A cut in federal excise taxes would help boost the makers of craft beers

Craig Becker stacks freshly bottled (or canned) Summer Ale at Fremont Brewing on June 22, 2015 in Seattle. A tax cut would let Fremont make another hire and buy one more fermenter.
Craig Becker stacks freshly bottled (or canned) Summer Ale at Fremont Brewing on June 22, 2015 in Seattle. A tax cut would let Fremont make another hire and buy one more fermenter. TNS

Fans of Seattle’s Fremont Brewing know the picnic tables and beer barrels that line the brewery’s front facade, perfect for knocking back a cold one on a hot summer day.

But they don’t see behind closed doors into the world of production, where beer cans are filled and capped on an assembly line in the back of the brewery. And with every barrel of beer the brewery churns out, excise taxes get funneled to the government.

For each of the 18,000 barrels Fremont produced last year, $7 went to the federal government. That’s $126,000 annually – a number that will rise as the company opens a larger facility. Beer production will begin there in 2016, said co-founder Sara Nelson.

Now there are competing proposals in Congress to significantly cut the federal excise tax – or eliminate it altogether – depending on the size of the brewery.

Any of the options would mean enough savings for Fremont Brewing to hire another employee and buy one more fermenter for beer production. “It’s significant,” said Nelson. “It’s not small potatoes.”

But it’s unclear which, if any, of the proposals might become law. And lawmakers are stuck trying to appease even a group representing the largest of breweries, which says it would be unfair not to pass the tax cut on to them.

The craft-beer industry has been growing since home-brewing was legalized federally in 1978. Sierra Nevada Brewing and Boston Beer started with experiments at home before producing for a larger audience.

“Some people starting to drink now would never have not known craft beer to be around,” said Adam Robbings, co-founder of Reuben’s Brews in Seattle.

Small breweries are big business in Washington state. In 2014, the state had 256 craft breweries, the second-highest total in the country. That’s up from 136 in 2011, according to the Brewers Association.

Currently, brewers pay a federal excise tax of $7 per barrel for the first 60,000 barrels and $18 per barrel for 60,001 and above.

Small breweries have complained the excise tax hinders their ability to expand. Although large breweries make a larger profit, they also bear a much larger tax burden because excise taxes are based on barrels produced.

Under one proposal, brewers making fewer than 2 million barrels annually would pay $3.50 for the first 60,000 and $16 for the rest. Another plan would base tax cuts on the barrels produced, with the smallest of breweries – those who produce up to 7,143 barrels a year – paying no excise tax, and the rate increasing after that.

Compromise legislation has been introduced that would cut taxes in half for the first 60,000 barrels and reduce the tax for even the largest of breweries – those making more than 2 million barrels annually – and distilleries, wineries and vintners. That bill was the result, in part, of a group representing some of the largest brewers (Anheuser-Busch InBev and MillerCoors) crying foul when lawmakers proposed cutting taxes only for their smaller competitors.

A brewer that produces 60,000 or fewer barrels could increase cash flow with the tax cut, and larger breweries may be able to add jobs and increase investment with the extra money, said Andy Thomas, CEO of Craft Brew Alliance.

The smallest brewers would see those taxes cut at least in half, which is significant, said Jim McGreevy, CEO of the Beer Institute.

“We think when the tax is lowered and reformed, that’s going to do good things for beer and beer consumers,” McGreevy said.

But breaking down the legislation means understanding that the size of breweries can be as varied as the beers on tap at a local bar, and that is sparking disagreement.

“I think the 2 million is much too high,” said Mike Hale, president of Hale’s Ales, which produced 11,000 barrels of beer last year. He said 100,000 barrels should be the limit for tax cuts because small brewers wouldn’t necessarily have a thriving business and would need a financial break.

Less than 1 percent of the country’s breweries produce more than 2 million barrels annually, Thomas said. Most are much smaller – with 90 percent of breweries producing 7,143 barrels or less each year.

Naked City Brewing brewed 700 barrels last year, said its co-owner Bryan Miller. Its co-founder, Don Webb, added that it costs the brewery between $160 and $180 to produce a barrel of beer.

Peter Charbonnier, co-owner of Populuxe Brewing in Seattle, said it also costs them about $160 to produce each barrel, though the production cost varies based on brewery size and style.

On top of that expense, they pay $7 in federal excise tax and an additional $4.78 in state excise tax per barrel.

A federal excise-tax reduction wouldn’t be as much of a game-changer for Reuben’s Brews, which churned out 800 barrels of beer last year, said Robbings.

“I would get less than $3,000, which isn’t enough to do anything,” he said, presuming the tax is cut in half.

Bigger brewers producing more and paying more in taxes, he argues, may reap a more significant benefit for everyone than cutting taxes for the smaller ones.

“How many breweries are really going to benefit that much from a position in being able to change what they do?” Robbings said. “Because we won’t be able to change what we do.”

Larger brewers with tax breaks could get equipment to automate their beer making, and small brewers would be able to save a bit more money to put back into the business, said Charbonnier, who brewed just over 250 barrels last year. He knows he wouldn’t save a significant amount, but he’s still optimistic.

“Every little penny counts when you’re this small,” Charbonnier said.

To grow, breweries need tanks, fermentation space and kegs. These are all “very expensive things,” said Brad Benson, head brewer at Stoup Brewing in Seattle.

“Savings would be great,” he said.