until the provisions of the CBMTRA are on the floor for a vote and sent to the President’s desk for signature, ACSA will not rest. It’s a done deal WHEN it’s a done deal and not a moment before.”
What further complicates matters is that 2020 is an election year—Presidential and Congressional—and campaigns could get in the way.
“I think the biggest danger in trying to do something during an election year is that all of these [lawmakers] might be distracted with re-election and not paying attention to the work that needs to be done in the Capitol,” Shilling cautions. “We need to be vigilant and active and remember that the squeaky wheel gets the grease.”
Lehrman concurs. “The longer the fight drags on, industry members might also become immune to the necessity to remain vocal,” she says. “ACSA will not give up until the relief becomes permanent.”