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The bourbon barrel tax removal is dividing Kentuckians

Kentucky produces an astounding 95% of the world's bourbon supply.
The bourbon barrel tax removal is dividing Kentuckians
Posted at 8:15 PM, Jul 29, 2023

It's the beverage backlash rocking the bluegrass state.

"If you're going to make bourbon, you really need to be in Kentucky, and we want you in Kentucky to do that," said Jack Mazurak said.

Mazurak is the director of governmental and regulatory affairs for the Kentucky Distillers' Association.

The point of contention? The end of a barrel tax.

In March, Governor Andy Beshear signed off on a bill outlining the phasing out of the property tax placed on aging barrels of bourbon in the state.

The phase-out, which will begin in 2026, will see that tax reduced by a few percentage points each year, leading to its full elimination by 2043—a move being applauded by the state's roughly $9 billion bourbon industry.

"From an economic development perspective. When you look at a barrel tax, that's a punishment for growth. That's a punishment for success," Mazurak said.

Mazurak says the annual barrel tax was problematic as the demand for bourbon has been growing, leading distillers to produce and store more aging barrels of bourbon and therefore pay more in taxes.

"Last year, we had 12 million barrels aging in the state and paid $40 million in barrel taxes. So, you know, it went from 9.5 million in 2009, 2014 when things really started taking off, it was about $14 million in barrel taxes we paid. But I mean, just the increments that it was jumping each year was incredible. And it's a growing pain," Mazurak said.

Mazurak says the barrel tax only served as a deterrent for new distillers looking to set up shop in the state.

"If you're a startup, if you want to come to Kentucky and start up a small distillery, that's a major disincentive," Mazurak said. "So, you could go to Tennessee; you could go to Ohio, Indiana. You could go anywhere, right? And start up your distillery and not face these costs."

But while distillers are static about the tax break, counties that are home to distillers are now bracing for a financial hit in the coming years. In a state that's estimated to produce 95% of the world's bourbon, that's big money.

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"They feel like they haven't been listened to, like they've been thrown under the bus, like they've been abandoned, like they haven't been supported, like they've been very supportive of this industry. I'm not so sure they're going to be in the future," Pam Thomas said.

Pam Thomas is a senior fellow at the Kentucky Center for Economic Policy.

She says, like anywhere else, property taxes are used to fund local services. In the case of the funds collected from the barrel tax, that money has historically been used to fund schools, emergency services like fire and police, roads, and more in Kentucky.

"The thing about local governments in Kentucky is they do not have a lot of revenue sources. Their biggest revenue source is their property tax," Thomas said. "The thing about local governments in Kentucky is they do not have a lot of revenue sources. Their biggest revenue source is their property tax."

Thomas says overall, many counties are struggling with the bourbon industry's claims that the barrel tax has been a burden on business.

"It's pretty clear, given the growth of the industry, and you can go and look at the press releases from the governor's office, that they're in a boom, that they're in a huge boom, that the boom is already expected to last more than five years. So, the argument that it's making us not competitive, it just really doesn't hold water," Thomas said.

She adds that dropping the tax might end up disconnecting the industry from the communities where it operates as well.

"I just don't think they're going to get the local support that they got before because they do feel like they've been duped. And, you know, I would say that they have," Thomas said.

Thomas says the distillers knew what they were getting into when they opened their doors in Kentucky.

"Every single distillery that's come into Kentucky, and there's like 90 of them now; just a few years ago, there were only 14 or 15. They did a cost-benefit analysis that included the barrel tax, and they decided to come here anyway," Thomas said.

But for Mazurak, there are more important things. 

"Bourbon is wonderful to have, the enthusiasm and the tourism, and the demand. But at the end of the day, it's not a grocery item; you know, nobody has to have it. It's not a good tax policy to balance your county budget or to really have it tied in with schools because your kids' education and my kids' education is more important than that," Mazurak said.

Making the bourbon battle a topic of discussion at Kentucky watering holes for years to come.

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