Brad Hittle,
chief executive of Two Roads Brewing Co. in Stratford, Conn., has had a brutal roller coaster of a year, and now he is facing a tax increase if Congress doesn’t act soon.
Business at the craft brewery off Interstate 95 plummeted in March as the coronavirus spread. Mr. Hittle furloughed his sales staff and cut pay, then benefited from a Paycheck Protection Program loan and a summer outdoor-dining boomlet before cold weather lowered demand again.
“I feel like I’m in a boxing ring. And after Round 1 I was bloodied, and Round 2 I fought back,” he said. “Round 3: I’m getting bloodied again.”
The punches are a combination of the resurging pandemic, new dining restrictions and the excise-tax increase that is slated for January.
Two Roads is among brewers, wineries and distilleries across the country pressing Congress to continue excise-tax cuts that were created in the 2017 tax law, extended last year and now are set to lapse Dec. 31.
The tax cuts enjoy broad bipartisan support because so many lawmakers now have breweries in their districts. They also have backing from barley growers and restaurants that serve beer and other alcoholic drinks. About 80% of Congress has signed onto bills making the cuts permanent.
But the fate of the tax cuts—along with dozens of other expiring tax provisions that affect a range of industries—remains uncertain and overshadowed by the broader fight over economic aid as the lame-duck congressional session enters its final days.
“This has been a bipartisan issue, but as we’ve seen, Congress may have the best intentions but an inability to execute,” said
Sean Kennedy,
executive vice president for public affairs at the National Restaurant Association. “And that is the biggest challenge that restaurants are seeing right now. We need more than lip service.”
Currently, small brewers pay a tax of $3.50 a barrel (equivalent to 31 gallons) for the first 60,000 barrels a year and $16 for each additional barrel up to 2 million. Larger brewers pay $16 each for the first 6 million barrels and $18 above that. If the tax cuts expire, the $3.50 jumps to $7 and the $18 rate applies after 60,000 barrels.
Wineries and distillers got similar tax cuts, though critics have pointed to gaps in the legislation that let large producers, especially distillers, get much of the benefit that has been pitched to lawmakers as a policy designed to help smaller companies.
At Two Roads Brewing Co., CEO Brad Hittle says, “We have a hang-on-by-our-fingernails strategy.”
Photo:
Two Roads Brewing Co.
Lawmakers “could reconfigure this excise tax cut so it just benefits the craft distillers and wineries and breweries,” said
Rob McClelland,
a senior fellow at the Tax Policy Center, a Washington group run by a former Obama administration official.
Unlike quarterly income-tax payments, excise taxes are due as often as twice a month. That makes it less realistic for Congress to do what it often does with expiring tax breaks—let them lapse at year-end and later renew them retroactively.
The U.S. craft-brewing industry was booming even before the tax cuts, grabbing market share from larger producers. Although beer consumption overall has been relatively flat, the U.S. is now home to 8,743 breweries, nearly five times the 2010 total, according to the Brewers Association. That growth and fracturing of the market came in part because the industry isn’t a difficult or expensive one to break into, and the excise-tax cuts and liberalized state alcohol laws have made it even easier to get started.
“The U.S. used to be the worst place in the world to drink beer. Everything was light yellow lagers coast to coast,” said Dan Kenary, CEO and co-founder of Harpoon Brewery, which opened in 1986. “The U.S. has become the best place in the world to be a beer drinker, and that’s remarkable.”
Brewers say the tax cuts helped them invest in equipment and marketing.
Harpoon, which has breweries in Boston and Windsor, Vt., used its tax-cut savings on technology that lets it create labels in house instead of buying preprinted cans, Mr. Kenary said. The company, which is working to refinance debt, can’t assume the lower tax rates will continue when working with its lenders.
This year, sales dipped industrywide along with the crash in the restaurant and live-entertainment industries during the pandemic. Limits on indoor dining and events have hurt taprooms and brew pubs, where producers enjoy larger profit margins on sales that don’t go through wholesalers and retailers. That pain tends to fall more heavily on smaller and newer brewers, because they rely more on those sales that don’t require canning or bottling equipment.
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Heavy Seas Beer outside Baltimore typically filled up to 600 kegs a week before the pandemic. But it didn’t fill any from mid-March to early July as it closed its taproom and shifted to less-profitable cans, said CEO
Dan Kopman,
who expects 2020 revenue to be down 20%. Higher taxes in January would mean fewer jobs, he said.
“It’s two people’s livelihood in January at a time when we need to be saving jobs,” he said. “We have to find the savings, and it really is not going to come from our bank debt, and it’s not going to come from our landlord.”
Two Roads in Connecticut produces about 60,000 barrels a year to sell under its own brands plus 60,000 barrels for other brewers. Mr. Hittle said he expects sales to end the year down 10% from 2019, buoyed by strong demand for canned beers.
“We have a hang-on-by-our-fingernails strategy until March,” Mr. Hittle said. “I’m assuming the tax is not going to go up. I’m also praying daily.”
President-elect Joe Biden campaigned on raising taxes on the wealthy and corporations. But the fate of Biden’s plan rests largely on whether or not Democrats take control of the Senate. WSJ’s Richard Rubin explains. Photo: Olivier Douliery/AFP/Bloomberg
Write to Richard Rubin at [email protected]
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