UPDATED 3/31: HB 5 took a major step in moving forward as it passed the General Assembly. Now, only needing approval from KY Gov. Andy Beshear to be placed into official motion. HB 5 would effectively phase out “barrel taxes” on Kentucky Bourbon (all spirits). There are 2 sides to this.
INDUSTRY PERSPECTIVE: KY is the only state in America that imposes a barrel tax on aging spirits, on every barrel, year over year. Viewed as unfair as no other industry in Kentucky is “taxed during production” as stated by the KY Distillers Association.
COMMUNITY PERSPECTIVE: Barrel taxes help pay the way for schools, roads, fire departments and EMT infrastructure in communities hosting distillery related businesses. Removal of the barrel tax means loss of budget support for these local areas with distillery ties.
COMPROMISE: A 20 year transitional period would ensue if HB 5 passes, providing a sizable buffer for local communities to adjust budgets and effectively wean off barrel tax support.
Kentucky Bourbon barrel inventory has been multiplying like rabbits over the last decade. In 2010, there were 4 million plus barrels aging in the Bourbon State. In 2022, that number swelled to more than 11.5 million barrels patiently aging to perfection.
THE PROBLEM: Each year, year over year, every single aging barrel of Kentucky spirit (not just Bourbon) is taxed in what is called “ad valorem”. This tax revenue is used by local communities that house each respective distillery as a portion of the generated barrel tax is also kicked up to the state. Funding for school systems, fire departments, and other municipalities are at the heart of the tax.
Some of the larger distilleries have millions of barrels stored in rickhouses. And if you’re a new distillery, let’s say you want to wait at least 4 years to put out your first Kentucky Straight Bourbon, that’s a long time to wait and pay taxes on each aging barrel before seeing a penny of rev. Not to mention the mountain of costs associated with starting your own distillery.
House Bill (HB) 5: Phasing Out Barrel Taxes
The Kentucky House recently voted in favor of HB 5, sponsored by two influential leaders—House Speaker David Osborne (R) and House Appropriations and Revenue Committee co-chairman Jason Petrie (R). HB 5 essentially is a gradual phase out and eventual elimination of ad valorem, ie barrel taxing. The Bill now is on to Senate. If passed, it would then land on Governor Beshear’s desk for final approval.
If passed, the Bill will not officially begin until 2026 and would initiate with a light tax cut of 3%. Over time the tax cuts would increase year over year, eventually ending ad valorem in 2039 (13 years later). In theory, this would allow schools and government related systems that use the barrel tax money to not be shocked by a sudden revenue withdrawal, rather, allowing time to adjust budgets.
According to the Kentucky Distillers Association, Kentucky is the ONLY state that implements a barrel tax. It is also only one of two states that implements both an excise and wholesale tax on its state produced spirits. Per KDA provided data, Kentucky also has the 5th highest taxes on its Bourbon and spirits.
Now, from an industrial perspective, it’s common to have property related taxes, including inventory. But where the kicker is for Bourbon, the time it waits while aging on property warehousing. A car manufacturing for example doesn’t age its cars for years on end.
Prior Efforts to Soften Barrel Taxes
In 2014, Kentucky passed a law allowing distilleries to apply 100% credit of barrel taxes to its respective state income tax bill. This was viewed as a sufficient compromise at the time to offset barrel taxes without taking money away from local surroundings.
However, in 2018, Kentucky lowered its overall corporate income tax from 6% to 5% and also removed property and payroll taxes from the overall state income tax formula, leaving just sales tax. This lowering of income tax, coupled with the overall tremendous growth of barrel inventory over the last 5 years has translated to barrel taxes exceeding income tax levels. Meaning a chunk of barrel taxes still remain to be paid and will likely not be offset by income tax.
Not Everyone is Happy: Local Concern for Lost Tax Rev
Local communities that have a vested interest in the barrel tax are voicing concern about their respective communities and the consequences of pulling away the Bourbon tax bucks. Recent data showed the barrel tax generated $15.6 million for the counties where distilleries are located, including $5.5 million for public schools.
An article by Pam Thomas of KyPolicy.org noted that in Nelson County (Bardstown), 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.
Bourbon warehouses are themselves tremendous fire hazards. There is angst over ensuring such communities will have the funding to be prepared for a distillery related fire and maintaining the force, training, and technology needed.
There are proposed changes to the Bill that would allow city/county related infrastructure to work out a fee with distilleries of the respective community to support necessities like adequate fire department requirements. And the Bill claims that public school system funding would be held “harmless”.
We’ll keep you posted on updates to HB 5. There feels like some pretty good traction here, but details to work out on the particulars of covering local community related funding.