Blog By: Ben Bertram
Over $350 million of tax revenue for Kentucky is generated annually from the production and consumption of distilled spirits.[i] It should come as no surprise that bourbon is a large component of this.[ii] But like all taxes, the benefits afforded to the public in the form of public services are at least nominally offset by the burdens imposed on those paying.[iii] Therefore, tough policy choices must be made when determining how much and upon whom these burdens should fall.
The distilling industry is an outlier in the tax burden it carries.[iv] 17.4% of the output value goes to paying taxes—a higher rate than all other large manufacturers in Kentucky.[v] This cannot be categorically attributed to a burden imposed on alcohol production in general: the wine and brewing industries combined fail to achieve half of this rate (six percent and 2.2%, respectively).[vi] Bourbon is taxed at all stages at the state and local levels, including both production and consumption-related taxes, like occupational taxes, license fees, case taxes, wholesale excise taxes, retail sales tax, and more.[vii]
For decades, Kentucky has levied property taxes on distillers through common methods like real estate and tangible property, but more recently through unique methods, such as taxing spirits aging in barrels.[viii] The latter is an ad valorem tax assessed on barrel inventory in bonded warehouses—similar to a real estate assessment.[ix] Kentucky is the only jurisdiction worldwide that imposes a property tax over the years that bourbon ages.[x]
This is not for long—that is, at least until the two-decade phase-out measure in KRS § 132.140(3) sunsets.[xi] House Bill 5 of the 2023 Regular Session of the Kentucky General Assembly gradually eliminates this “barrel tax.”[xii] HB 5 represents a salient topic which endured organized chaos as it was passed during the final days of the 2023 session.[xiii] As a result, over twenty-five counties are expected to lose some $30 million in annual tax revenue.[xiv] While proponents of the new law argue that it relieves an industry of an unproportionally high tax burden, opponents claim that cutting the tax simply rewards an already-thriving industry and diverts much-needed funds from local governments.[xv] Like many other fiscal debates, there exists a great deal of disagreement surrounding the practicality of industry tax cuts, especially when many local public services remain underfunded across the Commonwealth.[xvi] But as the Bourbon industry grows, so do the Kentucky farmers who continue to provide grains which are integral to the finished product.
Many environmental factors contribute to Kentucky being the bourbon capital of the world: bountiful limestone rock capable of adequately filtering and flavoring water, a mixture of hot summers and cold winters to interact with oak barrels, and fertile soil perfect for growing corn which comprises fifty-one percent of the final product.[xvii] As a result, Kentucky’s bourbon and corn industries are deeply intertwined at the production level and likewise mutually benefit from one another’s success. Kentucky’s bourbon and alcohol distillers use between 15 and 20 million bushels of home-grown corn annually.[xviii] However, the Kentucky Corn Growers Association describes the barrel tax as “discriminatory,” reflecting the frustration the General Assembly faced when considering the recent legislation (compared with opposing frustration from local governments).[xix] This frustration may be well-placed: about nine percent of the corn produced in the Commonwealth is purchased by distillers.[xx] Even more illustrative is the fact that corn production has increased by 300% in core distilling counties since 2009.[xxi] It follows, therefore, that increased opportunity for the bourbon industry brings paralleled robust growth to Kentucky farmers.
When the bill was introduced, and even still, many argue that legislators showed favoritism to an industry that was making empty threats.[xxii] Indeed, the fiscal note statement showed a $249 million loss in tax revenue from 2026 to 2039.[xxiii] Sunsetting taxes will indeed force localities to find other ways to raise funds or cut expenditures; yet, the localities benefitting the most from this revenue, the core distilling counties, will also be home to the industries in the best position possible to provide for and pay other taxes on this increased growth. Further, evidence was introduced to legislators that Kentucky may be on the downside of the “Laffer Curve” when it comes to distillation taxation.[xxiv] This tax revenue is not disappearing—it is simply transferred down the line to those who keep the industry afloat, including Kentucky farmers.
Allowing these industries to thrive while keeping other streams of income available is to allow bourbon-centric communities and the bourbon industry itself to maintain a mutually beneficial relationship. This bill simply removed a tax burden that was unacceptable for long-term health. Furthermore, a benefit to Kentucky’s bourbon industry is a benefit to Kentucky farmers. This impact is magnified in areas affected the most by the elimination of the barrel tax. Increased demand and production bring increased indirect benefits to all markets involved in the production process, perhaps most notably for Kentucky farmers and their role in providing bourbon’s most important ingredient. Kentucky was the only jurisdiction in the world to impose the barrel tax, but its phase out will now allow both industries to continue freely thriving and should prove to be a victory in the long run.
[i] Paul Coomes & Barry Kornstein, Ky. Distillers’ Ass’n, The Economic and Fiscal Impacts of the Distilling Industry in Kentucky 4 (2023).
[ii] Id. at 1.
[iii] Internal Revenue Serv., U.S. Dep’t of the Treasury, Pub. No. 2105, Why do I have to Pay Taxes? (2023).
[iv] Coomes & Kornstein, supra note i.
[v] Id. at 24.
[vi] Id.
[vii] Id. at 26.
[viii] Ky. Rev. Stat. § 132.140 (LexisNexis 2024).
[ix] Id.
[x] Coomes & Kornstein, supra note i.
[xi] § 132.140 (LexisNexis).
[xii] H.B. 5 2023 Gen. Assemb., Reg. Sess. (Ky. 2023).
[xiii] Id.
[xiv] William Twigg, Bourbon Barrel Tax, MPA/MPP/MPFM Capstone Projects, July 26, 2023, at 6.
[xv] Pam Thomas, Kentucky’s ‘Booming’ Bourbon Industry Doesn’t Need Another Tax Cut, Ky. Ctr. for Econ. Pol’y (Jan. 12, 2023), https://kypolicy.org/kentuckys-booming-bourbon-industry-doesnt-need-another-tax-cut/ [https://perma.cc/8FQL-SUVY].
[xvi] Ky. Ctr. for Econ. Pol’y, Our Commonwealth: A Primer on the Kentucky State Budget (2016) https://kypolicy.org/wp-content/uploads/2016/01/Ky-Budget-Primer-2016-web-ready.pdf [https://perma.cc/3JX5-68HU].
[xvii] Twigg, supra note xiv, at 8.
[xviii] KYCorn, Bourbon and Distilled Spirits https://kycorn.org/distilled-spirits/ (last visited Oct. 9, 2024, 8:32 PM) [https://perma.cc/3BGU-7RS5].
[xix] Id.
[xx] Janet Patton, What’s the economic impact of bourbon in Kentucky? Report says major growth still to come, Lexington Herald Leader (Feb. 8, 2024), https://www.kentucky.com/lexgoeat/bourbon/article285143507.html [https://perma.cc/JQK6-LJY7].
[xxi] Bourbon 2023 Economic Impact, Ky. Distillers’ Ass’n, https://kybourbon.com/wp-content/uploads/2024/02/Bourbon-Boom-One-Pager-v5.pdf (last visited Oct. 9, 2024, 8:41 PM).
[xxii] Twigg, supra note xiv, at 19.
[xxiii] Fiscal Impact Statement to H.B. 5, 2023 Ky. Gen. Assemb., Reg. Sess.
[xxiv] Abolishing Kentucky’s Aging Barrel Property Tax: Some Issues to Consider, Before the Bourbon Barrel Taxation Task Force (Sept. 23, 2022) (presentation by Paul Coomes, Emeritus Professor of Economics, University of Louisville).