WASHINGTON – Forgive John Reardon if congressional wrangling in the waning weeks of 2019 left the founder of the popular Deep Ellum Brewing Co. and Deep Ellum Distillery in need of a stiff drink.
Tens of thousands of dollars, after all, were at stake on his ledger.
Reardon and other beer, wine and spirits producers – small and big, in Texas and beyond – were waiting to see if Congress would keep the tap flowing on a significant cut to federal alcohol taxes that began in 2018 and was set to expire at the end of last month.
It took lawmakers until almost the last possible day to extend the perk for another year.
“We were definitely hanging on with bated breath,” said Reardon, who explained that his distillery “probably wouldn’t have survived” if the tax cut had not gone into effect just over two years ago.
The extension came via a late-hour inclusion in a $1.4 trillion spending package, which lawmakers sent to President Donald Trump for his approval right before they left the nation’s capital for a multi-week recess over the holidays.
Reardon and others had hoped Congress would make permanent the tax break. While the boost has not and is not expected to reduce the price of a six-pack, it has been crucial in helping many craft producers add staff, invest in infrastructure and take chances on new products.
But no one is complaining about getting a reprieve at least through the end of this year.
Trade groups had estimated that reinstatement of the levies would’ve cost the alcohol industry hundreds of millions of dollars, with small-time distillers, for instance, facing a tax increase of 400% on the whiskey, gin and other spirits they produce.
“It was quite the last-minute save,” said Michael Peticolas, who said an estimated annual tax savings of $20,000 has helped his Peticolas Brewing Co. in Dallas’ Design District add a staff member and start canning its beer.
Michael Peticolas, founder of Peticolas Brewing Co. in Dallas, said the tax break has resulted in savings of $20,000 a year.(Jae S. Lee / Staff Photographer)
This battle has been brewing for some time.
The alcohol industry had long complained about the dizzying array of excise taxes on beer, wine and spirits. So they pushed Congress in recent years to decrease the financial burden – in some cases, to a fifth of the existing tax rate.
Craft alcohol producers were pitched as the big potential winners, though heavyweight brands would also prosper.
The boozy benefit garnered broad, bipartisan backing, but supporters were unable to pass it as a stand-alone measure. It eventually found favor in late 2017 as a minor part of the sweeping tax overhaul that Congress passed with only Republican support.
Hopheads, grape growers and cocktail connoisseurs rejoiced.
“It’s very significant to our bottom line,” said Kat Thompson, founder and CEO of Texas Ale Project, another brewery in Dallas’ Design District.
Federal excise taxes decreased for all different forms of alcohol. But given that beer, wine and spirits are taxed in different ways to reflect different means of production, lawmakers took varying approaches to achieve lower tax burdens for each type.
Kat Thompson, founder and CEO of Texas Ale Project, said the short-term nature of the tax cut has been frustrating. But she said it was still helpful in allowing the Dallas brewery to experiment.(Rose Baca / Staff Photographer)
Consider the perk for beer.
Big brewers had been paying a tax of $18 per barrel, which consists of two kegs. Producers making fewer than 2 million barrels a year, meanwhile, had been doling out $7 per barrel on their first 60,000 barrels and then the higher rate after that.
The change reduced the tax on big operators to $16 per barrel. Craft outfits, including the couple hundred brewing in Texas, saw the levy drop to $3.50 per barrel on the first 60,000 barrels and then to the new $16 per barrel rate after that.
“That’s a sizable sum,” Peticolas said.
There was one skunky note, though.
The overarching tax overhaul in 2017 came with a massive $1.5 trillion price tag, largely to fund lower tax rates for businesses and individuals. To keep that sticker shock from reaching even higher, lawmakers made several components expire over time.
The tax break for beer, wine and spirits was set to disappear after two years, leading to the will-they-or-won’t-they moment last month before Congress decided on the one-year extension.
That continued uncertainty has caused consternation for many producers. Thompson, the Texas Ale Project CEO, said she was frustrated that she couldn’t reliably budget in future savings, though she explained that the money has still been helpful in launching new products.
“It’s enabled us to experiment a little more,” said Thompson, who’s now rolling out a hard seltzer called TAP WTR.
John Reardon, founder and CEO of Deep Ellum Distillery, right, said he had been “hanging on with bated breath” to see if Congress would prevent the tax break from expiring. Also in the photo is business partner Andrew Welker.(David Woo / Staff Photographer)
Efforts are already underway to seek a permanent break or at least a longer extension, said Chris Swonger, a Texan who serves as CEO of the Distilled Spirits Council of the United States.
“For the small guys, it’s a significant lifeline,” he said, noting that distilled spirits are among the most-taxed consumer goods in the world.
There’s not so much a problem of finding lawmakers who support the idea, though a report from the Brookings Institution, a Washington-based think tank, has raised concern that large distillers have found a loophole that allows them to access a perk designed for smaller outfits.
An overwhelming majority of lawmakers – Republican and Democrat – have signed on as co-sponsors to legislation that would solidify the lower alcohol taxes.
“It’s not a party-line issue,” said Joanna Salinas, co-founder of Still Austin Whiskey, who traveled to Capitol Hill last fall as part of an advocacy campaign organized by the Distilled Spirits Council. “It’s a small-business issue.”
But inertia remains a powerful force in Washington, and so-called tax extenders have been known to persist in purgatory for years.
So the stakes going forward remain high for all manner of booze barons. Distillers like Salinas and Reardon, the Deep Ellum producer, have perhaps the most on the line. Liquor has long faced the highest levies – and accordingly, received the most substantial tax cut.
Salinas said her distillery, which launched two years ago, likely would not have made it without the added financial windfall.
“It changes the entire dynamic for us,” she said, estimating her company’s savings in terms of hundreds of thousands of dollars.