Craft Distillers Get Tax Reprieve, for Now

Distillers won a reprieve from Congress on Tuesday, as lawmakers moved closer to approving a one-year extension for a popular tax cut that benefits certain alcohol producers.

The extension was tucked into a broader package of tax and spending changes that lawmakers are expected to vote on this week. Congress must pass the agreement by Friday to avoid a government shutdown.

The tax package also renewed an expired credit for companies that use biodiesel fuel, deductions for mortgage insurance premiums and a more rapid depreciation for racehorses, among other provisions.

The tax cut for alcoholic-beverage producers, known as the Craft Beverage Modernization and Tax Reform Act, was originally passed as a two-year provision in the Tax Cut and Jobs Act of 2017.

The new measure, which is expected to gain Senate approval, gives alcohol producers the additional year of the tax reduction amounting to about $665 million less for federal coffers, according to the federal Joint Committee on Taxation.

“The craft beverage bill has been an incredible boost for our industry, and this extension allows us to continue investing in our wineries by buying new equipment, remodeling tasting rooms, hiring new employees and more,” said Hank Wetzel, founder and family partner of Alexander Valley Vineyards in Healdsburg and chairman of Wine Institute trade group. “All of this benefits local communities in the form of jobs, tax revenue and support for the hospitality industry.”

The package primarily benefits distillers, who pay a much higher federal excise tax than breweries and wineries and had no reduced rate prior to 2018. But it benefits all alcohol producers, including cideries, though it is skewed to help smaller manufacturers.

For example, the measure retains a new tiered tax credit system designed to help smaller wineries. Wineries pay an excise tax of between $1.07 and $3.40 per gallon. Under the measure that was extended, there will remain a $1 per gallon tax credit for the first 30,000 wine gallons; 90 cents per gallon for the next 100,000 wine gallons; and 54 cents per gallon for the next 620,000 wine gallons. It also applies the tax credits to sparkling wine and provides the lowest excise tax rate for wines with an alcohol content up to 16%. The old cap used to be 14%.

Beer is generally taxed at the federal level at $18 per barrel, the equivalent of 31 gallons.

The measure continues a rate of $16 per barrel for the first 6 million barrels of beer either produced domestically or imported. U.S. brewers who produce less than 2 million barrels annually would be eligible for a rate of $3.50 per barrel on the first 60,000 barrels.

Russian River Brewing Co. in Windsor would save about $140,000 next year from the federal excise tax break if it produces up to 40,000 barrels, co-owner Natalie Cilurzo said.

“Guess what we will probably spend that on? A freakin’ generator,” Cilurzo said in a text, referencing backup costs incurred from the October PG&E power shut-offs and the possibility the brewery will buy instead of rent a generator for next year’s wildfire season.

Still, the alcoholic-beverage industry was hoping for something more, like legislation making the tax cut permanent. This summer, the House Ways and Means Committee passed such a bill, and a bipartisan Senate task force endorsed a permanent cut as well.

The legislation that the House Ways and Means Committee passed in the summer has 326 co-sponsors, and an identical bill in the Senate has 73. The failure by Congress to move forward on such a popular item left many observers frustrated.

“It was nice to awaken to part of a Christmas present,” Lehrman said, “but they forgot to include the batteries.”

Many craft-beverage producers say that without the certainty that the cut will continue after Dec. 31, 2020, they cannot make long-term investments like buying stills, planting vineyards or hiring staff.

“One year is awesome for one year, but then what?” said Jaime Windon, chief executive and co-founder of Lyon Distilling, a small rum producer in St. Michaels, Maryland. “I’ll still probably cut back next year. I can’t go forward without that confidence.”

Lehrman added that she felt hopeful about getting Congress to make the cut permanent when it returns in 2020. But she also said that in a tumultuous election year, she and her fellow industry lobbyists had a lot of work to do.

“I will need to resole my shoes,” she said. “All those people I got to know on the Hill, I’m going to be seeing a lot more of them.”

The Press Democrat contributed to this report