Distilling the Tax Cuts and Jobs Act of 2017: Recent Revolutions in the Alcohol Excise Tax Rate

Andrew Zuckerman – Article 1 Section 8 of the United States Constitution grants to Congress the power to “lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” (U.S. Const. art. I, § 8).

Faced with mounting debt from the American Revolution, the Federal government first used this power of taxation via an excise tax on distilled spirits. The Excise Act of March 3, 1791 commonly known as the “Whiskey Tax,” imposed a rate varying between six and 18-cents per gallon on distilled spirits. The rate and terms of payment of the tax were dependent on the volume produced. For example, when the amount of tax owed was less than fifty dollars, payment of the tax was due immediately and in cash. For amounts owed greater than $50, at the election of the distiller, the tax could be paid either immediately or secured by bond for payment over four to six months. This regulation resulted in smaller distillers often having to pay more than twice the tax per gallon than what larger producers paid. Additionally, for small distillers in the western frontier the requirement to pay the excise tax in cash was a great hardship compared to larger commercial distillers in the eastern United States who were better able to absorb the cost of the tax and finance its payment. The resulting tensions over compliance with the excise tax led to the “Whiskey Rebellion,” an armed insurrection by small western distillers that threatened the sovereignty of the Federal Government. In 1794, George Washington, as President, personally led a force of 13,000 troops to end to the conflict and restore the taxing authority of the government.

Two-Hundred-Twenty-Four years later, the excise tax on distilled spirits has returned to the national spotlight. The Tax Cuts and Jobs Act of 2017, included provisions for reduced tax rates on distilled spirits (as well as beer and wine). Since January 1, 1991 the tax on distilled spirits has been kept steady at $13.50 per proof gallon (“PFG”). (A proof gallon (PFG) is one liquid gallon of spirits that is 50% alcohol at 60 degrees F.). Per the new tax law, effective January 1, 2018 the tax has been reduced to $2.70 per PFG on the first 100,000 PFGs produced, and $13.34 per PFG on the next 22.13 million PFGs. Production of more than 22.13 million PFGs remains taxed at $13.50 per PFG. These rate reductions are significant because it is the first time in nearly 30 years that there has been any rate change to the alcohol excise tax regime, and because it is the first time since 1868 that there has been a reduction in the excise tax for distilled spirits.

Prior to the new law, all distilled spirits regardless of the volume produced were taxed at the uniform rate of $13.50 per PFG. By introducing a lower tax rate on the first 100,000 PFGs of production, the new tax law aims to help small distilleries compete against their larger competitors. The tax savings are expected to help these smaller companies purchase better equipment, expand operations and create new jobs. For distilleries operating up to the 100,000 PFG range, this results in savings up to approximately $1.08 million per year. ($10.80 per PFG savings x 100,000 PFG = $1,080,000). However, distilleries with larger production volumes can receive additional tax savings of $3.54 million up to a grand total of $4.62 million. ([$.16 per PFG saving x 22,130,000 PFGs] + $1.08m in savings from the first 100,000 PFG produced = $3,5430,800 + $1,080,000 = $4,620,800).

The rate reduction in distilled spirits combined with reductions in the tax rate on beer and wine are expected to cut alcohol tax revenue by $4.2 billion over two years according to the Congressional Joint Committee on Taxation.

The recent changes to the tax law represent a significant benefit to the alcohol industry. While the headline reduction of $13.50 per PFG to $2.70 on the first 100,000 PFGs of production will give a significant boost to small and medium sized distillers—consistent with the objectives of the Tax Cuts and Jobs Act, the greatest savings are likely to be realized by the large commercial distilleries via the $.16 tax reduction per PFG on their next 22.13 million PFGs produced. The excise tax on alcohol is one of the most significant costs of alcohol beverage production. Excise tax compliance and the ability to absorb its cost continues to be a source of tension in the industry between small craft distillers and their larger commercial competitors. The Whiskey Rebellion was fought over the disparate tax treatment of small distillers who faced higher tax consequences based on their volume of production. Like their early ancestors, large commercial distilleries today are better able to absorb the cost of excise taxes than are smaller distillers. The recently enacted tax reductions are meant to help both smaller and larger distillers. The reductions are scheduled to expire in two years unless renewed. It will be interesting to see at the end of this period, whether the volume-based tax reductions have “fermented” greater competitiveness in the industry.

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