Courtesy of Alamo Distilling
The past couple of years have been good for Texas’ craft distillers.
From just a handful of distilleries 15 years ago, the Lone Star state now boasts roughly 160. And spirits produced here — from Garrison Brothers’ whiskey to Dripping Springs Distilling’s vodka — are gaining regional or national followings.
But distillers warn that unless a temporary tax break that enabled some of that recent growth is extended, the party may soon be over.
Craft distillers won a significant but temporary tax reduction as part of the sweeping tax package Congress passed in 2017. But that two-year break expires January 15, and if federal lawmakers don’t act soon, it could stymie production and lead to higher prices for consumers, industry officials warn.
“If it doesn’t happen, there will be real economic impact right there in the Lone Star State,” said Chris Swonger, chief executive officer of the Washington D.C.-based Distilled Spirits Council. “Being a distiller is a capital-intensive business, and that lack of certainty makes it tough to make decisions.”
Under the temporary tax rate adopted in 2017, distillers pay just $2.80 per gallon on the first 100,000 proof gallons of liquor they pull out of storage to sell. A proof gallon is one liquid gallon that’s 50 percent alcohol.
If Congress fails to extend that rate, the tax will bump back up to $13.50 per gallon, which Swonger said makes U.S. distilled spirits “one of the highest-taxed items on the planet.”
Small distillers say they’re already waging an uphill fight against big liquor conglomerates such as Bacardi and Jim Beam owner Beam Suntory, which have better distribution and can offer lower prices. Such competitors can produce 100,000 proof gallons in an hour, meaning they’ll likely shrug off the pending tax increase.
“What this means is the speed of buying equipment and hiring and all the other great things we craft distillers do to compete against the big guys will have to be slowed,” said Gary Kelleher, CEO of Dripping Springs Distilling.
Kelleher said it’s too late for him to put the brakes on new equipment he’s purchased to expand his plant. However, if the tax relief isn’t approved, he’ll have to rethink plans to hire another 12 workers this year — a move that would increase his payroll by a third.
He warns that things look worse for the 30 or so Texas distillers that opened for business this year. Those operations have never had to do business under the previous tax structure.
“For a number of them, if this 400% tax increase falls into place in January, they’ll literally be closing their doors,” Kelleher said. “It’s going to hurt them significantly.”
Dan Garrison, owner of Garrison Brothers, estimates that a dozen or two newer Texas distilleries are likely to fail if the taxes rise to their old level. While his business is on strong financial footing, it will nonetheless be forced to make tough decisions.
“The last thing I want to do is raise prices, but that’s one of the considerations that’s on the table,” Garrison added.
The pending tax increase also comes as the Trump administration’s growing trade quarrel with Europe closes off a potential avenue for craft distillers to boost sales. Since the EU’s 25% retaliatory tariff on American whiskey was imposed last year, exports have declined by roughly a quarter.
Swonger of the Distilled Spirits Council said he’s hopeful Congress will take action since relief measures in both houses enjoy broad bipartisan support. Even so, though, the timing isn’t working in distillers’ favor. The ongoing impeachment battle is commanding the attention of lawmakers in both chambers, and time is ticking down before lawmakers’ holiday recess.
That means craft distillers may need to wait until spring if lawmakers are going to extend the tax breaks. And if that happens, smaller operations will could be smarting from weeks or even months of doing business under the much higher rates.
“It’s going to be tough for a tax package to come together in the next 10 days, but that’s what we hope happens,” Swonger said.
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