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As U.S. Senate Considers Tax Bill, Wineries Seek a Break

An amendment to the Republicans' ambitious tax bill would reduce taxes on wineries, brewers and distillers. But is it a giveaway to large producers?
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Tucked inside the Republican tax bill being considered on Capitol Hill is a major change to excise taxes for wineries, breweries and distillers.

Emma Balter
Posted: November 30, 2017

Updated Dec. 4: The senate passed their version of the larger tax bill Dec. 1, including the excise-tax amendment. The two chambers will now go to conference to reconcile the differences in the two bills. Wine Spectator will post further updates this week.

Taxes are the hottest topic in Washington, D.C., right now. The U.S. Senate is considering what could be the biggest overhaul of the federal tax code since 1986. But while the debate has focused on corporate tax rates and personal income tax brackets, the bill also could have a major impact on the wine industry.

A separate bill, the Craft Beverage Modernization and Tax Reform Act (S. 236/H.R. 747), which would significantly reduce the tax burden on wineries by restructuring the excise tax code, has been added to the Senate bill as an amendment. That means that if tax reform passes, it could have a huge impact on wineries, brewers and distillers. That has many in the alcohol industry lobbying for the proposal.

If it passes, how would it affect wineries? Will it help everyone equally? And will wine-loving consumers benefit?

How did we get here?

"Federal taxes on alcohol supported the federal government right through 1913," said John Hinman, founder and partner of Hinman & Carmichael, a law firm that specializes in beverage law. Excise taxes were a major source of income for federal coffers.

In 1913, the 16th Amendment of the Constitution was ratified, allowing the federal government to collect income taxes. The temperance movement had been gaining traction by that point, and shifting the national reliance to income tax, rather than alcohol excise tax, made it easier for lawmakers to back Prohibition. Restoring states’ and the federal government’s ability to collect excise taxes was one argument for Prohibition’s repeal in 1933.

Fast-forward to the early 1990s, when President George H. W. Bush raised excise taxes on alcohol, with table wine (up to 14 percent alcohol by volume) going from $0.17 to $1.07 per gallon. Shortly afterward, Congress added a "small producer tax credit" to protect smaller operations: Wineries making less than 250,000 gallons (around 105,000 cases) a year can benefit from a tax credit of $0.90 per gallon on the first 100,000 gallons, effectively reducing their tax to the old rate. (Wineries making between 100,000 to 150,000 gallons can take the tax credit, but only on the first 100,000 gallons. The credit gradually phases out for wineries making between 150,000 and 250,000 gallons.)

"It's been 25-plus years since excise taxes on alcohol have been modified or reformed in any way, and obviously a lot has changed in that time period," said Charles Jefferson, vice president of federal relations for the Wine Institute, an advocacy organization representing the California wine industry. Many believe the current tax system is regressive, and has not kept up with the dynamic growth the beverage industry has experienced in recent years. For one thing, it discourages small wineries from growing bigger. "It creates a disincentive for growth at that point," said Jefferson of the current limit on the small producer tax credit. Wineries that wish to expand their brand, to the extent that they can, might be deterred from the higher taxes that come with increased production.

"It really doesn't provide any productive return, it's just a tax," said Jim Trezise, president of the trade group WineAmerica. Historically, the tax has been designed to keep alcohol prices high, discouraging consumption, rather than helping economic growth.

The Craft Beverage Modernization Act was written for brewers, but after years of discussion and compromise, both the spirits and wine industry joined forces for a more comprehensive tax bill encompassing all three.

How would the proposed bill impact wineries?

The first thing the new bill does is take the tax credit, currently only available to wineries making up to 250,000 gallons, and expand it to all wineries regardless of how much wine they make overall. The two tiers in current law would become three tiers: Wineries will receive a $1 credit per gallon for the first 30,000 gallons made, $0.90 for the next 100,000, and $0.535 for the next 620,000. Wineries making more than 750,000 gallons pay the full tax rate on everything over 750,000 gallons.

Take a winery that makes 150,000 gallons of wine a year (around 62,500 cases). Under the current tax code, that winery pays $160,500 in excise taxes a year and receives a tax credit of $90,000: Their effective annual tax rate is $70,500. Under the new plan, their credit would increase to $130,700, making their new rate $29,800, and saving them $40,700 a year.

Another significant provision in the bill is an increase in the alcohol level at which a wine can be taxed as table wine. Currently, wines exceeding 14 percent alcohol by volume (but under 21 percent) are taxed at $1.57—$0.50 more than their lower-alcohol counterparts. The beverage act would increase that threshold to 16 percent.

The 14 percent limit was set after Prohibition, when table wines were generally lower in alcohol than they are now, and 14 percent seemed like a reasonable ceiling. "Alcohol levels have crept up over the last 40 years," said Hinman.

Many in the industry feel that 14 percent is no longer reflective of today's climate or winemaking practices. "We learned to improve viticulture, and reduced crop size and opened up canopies," said Marty Clubb of L'Ecole No. 41 winery in Washington. "The main goal of that was to increase structure and flavor development, but one side effect was also sugar accumulation, which translated into over 14 percent alcohol." Clubb makes wines that are slightly over 14 percent; he pays more than $50,000 in extra taxes a year with this provision, "just because I'm trying to make better wine," he said.

The tax-cut potential for wineries is substantial, and many are already thinking about what they would do with it. "Whatever savings they get in terms of excise taxes they're going to apply right back to their business," said Jefferson. "They're going to invest in whatever area they see fit." This can come in many forms: hiring more people, making more wine, or spending more on marketing, for instance.

Clubb mentions the many costs wineries face today that the new tax code could help offset. Drought in various parts of the country has affected crops and the way we farm them; waste-water management and other environmental compliance is costly.

He also cites labor shortages due to recent immigration policies; and the overall cost of labor has gone up. Many local and state governments have passed a higher minimum wage, sometimes up to $15—a measure Clubb supports, but sees as a challenge for his own small business. As the result of a 2016 ballot measure, Washington state's minimum wage will be at $13.50 by 2020.

”This tax bill really helps give that small producer an ability to compete a little bit better in this arena, where we're consumed with compliance and regulatory issues," said Clubb.

And in current law, sparkling wine, which is taxed at a much-higher $3.14 per gallon rate, cannot take advantage of the tax credit. The new bill does not specifically prohibit sparkling-wine producers from taking the credit, however, the terms of this change would have to be ironed out when the Tax and Trade Bureau write the regulations.

Will there be losers?

With every discussion about tax reform, there's talk of winners and losers. Although the beverage act cuts taxes for all wineries, the biggest cuts happen at the bottom and the top, and drop in the middle of the spectrum.

For example, under the new plan, a winery making 10,000 gallons of wine will receive a nearly 60 percent tax cut (from $1,700 to $700). And a large winery making nearly 300,000 gallons will get a tax cut of around 65 percent (from $321,000 to $110,050). But a winery in the middle, making more than 100,000 but less than 150,000 gallons, will pay somewhere between 10 and 20 percent less taxes.

According to a Democratic aide to the Senate finance committee, the bill was crafted not as a tweak to the current tax code, but rather as if the law had been designed from scratch, in order to accommodate the interests of today’s growing wine industry.

"I think everybody benefits and that's important," said Jefferson. "But obviously, any time you're trying to reduce taxes, the people who are paying more taxes are likely to see a bigger reduction than those who aren't." Jefferson and other sources interviewed for this story said that wineries who receive a smaller benefit from the new tax credits would still see big benefits from the change in alcohol level taxation.

Not every vintner is happy with the rise from 14 to 16 percent, however. Jamie Kutch, proprietor of Kutch winery in California and an advocate for lower-alcohol wine, is one of them. "The fad has become this massive, overripe, high-alcohol [wine]," he said. "And they're trying to get away with capturing less taxes by moving the bar up higher." Kutch believes the alcohol levels in the tax code should be broken down even further than they are now.

Of course, cutting taxes of any kind is cutting into government revenue. Several advocates believe excise taxes should be higher, not lower. Although the Congressional Budget Office (CBO) has not analyzed the Craft Beverage Modernization Act, it did publish a report in 2016 citing an increase of alcohol excise taxes as one solution to reducing the deficit.

Alcohol Justice, a nonprofit industry watchdog that advocates for higher taxes on alcohol to compensate for the societal costs of such beverages, is against the bill. "This cost to society is a cost to government," said executive director Bruce Lee Livingston. "Any reduction in alcohol taxes is a loss of revenue to deal with alcohol-related and alcohol-cause problems." According to an analysis conducted by Alcohol Justice, the passage of this new tax code would result in an annual revenue loss of $321 million just from domestic alcohol production.

The analysis also estimates the cost from excess drinking to be $249 billion a year. "We really should be talking seriously about the public health and the public-safety harms of alcohol, instead of trying to incentivize an industry that's already doing quite well," said Livingston.

Will it trickle down to consumers?

With all the savings that wineries stand to gain, how will this affect the wine consumer? Most experts believe customers will see a benefit, but how direct it will be is up for debate.

"It is good for consumers," said Scott Drenkard, an economist at the Tax Foundation, a D.C.-based think tank. "Most of these taxes end up getting passed down to consumers in the form of higher prices."

Hinman, however, disagrees. While taxes on alcohol have stayed the same for 25 years, prices, on the other hand, have increased. Therefore, the proportion of tax on the price of a bottle of wine has fallen significantly, he argues, and is measured in cents. "The taxes are so low that it's going to have a minimal effect on pricing," he said. "This is really about supporting the businesses."

Trezise notes it will be up to the individual wineries to decide what to use their savings on, but said it's possible some of it could be passed on to the consumer. "Wine is a very competitive business and wineries are very price-conscious," he said, suggesting that competition could drive down prices.

Can Congress pass the bill?

For many in the industry who have lobbied for or supported the Craft Beverage Modernization Act since its introduction in 2015, now is the best shot they have to pass it. Tax reform is high on the agenda for the Republican congressional majority and for President Donald Trump. And the beverage bill is now included as an amendment in the larger plan, which Republicans believe they need to pass in a year of few legislative victories.

The excise tax reform is also a bipartisan proposal—a rare feat in Washington these days. The standalone bill attracted majorities in both chambers as sponsors or cosponsors, with Republicans making up around 55 percent of sponsors, and Democrats the other 45 percent.

But because it’s now attached to the larger tax bill, one that has no Democratic support, the excise tax reform now hinges on the survival of the bigger bill—and whether Senate Majority Leader Mitch McConnell can produce 50 votes for it.

Including the measure in the larger bill came with another cost. Because the Republican tax bill is being passed under budget reconciliation procedures, which protect it from filibuster, it must stay within a certain cost within a 10-year window and beyond. To keep costs in line, Republicans have added sunset provisions to many parts of the bill. The cuts end after a few years, forcing Congress to either extend them, and increase the deficit, or let them expire.

That includes the excise tax credits—after two years, the tax credits would expire. Sen. Ron Wyden, Democrat of Oregon, who first introduced the excise tax bill, has advocated for making it permanent. He calls the sunset provision a mistake, and a missed opportunity to pass a proposal with bipartisan support that would create jobs across the country.

"The Treasury Department has told us that a two-year provision would expire before they could even write the regulations to implement it," Sen. Wyden argued before the finance committee last week. "So right out of the gate, the short-term version is going to be a dud." His amendment to make the cuts permanent was rejected by the committee.

But Trezise is not worried about the sunsets. He understands it as essential to getting the bill included, and notes that extensions are often passed with little difficulty. "And of course we will be lobbying hard to make sure that is the case in two years if this passes," he added. “Politics is crazy.”

The Senate is scheduled to vote on the broader tax reform this week.

Charles Chambless
Stow, Ohio, USA —  November 30, 2017 9:36pm ET
This article makes it appear that the wineries pay the federal alcohol tax. However, in my experience it is the purchaser/distributor who pays the tax, not the winery.
Emma Balter
New York, NY —  December 4, 2017 12:14pm ET
Hi Charles,

Thank you for your comment. Federal excise taxes on wine are paid by wineries to the federal government. This cost can certainly be passed on to distributors, and then the consumer, but it is not billed to them directly.

Let me know if you have any other questions. Thank you for your interest!

Best,

Emma

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