Considering the Implications of a New Bourbon Tax

 

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By: Arthur Cook, Staff Member

Any person that has toured (or tasted from) one of Kentucky’s premium Bourbon whiskey distilleries can tell you, no drink would be the same without a water source of superior quality. Kentucky’s abundant supply of limestone, which provides a natural water filter, allows much of the world’s top Bourbon to be produced there.[1] A recent study of Kentucky’s economy revealed that the Bourbon industry contributed $2 billion in gross state product each year for the last decade.[2] Governor Steve Beshear has observed that the industry accounts for 43% of the distilling jobs in the nation.

With a lagging national economy and Kentucky behind the national recovery rate, citizens of the Commonwealth are very interested in maximizing tax revenue from the Bourbon industry. One proposed solution is re-examination of the state’s “barrel tax.[3]” By way of example, the citizens of Moore County, Tennessee recently sought to impose a barrel tax on Lynchburg’s most famous resident, Jack Daniels.[4] The “barrel tax” is an annual ad valorem tax of $.05 per $100 of value for goods “held for sale in the regular course of business, which includes . . . distilled spirits and distilled spirits inventory, and in-process materials, which includes distilled spirits and distilled spirits inventory, held for incorporation in finished goods held for sale in the regular course of business.”[5]

A Kentucky barrel tax would be cumbersome for the distilling industry. Many spirits, such as Bourbon, can take up to 12 years to age in barrels, increasing in value per year. Rep. Linda Belcher of the Kentucky General Assembly has proposed House Bill 418 to take an income tax credit to offset the cost of the tax.[6]

A recent op-ed by industry leaders concedes that the ad valorem tax supports critical needs in multiple fields, but also attempts to undermine concern that the tax credit envisioned by House Bill 418 would denigrate tax coffers by arguing the tax credit would be “reinvested in the commonwealth.”[7]

Kentucky’s natural resources - the climate and limestone bedrock - are ideal for the production of premium spirits like Bourbon. However, without a clearer statement of the “reinvestment” which would offset the loss in tax revenue from the tax credit, forgoing taxes on an industry that has boomed in the last few years would be a stiff drink to swallow.

[1] Buffalo Trace Distillery, Whisky.com, http://www.whisky.com/distilleries/buffalo_trace_distillery.html (last visited Feb. 6, 2012); Woodford Reserve Kentucky Straight Bourbon Whisky, Whisky.com, http://www.whisky.com/brands/woodford_reserve_brand.html (last visited Feb. 6, 2012) Maker's Mark Kentucky Straight Bourbon Whisky, Whisky.com, http://www.whisky.com/brands/makers_mark_brand.html (last visited Feb. 6, 2012).

[2] Kevin Wheatley, State-Journal.com - Bourbon industry booming, study reveals, http://www.state-journal.com/news/article/5153644 (last visited Feb. 6, 2012).

[3] Id.

[4] Tim Ghianni, Jack Daniel's wins battle over whiskey barrel tax, Reuters, http://www.reuters.com/article/2011/11/22/us-tennessee-whiskey-idUSTRE7AL1OR20111122 (last visited Feb. 6, 2012).

[5] Ky. Rev. Stat. §132.020(1)(n)

[6] Barrel tax hobbles bourbon industry, Kentucky.com, http://www.kentucky.com/2011/03/08/1661958/barrel-tax-hobbles-bourbon-industry.html (last visited Feb. 6, 2012).

[7] Id.