Craft Brewers Get a Tax Cut. Is It Good Policy?
When the Republican Party pushed through their tax cut bill a couple days ago, nearly every provision was lobbyist-designed to benefit a powerful interest. It was a law written by Republicans to benefit wealthy Republicans and their donors. Democrats weren't consulted and, where possible, Republicans made sure to help offset the deficit-exploding cuts with hikes on Democratic constituencies. And yet, as with every legislative battle, there were provisions tucked in that cut against the broad scope, including the "Craft Beverage Modernization and Tax Reform Act." It's a bipartisan proposal that's been kicking around with broad support that will actually benefit the little guy--in this case craft breweries. But is it good public policy or another giveaway, albeit to an unusual business sector?
[On Twitter, it's been coming in for a lot of hell because it was bundled with the catastrophically bad tax cuts. If that's the only reason you hate this bill, I would submit you don't understand politics. Very few spending bills pass the legislature--one a year at most. They are always garbage scows containing all kinds of motley provisions not connected to the central bill. This isn't a bug, though, it's the central feature of how things get done in our system. In this case, the small-brewery lobby did exactly the right thing. They crafted legislation and slowly built support for it on a district-by-district level. They waited until a law came along that was going to pass and lobbied to have it included. That's politics. There hasn't been a single major spending bill that hasn't followed this process--however unprecedented everything else was about the GOP approach this time--in the country's history. If we demanded that the legislature only passed "clean" bills, they'd never pass any bills at all and government would cease to function. Arguing that since the process sucked the bill must also suck is a naive one uninformed by the realities of our legislative system.]
So, what are the provisions?
- The current excise tax for breweries making less than 2 million barrels a year will drop from $7 to $3.50 on the first 60,000 barrels of production.
- Big breweries will also see their excise taxes drop from $18 to $16 on the first six million barrels of production.
- The bill expires at the end of 2019.
It's a nice break, but not a gigantic one. Only about 10% of American breweries make more than 20,000 barrels; for 90% of the breweries, the savings will be $70,000 or less. About half the breweries in America make fewer than a thousand barrels; they'll save $3,500 or less. The most any small brewery can save under the bill is $210,000. [This is incorrect; see below.] That's nice, but for a 2 million-barrel brewery, it's not much. (Big breweries making 6 million barrels or more a year, incidentally, will save $12 million.)
A big correction here. I calculated this wrong, and it has substantial ramifications on the whole is-this-good-policy? question. Breweries making 2m barrels or fewer also get that $2 break on barrels 60,001 through 2 million. That amounts to an additional savings of $3.88 million, or a total of $4.09 million. Thanks to Michael Uhrich for the heads up.
Excise Taxes
It's worth unpacking exactly what's happening here. Breweries are treated differently than other companies. You may have heard how certain industries are able to avoid most of their taxes--and some even get money back from the government. Breweries are decidedly not one of those favored businesses. In addition to all the local, state, and federal taxes breweries pay as businesses, they also pay two separate taxes, one state and one federal. They are known as "excise taxes," and of all the people involved in selling booze, only producers pay them. Breweries currently pay $7-$18 on every barrel of beer they produce depending on their size. That's just under 23 cents a gallon for small breweries and 58 cents for large breweries. States add on a similar excise tax, and it ranges from 59 cents a barrel in Wyoming to $39.89 a barrel in Tennessee (!).
Again, this is all taxed the second breweries make a batch of beer and is in addition to the other taxes they have to pay. And no other entity making money off beer--wholesalers, who make money when they sell it to pubs and stores, or the stores that sell them to you--has to pay this tax. You can see why breweries feel they are being singled out for extra taxation and don't feel too bad when one of these taxes is cut back. Apple must laugh at the little companies like Sierra Nevada who actually make their products in the US and pay taxes on them.
Now, it is true that alcohol does generate "negative externalities"--costs to society not reflected in the sale price. When a drunk smashes his car into someone or commits domestic violence, the state has its own costs as a result. "Pigouvian taxes" are intended to correct this and include those costs in the ticket price of an item. Many people believe alcohol and tobacco should have associated pigouvian taxes to pay for these costs, and they have a strong argument. But in tax law, there are always winners and losers, and breweries wonder why, in the stream of people making money of their hard labor, they're the only ones picking up the cost. Reasonable people may disagree about this, but them's the facts.
Good Law?
I keep going back and forth on this one. Little breweries are inefficient. It costs them a lot more to make a barrel of beer than it does a brewery with a huge, highly efficient brewery. Cutting their taxes help keep them somewhat competitive--or anyway that argument could be made. But if that's the case, why sunset the law after two years? Here the argument for this cut becomes more tenuous. In order to pass their bill through the Senate, Republicans had to conform to an arcane rule called the "Byrd rule." In order to avoid the filibuster (60 votes) and pass it on a party-line majority, the GOP had to keep the deficit from exploding too radically. To extend the cuts to their principal beneficiaries (the ultra-rich), they had to sunset many of the cuts to taxes affecting the little people to keep costs down. (Which were in any case window-dressing.) I've never heard whether that was why the beer tax cut was so short, but in any case it makes no sense. If little breweries need the law in 2018, they need it in 2020, right?
So chalk it up as: whatevs. It'll be a nice little boost to breweries in the short term, and maybe allow them to buy a tank or two. The argument that it will allow them to hire new people is a lot less convincing because of the temporary boost. Craft beer is suffering a bit of a slowdown in growth right now, but it is healthy by historical measures. One reason to give industries a temporary cut is to get them spending again or to give them a temporary boost during a rough patch. That's not the case here, so it's functioning more as a nice little windfall (and let's be clear, it is little). Good for them, but I doubt anyone's going to change much as a result. But hey, talking about the tax cut for little breweries is a lot nicer than talking about the ones billionaires got, isn't it?
Ah, how a simple error can make all the difference. (Or, "this is why I don't prepare my own taxes.") Thanks to Michael Uhrich's correction, the maths are very different depending on what size brewery you are. Let's recap:
- Small brewery making 2,000 barrels of beer: $7,000 tax cut.
- Large regional brewery making a million barrels: $2,090,000 tax cut
- Large regional brewery making 2 m barrels: $4,090,000 tax cut
- Large industrial brewery making six million barrels: $12,000,000 tax cut.
I would like to amend my analysis. These tax cuts are still the best deal, per barrel, to the small brewery. But as with the Trump tax cut in general, the serious cash accrues to the already-successful. The vast majority of beer excise taxes cut by Congress will go to the largest breweries. They pay the most in taxes, so you may feel like this is only fair. On balance, given the short window and puny benefit small breweries will actually realize, the whole thing looks a lot like another way to transfer federal dollars to giant corporations. Your mileage may vary, but I see no public policy good served by this wealth transfer.