Opinion: HB 5’s end to anti-competitive barrel tax is a ‘positive start’

Bluegrass Institute for Public Policy Solutions

Tuesday, Feb. 28, 2023 — General Assembly sessions that both advance sound policies and eliminate harmful ones offer the longest-lasting benefits for the commonwealth and its citizens.

This year’s session could be one of those events.

Legislators have already made it memorable by advancing sound policy in reducing Kentucky’s individual income tax rate by another half-percentage point to 4%. This brings the state a step closer to eliminating the tax altogether and letting people keep more of their own hard-earned money.

Lawmakers could make this year’s session even more successful by eliminating the harmful barrel tax – a barrier to the future growth of Kentucky’s signature bourbon industry.

One would be hard-pressed to find a tax that’s more unfair; it taxes bourbon still aging in the barrel, years before the first bottle even reaches the shelf and generates income.

It’s like taxing General Motors for Corvettes still on the assembly line in Bowling Green.

The Kentucky Distillers’ Association (KDA) says Kentucky is the only place on the globe that taxes still-aging spirits.

Of even greater concern is the long-term impact of the barrel tax on Kentucky’s ability to remain the bourbon capital of the world.

Other states are challenging for a bigger piece of the action, offering entrepreneurs a better business environment to launch their new small distillery businesses.

Economist Paul Coomes, emeritus professor of economics at the University of Louisville, touts bourbon’s immense impact on Kentucky’s economy – creating $9 billion in total economic impact and supporting more than 22,000 jobs.

Coomes identifies the “enormous rise of craft distilleries in other states” as a specific concern. He points to the fact “Kentucky’s national share of distilling jobs slipped from 43 percent to 30 percent from 2001 to 2020.

Eleven states have more distilleries than Kentucky while five of our seven neighboring states have more craft distilleries than we do.

Part of the challenge is dealing with the impact that eliminating the barrel tax would have on a small number of counties.

No question, local governments require resources to support local services like fire protection, public safety and infrastructure. The distillers acknowledge those services are important to their investments in those local communities.

“It’s clear to most policymakers that Kentucky’s barrel tax is a competitive disadvantage to the industry’s growth,” according to Andrew McNeill, a visiting policy fellow at the Bluegrass Institute. “Eliminating this archaic tax while holding local governments harmless in the short and intermediate term is the answer legislators appear to be pursuing.”

House Bill 5 filed by Rep. Jason Petrie, R-Elkton, chairman of the House Appropriations and Revenue Committee, was introduced last week and, according to McNeill, “is a positive start” on this critical issue.

McNeill believes ending the barrel tax on new barrels would result in even more investment from the industry, especially from craft distillers.

Increased investment will drive growth in the other local revenue sources generated by the industry. New distilleries will create opportunities for more Kentucky counties to benefit from the tourism surrounding bourbon. Entrepreneurs will see Kentucky as the place to get their start.

Imagine the economic impact to local communities and our entire commonwealth if the next generation of distillers choose to launch their new distilleries in London, Kentucky, instead of Lynchburg, Tennessee?

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at www.bipps.org. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.


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