Bourbon distillers face big tax bills and higher tariffs after a record year for production

WASHINGTON – For the first time there are more than 10 million barrels of bourbon aging across Kentucky, and distillers set records by filling nearly 2.5 million barrels in a single year.

That all sounds like a triumph for America’s native whiskey. Yet bourbon producers are contending with trade fights that hurt sales and a pandemic that is hampering tourism. Bigger tariffs are in store later this year.

There’s also a hefty, one-of-a-kind tax bill due.

Distillers in Kentucky are slated to pay more than $33 million in aging barrel taxes in 2021 alone. That figure is 140% higher than it was 10 years ago.

“This is truly a historic and landmark record but that milestone comes with a cost,” Eric Gregory, president of the Kentucky Distillers’ Association, said about the record production and tax rates. Because bourbon-aging barrels are considered property, they’re subject to property tax in Kentucky, Gregory said.

“Every year that barrel ages, it is taxed again and again and again and again,” he said. “If you’re drinking a bottle of 18-year-old Elijah Craig, that whiskey from that barrel had been taxed 18 times before it was bottled.”

“No other place in the world does this, they don’t do it in Japanese whiskey, or Canadian whiskey or Scotch whiskey or Irish Whiskey or even Tennessee whiskey. We’re the only place in the world that taxes aging barrels as spirits,” Gregory said.

The tax puts Kentucky distillers at a competitive disadvantage, he added: “Not only does it raise prices, but that is important capital that we could be using to invest here in Kentucky.”

In addition to the aging-barrel taxes, Kentucky distillers are set to pay approximately $300 million in state and local taxes and another $1.8 billion in federal excise taxes on alcohol.

Then there are the tariffs.

Since the entirety of bourbon production can only occur within the U.S., per a 1964 congressional resolution that called it a “distinctive product of the United States,” a tariff on the drink comes across as a strategic political punch to Kentucky, which is represented by Sen. Mitch McConnell, the top Republican in the Senate.

Kentucky’s unique climate and pure limestone water is why the Bluegrass State is considered the birthplace of bourbon, responsible for 95% of the world’s supply of whiskey. Kentucky’s bourbon business employs approximately 20,100 workers and generates a smooth $8.6 billion annually.

“No other country in the world can produce a whiskey and call it bourbon. So when you’re looking at something to target that is uniquely American and can’t move its production overseas, bourbon is a good target,” Gregory explained. “There are no winners in trade wars, only consequences and we’re a consequence.”

In 2018, China, Mexico, Canada the European Union and the United Kingdom imposed retaliatory tariffs on American whiskey in response to U.S. Section 232 tariffs on steel and aluminum.

Since the imposition of 25% tariffs on American whiskey, exports to the EU, the largest export market for the spirit, plunged 37% from $702 million in 2018 to $440 million in 2020, according to figures provided by the Distilled Spirits Council.

Bourbon exports to the UK, the fourth-largest market for American whiskey, declined by 53% from $150 million in 2018 to $71 million in 2020.

In 2019, a long-running trade battle between U.S. aerospace titan Boeing and European rival Airbus took an anxious turn when the Trump administration imposed a 25% retaliatory tariff on single malt Scotch whisky and single malt Irish whiskey from Northern Ireland, and certain liqueurs and cordials from Europe.

Tit-for-tat retaliatory tariffs across the Atlantic ensued, further exacerbating problems for the bourbon industry.

“The tariffs have been devastating,” Gregory said. “Our industry is collateral damage in trade disputes that have nothing to do with bourbon.”

Earlier this year, the Biden administration alongside the EU and UK agreed to suspend tariffs on distilled spirits and wine targeted in the Airbus and Boeing dispute for the next five years.

The 25% tariff on American whiskeys in the steel and aluminum dispute persists, though, making bourbon the only spirit subject to duties in an ongoing transatlantic trade row.

Despite bars and restaurants closing down for stretches last year due to the Covid pandemic, sales in America’s whiskey sector rose 8.2% year-over-year to $4.3 billion, according to data compiled by the Distilled Spirits Council of the United States.

Domestic volumes of bourbon, Tennessee whiskey and rye whiskey rose 7% to 28.4 million cases, an indication of strong demand across price ranges.

Yet the 25% percent tariffs triggered by steel and aluminum duties still loom large and are set to double on Dec. 1.

“The tariffs on American whiskey have left a path of destruction impacting both sides of the Atlantic, from U.S. distillers and farmers to EU and UK restaurants, bars and consumers,” said Lisa Hawkins, senior vice president of public affairs for the Distilled Spirits Council of the United States.

“These tariffs continue to be a significant and unnecessary drag on the recovery of craft distilleries across the U.S. that had to close their tasting rooms and tours for months on end due to the pandemic,” she said.

The nation’s top trade chief said Monday that the Biden administration is working to resolve the outstanding steel and aluminum trade issue with Europe in order to stoke greater cooperation on challenges posed by China.

“The engagement with the EU follows the same line of thinking and spirit as the approach that we took to large civil aircraft. Which is, how do you take a situation of tension and work through it to convert it into a partnership and collaboration,” U.S. Trade Representative Katherine Tai said when asked about dissolving the trade dispute.

“And that is certainly what we are working on and our goal in that exercise,” Tai said, without providing further details.

Distillers are dreading the coming tariff hike.

“It’ll be crippling. It will all but force some distillers out of the European market, it will be a crippling blow for bourbon and whiskey,” Gregory said.

“We’ve lost over $200 million in exports at 25% and now double that,” he said. “That’s what we’re looking at.”