Kentucky’s bourbon and spirits industry had a banner year in 2022, with announcements of a record $2.1 billion in new investments. According to the Kentucky Distillers Association (KDA), 2.4 million full bourbon barrels now roll out of distilleries each year. As they say on their website, “We don’t mean to brag – or maybe we do.”
Despite this indisputable bourbon boom, and even with the significant tax giveaways Kentucky already gives the industry, lawmakers last week introduced House Bill 5 to award them with even more tax breaks. The bill is a response to industry claims that property taxes distillers pay on bourbon aging in barrels, known as the barrel tax, makes Kentucky less competitive and hampers industry growth.
That doesn’t pass the sniff test. The record-breaking stats the industry put up last year are part of a rapid growth trend. According to the KDA, the number of distilleries in Kentucky has multiplied from 19 in 2009 to 95 in 2021, with dozens of new projects announced in recent years.
The companies behind these projects no doubt conducted a cost benefit analysis that included payment of the barrel tax, and elected to move forward anyway. So repealing the tax will only further expand their already swelling bottom lines. And because the bulk of the payments go to school districts and local governments, communities will be left over a barrel with fewer resources to provide the services the distilleries need to continue operating.
A legacy of tax breaks for a signature industry
The debate over the bourbon barrel tax is not new. In response to years of lobbying, the 2014 General Assembly came up with a solution to appease the industry without directly hurting school districts and local governments in bourbon counties — give distillers a 100% credit against the state corporate income tax for the total amount paid in barrel taxes. Lost local tax revenues would then be borne by the entire state.
For a time, this credit satisfied the industry. Then in 2018, the General Assembly reduced the corporate tax rate from 6% to 5%, and changed the way some corporations calculate their taxes by removing property and payroll, which distilleries have a lot of, from the calculation. Those changes were a windfall for the distillers, reducing their income taxes so significantly that, when coupled with the growth in the number of aging barrels, meant they no longer paid enough in income taxes to offset the barrel tax.
In addition, distillers also benefit significantly from company-specific state tax breaks awarded by the Cabinet for Economic Development, receiving subsidies over 100 times between 2015 and 2022. Those giveaways include the refund of sales taxes paid on construction materials and the ability to keep income taxes collected from employees and sales taxes collected at gift shops.
Local communities lose, big bourbon wins
HB 5 proposes to phase out the barrel tax over the next 15 years, depleting resources for the school districts, libraries, fire districts and other local government entities that sustain the areas where distilleries operate. In Nelson County, eliminating the barrel tax would result in schools losing nearly $7 million, the library losing $280,000 and the sheriff $250,000, according to County Judge Executive Tim Hutchins.
Distilleries also bring disaster risks and greater infrastructure and public safety needs, which are expensive. In 2021, Bullitt County spent more to repair roads damaged in the construction of bourbon warehouses than it received in barrel tax revenue.
Local governments have also subsidized the construction of bourbon aging warehouses by issuing industrial revenue bonds (IRBs), which exempt those facilities from property taxes for between 30 and 40 years. Decisions to grant IRBs were made with the promise that revenues from the barrel tax would grow over time, making up for lost property tax revenues. Repealing this tax is a breach of trust with counties that can put them in a financial bind.
There’s no credible argument that the barrel tax has impeded the bourbon industry’s growth. It has simply allowed communities experiencing this growth to provide the roads, workforce, land and services the industry’s very existence relies on. If they pass HB 5, the General Assembly will be prioritizing even bigger profits for an already lucrative and heavily subsidized industry over the communities that helped to make it what it is.