At the beginning of this year, you likely could have found no shortage of craft breweries already concerned over the fact that tax cuts on federal excise tax on alcoholic beverages were set to expire at the end of 2020. After six months of pandemic in the U.S., though? Well, you can probably take that concern and multiply it exponentially. With the beer industry having been hit even harder than other corners of the alcohol market by the economic forces inherent to COVID-19 quarantines, many small breweries are hanging on by a thread as is. The last thing that many of them need at the moment is the knowledge that their excise taxes are like to double, less than six months from now. It’s a looming existential threat that could conceivably spell the end for many breweries that have barely managed to continue operations during the pandemic.
The situation these breweries face now is the result of favorable legislation that was included in the Craft Beverage Modernization and Tax Reform Act (CBMTRA) section of the larger 2017 Tax Cuts and Jobs Act. Heavily lobbied for by the Washington D.C.-based The Beer Institute—more or less considered the lobbying arm of the world’s biggest breweries, but occasionally helpful to craft breweries as well—this act included temporary reductions in the amount of excise taxes that would be paid by producers and importers of beer, wine and spirits. The cuts went into effect at the beginning of 2018, but they’re now set to expire at the end of 2020, unless Congress was to intervene by extending the cuts or making them permanent. Those lower excise tax rates were rationalized to allow small brewers in particular to direct their cash flow at necessary expenditures to grow their businesses, rather than lining the pockets of the federal government. And indeed, the total number of U.S. breweries continued to surge during this era, to more than 8,000 as of 2019.
Prior to the CBMTRA, breweries that produced less than 60,000 barrels of beer per year were paying a tax rate of $7 per barrel. Following CBMTRA, that number was cut in half to $3.50 per barrel—a very significant decrease, considering that the vast majority of American breweries produce significantly less than 60,000 barrels per year. Beyond 60,000 barrels, the number leaps upwards—breweries pay $16 per barrel in excise tax for every additional barrel produced between 60,000 per year and 2 million per year. That still represents a smaller, $2 cut from the $18 per barrel paid by breweries beyond the 6 million barrels per year mark, which hints at the true reason for the legislation in the first place—to shave a few million bucks off the tax burden of some of the largest breweries. Still, even if this is the case, those cuts may now be needed far more desperately by the smallest breweries, who were the least equipped to deal with the economic consequences of the pandemic. For each 10,000 barrels produced by a small craft brewer, for instance, the increased excise tax will mean another $35,000 in taxes paid. In total, The Beer Institute estimates the additional taxes would cost the industry as a whole around $130 million.
To be sure, the wine and spirits industries have also faced their own hurdles during the pandemic, and both would likely want to see the excise tax reduction continue. But the beer industry has been hit worst of all, because it’s more dependent than either wine or spirits on what is referred to as “on-premise” consumption—beer that is consumed at bars, restaurants and (an especially important one) brewery taprooms. The latter is a model that many young breweries had entirely based themselves around in recent years—open a small brewery with a large taproom, and focus entirely on the most lucrative slice of the business, which is selling beer directly to the consumer from your own taproom, cutting out the distribution middle man. And it’s those small breweries that have been most devastated by COVID-19, as the inability of drinkers to patronize their establishments meant that beer sales in many cases dried up overnight. Most of those breweries have since transitioned to selling to-go beer, patio beers, or packaged beer for curbside pickup, but those sales are like applying bandages to a still-bleeding wound. They can’t entirely replace the lost revenue for most breweries that were heavily built around on-premise consumption. And the last thing those breweries need right now is for their excise taxes to effectively double at the end of 2020.
The problem is only compounded by the fact that it’s actually gotten harder during the pandemic for small craft breweries to get their products on to store shelves, rather than easier. According to Nielsen data, the number of SKUs dedicated to beers in grocery stores has declined overall in the last year, pushed out by increased focus on hard seltzer among other things, and small craft brewers are the most disproportionately affected. This means that even if breweries that had been dependent upon on-premise sales are attempting to redirect their attentions into canning and more traditional distribution, there’s less room than ever on store shelves for their products, and a lower chance of being able to get their beer in front of a consumer. It makes on-premise consumption and direct to-go sales from the taproom that much more important.
It remains to be seen whether beer industry lobbying will be able to get this issue before Congress in 2020, in time to potentially extend the current tax cuts, or make them permanent. But if excise taxes double overnight for thousands of small U.S. breweries at the end of 2020, expect to see some blood in the streets as pandemic-devastated breweries are forced to call it quits.