BIPPS: End the barrel tax on new bourbon barrels
The Bluegrass Institute has serious concerns that the bourbon barrel tax’s negative effect will prevent the next generation of distilling entrepreneurs from getting their start in Kentucky. (Link & link) The growth of craft distillers in other states is outpacing distiller growth here.
We wrote in our first post, “Kentucky continues to be the dominant player in bourbon production. It would be shortsighted, however, to base policy decisions on that fact when there are clear and visible threats to our position as the Bourbon Capital of the World.”
Last week we posted that “there are viable ideas for how to move forward in an equitable manner on the barrel tax. The legislature should make it a priority to tackle this issue before going home.”
Let’s dig in a little deeper on those “viable ideas.”
According to the Kentucky Distillers’ Association (KDA), “Distillers pay ad valorem property taxes at the state and local level each year on aging barrels in warehouses. The majority of barrel taxes are paid at the local level.” (Source)
The barrel tax is a revenue stream for a small number of Kentucky counties — those with bourbon aging in barrels. A slide from last summer’s Bourbon Barrel Task Force identified 7 counties with more than $1 million in revenue from the tax: Nelson ($6.26m), Franklin ($2.37m), Bullitt ($2.21m), Jefferson ($2.03m), Marion ($1.40m), Woodford ($1.23m) and Anderson ($1.12m).* The growth in local barrel tax revenues tracks with the industry’s growth over the past decade.**
BIPPS understands local governments require resources to support local services like fire protection, public safety and infrastructure. The distillers acknowledge those services are important to their investments in those local communities.
At its best, the legislative process pursues compromise by balancing competing interests. It’s clear to most policymakers that Kentucky’s barrel tax is a competitive disadvantage to the industry’s growth. Eliminating this archaic tax while holding local governments harmless in the short and intermediate term is the answer legislators appear to be pursuing.
BIPPS believes KDA’s proposal to end the barrel tax on new barrels by January 1, 2025 accomplishes this goal. Doing so will remove a significant barrier to growth while counties continue to collect revenue on the existing inventory, providing time for those local government entities to manage a steady transition in their budgets.
Eliminating the barrel tax should result in more investment from the industry, particularly craft distillers. As we wrote last week, “startups that produce bourbon must pay taxes on their aging barrels — unfinished product — for years before putting their first bottle of bourbon on the shelf. Realizing this during their planning stages, it is safe to assume startups are increasingly choosing other states.”
Increased investment will drive growth in the other revenue sources generated by the industry. New distilleries create more opportunities for more Kentucky counties to benefit from the tourism surrounding bourbon. Entrepreneurs will see Kentucky as the place to get their start.
The barrel tax is an anti-competitive tax with serious ramifications. The General Assembly should take this threat to our state’s signature industry seriously. Ending the barrel tax on new barrels is the place to start.
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*A presentation to the Task Force from the Kentucky Association of Counties provided additional details for Bullitt, Nelson and Marion. Henry County officials have also been active in the discussion based upon the anticipated revenue from ongoing investments by the bourbon industry.
** A significant portion of barrel tax revenue goes toward local school districts. We’ll address this important piece of the puzzle in a future post.