Taxing challenge for craft brewers

Over the last 30 years, America’s small brewers have worked tirelessly to revive a proud American industry. We have become one of the shining economic beacons for this country, providing upwards of 110,000 jobs and generating a $34 billion economic annual impact. Our 3,200 small U.S. breweries of today represent nothing short of a miraculous renaissance from the dark days of the late 1970’s when less than 89 U.S. breweries existed, from more than 1,847 in 1905.

This success is noteworthy, given that since Prohibition, the brewing industry has been consolidated and controlled by large, global breweries with big budgets and even bigger barrels. 

{mosads}Threatened by our small breweries’ increasing—but still minor market share—big brewers are actively engaged in a mission to slow our growth and stifle us competitively. We recognize that such activities are part and parcel of doing business, but this time the drama isn’t playing out in the expected venues, bars and store shelves, but rather in the halls of government.  

Let us explain the situation today.

Ambitiously entering a centuries old industry, we small brewers face significantly higher costs than our well-established multinational competitors for quality raw materials, customized production equipment, packaging and overall market entry initiatives. We also compete with them for financing. In this prevailing landscape of constricted lending and increasing production costs, one way to level the playing field is through intelligent beer excise tax policy. Basically, permit small brewers to retain a higher portion of their earnings to reinvest in employment opportunities and production capacity.

Various proposals for such principled reform are being introduced in Congress but only one is fair and meaningful to small American craft brewers.  

The Small BREW Act, a bipartisan bill, seeks to recalibrate the federal beer excise tax rate for America’s small brewers. The legislation would reduce the small brewer tax rate on the first 60,000 barrels of production by 50 percent (from $7.00 to $3.50/barrel) and institute a new rate of $16.00 per barrel above 60,000 barrels up to 2 million barrels. Brewers with an annual production of 6 million barrels or less would qualify for these tax rates. Presently, when all taxes levied on the production, distribution and retailing of beer are added up, they amount to more than 40 percent of the retail price.

So, what is ‘small’ and what is ‘large’ in the brewing industry? Consider this: the largest craft brewer produces 2.9 million barrels of beer a year whereas Anheuser Busch produces around 100 million barrels a year. That’s a difference of over 4,500 Olympic size swimming pools of beer.

Such discrepancies in size cannot be ignored. 

The positive effect the Small BREW Act would have on not only small brewers, but the overall economy, would be significant. A study by Dr. John Friedman (formerly of Harvard University and the White House, now with Brown University) found that when passed, the Small BREW Act will generate $183.1 million in economic activity in the first year and almost $1.04 billion over five years. Instituting the Small BREW Act would cost only $64 million annually—a number that may seem high but is negligible in terms of the overall federal budget. So, small brewers would use these retained earnings to pour that money right back into the U.S. economy. Can the same be said for the global and multinational breweries that already pay lower effective tax rates than purely domestic brewers, have cut thousands of U.S. jobs in the past six years and have exported their U.S. profits? If history is any indication, the answer is no.

Additionally, Friedman projected the Small BREW Act will create over 5,200 jobs in the first 12 to 18 months after passage and an average of 300 jobs in each of the four subsequent years. We firmly believe that stimulating American job growth is the most valuable purpose of any tax policy reform. 

The excise tax on small brewers has not been modified since its inception in 1976, a time when there were only 30 small brewers. There are over 100 times as many small brewers today. We need a tax code that further boosts our track record of production expansion, protecting existing jobs and stimulating new employment opportunities. 

For example, at Short’s Brewing Company in Michigan, we would use any tax relief to invest in our downtown development project in Bellaire, as well as expand capacity our Elk Rapids packaging facility.  At Victory Brewing Company in Pennsylvania, we would expand employment opportunities for many qualified engineers, mechanics and quality assurance personnel who have moved from other industries to join craft breweries. At Port City Brewing Company in Alexandria, Virginia, we need to be able to invest in adding more capacity to keep up with soaring demand. This is done by adding more tanks. Each new tank added increases volume to support two new jobs. If enacted, the Small BREW Act will save enough on taxes to allow us to install two more tanks in 2015, and add four more jobs.  

Our craft brewing colleagues have no shortage of plans either. Jason Wilson of Back Forty Beer Co. would also use the money to get new tanks and expand production, while Sara Nelson of Fremont Brewing Company would use the retained capital to offer a more robust healthcare plan for the company’s employees.  

“When we grow our production through capital investment, we are investing not only in our breweries and brands, but in people and places,” added Hugh Sisson, founder and owner of Heavy Seas Beer in Maryland. 

“The tax code needs to catch up to the nature of the brewing industry and not penalize the nation’s small brewers,” said Rep. Erik Paulsen (R-Minn.), who reintroduced the Small BREW Act legislation in the 114th Congress. During the previous Congress, there was major support for the legislation with 182 U.S. Representatives and 47 U.S. Senators backing the bill. 

Simple and targeted, this tax relief will have a direct impact on the now 3,200 small, American-owned operating breweries, providing an additional $64 million per year that would be used to support significant long-term investments in our breweries.  

For us, brewing is more than a business. We are a lucky group who gets to do what we are most passionate about for a living. We are a part of the American patchwork, firmly rooted in investing in not only our breweries but our communities and country. The Small BREW Act lets us do just that.  

Newman-Bale is a partner at Short’s Brewing Company.  Covaleski is co-founder and president of Victory Brewing Company. Butcher is founder of Port City Brewing Company.