Update 11/17: A deal lawmakers reached late Monday night appended the Craft Beverage Modernization and Tax Reform Act to a tax extender bill, which is expected to be ready for a full vote sometime before the end of this week. The tax cuts wouldn’t become permanent, though; they’ll just be extended for another year until Jan. 1, 2021, should the bill pass.
“It’s good news,” Jim McGreevy, CEO of trade group the Beer Institute, tells GBH. “This allows us to argue our case for another year and hopefully get permanence [for these cuts].”
Original story as follows:
THE GIST
The clock is ticking for Congress to renew excise tax cuts that were passed as part of December 2017’s Craft Beverage Modernization and Tax Reform Act (CBMTRA), signed into law as part of the larger Tax Cuts and Jobs Act. These tax cuts have benefited brewers, wineries, and spirits makers, reducing the excise taxes producers pay to the government.
The 2017 legislation was set to last just two years and will expire at the end of December unless Congress renews it. Despite bipartisan support in the House and Senate, 2019’s Craft Beverage Modernization and Tax Reform Act (H.R. 1175/ S.362) would need to be tacked on to a separate piece of legislation in order to pass. So far, lawmakers haven’t found a way to pass it, and the rapidly shrinking window to do so has heated up rhetoric surrounding the issue.
Trade groups including the Beer Institute, state brewers’ guilds, and the Brewers Association (which represents breweries it defines as “small and independent”—they must produce fewer than 6 million barrels of beer a year and adhere to other self-imposed guidelines to qualify)—have especially touted CBMTRA’s savings to breweries. The BA says savings have allowed craft breweries to hire more staff, purchase equipment, and grow their businesses.
But the median BA-defined craft brewery produces about 600 BBLs of beer annually. Failure to pass the CBMTRA would see a brewery of that size pay $4,200 in excise taxes rather than $2,100. The savings could buy the equivalent of roughly 4,000 pounds of malt (enough for six 7-BBL batches) or pay the equivalent of two months’ worth of power bills for a small brewery.
Thanks to CBMTRA, since January 2018, breweries producing under 2 million BBLs of beer per year pay $3.50 per barrel on the first 60,000 BBLs produced each year (the tax was previously $7 per BBL), which jumps to a $16 per-barrel excise tax rate after 60,000 BBLs (the same rate paid by America’s largest breweries). To provide a sense of scale: Lakewood, New York’s Southern Tier Brewing Company is on pace to produce almost 60,000 BBLs in 2019, as is Downington, Pennsylvania’s Victory Brewing Company.
If the CBMTRA is not renewed by the end of the month, that reduced rate for the first 60,000 BBLs would revert to its prior rate of $7—a jump many in the industry are painting as catastrophic. Dec. 17 and 18 likely represent the final two chances for Congress to vote on extending the cuts, as two minibus bills regarding tax extensions and federal government funding are on legislators’ dockets for those days.
WHY IT MATTERS
Doubling the excise tax rate in the United States is no small economic detail. But perspective is needed to clarify exactly how this would affect the vast majority of small breweries. Dire warnings issued by brewing trade groups about the need to keep taxes low do reflect the benefits of a lower annual bill, but don’t mirror the reality for the bulk of small and independent businesses that make up the country’s beer industry.
According to the Brewers Association’s chief economist Bart Watson, only 54 brewing companies—which, because of conglomerate companies comprised of multiple breweries, represent 230 total breweries—produced more than 60,000 BBLs in 2018. (There are more than 7,500 breweries currently operating in the U.S.) Watson estimates 70-75% of Brewers Association-defined craft breweries produce fewer than 1,000 BBLs of beer per year. A brewery producing 1,000 BBLs would see its annual excise tax double from $3,500 to $7,000 if the CBMTRA is not renewed.
This is not an insignificant cost for a small business, to be sure. But an increase of around $2,000 annually for a median-sized brewery (making 600 BBLs a year), up to $3,500 for a majority of breweries, is hardly enough to hire a new employee or invest in a canning line, let alone break a budget.
An op-ed jointly written by Brewers Association president and CEO Bob Pease and Beer Institute president and CEO Jim McGreevy, published in the Washington Examiner, credits the excise tax cuts for all sorts of grand improvements at craft breweries. “These businesses may even be forced to make decisions that could very well unravel much of the growth seen in recent years,” they write. But the numbers they cite don’t add up.
According to the op-ed, Night Shift Brewing in Everett, Massachusetts reportedly saved $140,000, which funded a loan for a new taproom and brewery; “on top of that, it was able to add more than 100 new jobs across the business”—all improvements mentioned without any context beyond pointing at the $140,000 saved because of CBMTRA. Bart Watson, chief economist with the BA, notes that those savings could be pivotal in helping to pay off loans.
The St. Louis-based 4 Hands Brewing Company, which produced more than 27,000 BBLs of beer in 2018—and therefore would have saved $94,500 in excise taxes under the bill—was able to use those savings to hire three new, full-time employees, upgrade its canning line, and buy a new keg washer, according to the op-ed.
To put it plainly: these numbers overstate the impact of excise tax savings on the average small brewery. A few thousand dollars is not negligible to a small business, but it’s hardly going to contribute to an industry-wide hiring freeze. Drew Pool, co-owner of the Phoenix, Arizona-based Wren House Brewing Company, which will produce roughly 2,000 BBLs of beer this year, paid roughly $7,000 in excise taxes. That would double to $14,000 if the CBMTRA isn’t renewed.
“The less money we have, the less we can invest in all areas of the business. But I think where it really hurts is either we raise prices to keep margins the same or we just eat it, which hurts us as a small business,” Pool tells GBH. “$7,000 could go toward bonuses or a raise for somebody. It makes us decide to pull back from distribution or maybe not go buy those extra expensive hops. It kind of is a snowball effect where it’s a lot of little decisions that we might make to cover that $7,000.”
That scenario, in which a brewery makes many small decisions to cover any potential increase in excise taxes, seems most likely among the average-sized craft brewery.
Kyle Jefferson, cofounder of Tucson, Arizona-based Pueblo Vida Brewing Company, says his brewery is on track to produce 1,500 BBLs in 2019, its fifth year in operation. An increase from $5,250 in excise taxes to more than $10,000 wouldn’t sink the business, but would come directly out of its operations budget. Jefferson says that $5,000 would likely preclude the brewery from buying flow meters, which cost roughly $1,000 each, or from moving an employee or two to full-time. Pueblo Vida currently has five full-time employees, including Jefferson, and while the brewery doesn’t anticipate shedding any employees as a result of increased taxes, it would potentially remain at status quo rather than grow its full-time workforce. Jefferson says he’s not entirely sure what hard choices he’d make if the tax cuts aren’t renewed, but the shortfall would likely delay small “quality-of-life” improvements, like equipment that would make brewers’ jobs easier.
“We’re pretty successful, but I can’t imagine this hit for a lot of breweries that are struggling,” Jefferson tells GBH. “And all of a sudden you take $5,000 away from somebody that’s not making any money and that really hurts.”
For some small breweries, stability is perhaps more important than the rate itself. The uncertainty of not knowing whether excise taxes will remain stable or will double within a month might be more vexing than a planned increase, announced well in advance, would be. James Alexander, owner and brewer at Structures Brewing in Bellingham, Washington, says that while he’d obviously prefer the lower rate, the tax cuts aren’t his top priority right now. He just wishes for clarity on the issue.
“Planning each year differently is obviously common with a small business, but keeping variables out of the equation helps for sure,” says Alexander. Structures Brewing will produce roughly 700 BBLs of beer this year. “Future me would hate right-now me to not care about this, but as a small business owner I am concerned more about my employees’ wages, hop contacts, schedules, expansion, social media, and above all making sure no one on my staff gets burnt out.”
The hit small breweries would take following lawmakers’ potential failure to renew the CBMTRA is obviously palpable. Many breweries pay excise taxes quarterly, so owners would sit down to write that first check in April. Other businesses that may pay annually or semi-monthly, would face much stronger pressure on cash flow with increases without the tax cuts sticking around.
But as industry groups, breweries, and beer drinkers discuss the potential effects of not passing this legislation, it’s crucial to keep the average craft brewery’s size in mind. It’s not necessary to overstate the potential blow higher excise taxes would deliver to small breweries; reality is enough.
Words by Kate Bernot