March 11, 2020
Justin Stiefel, Heritage Distilling Co. Co-founder and CEO, authored a guest feature for Distiller Magazine, a publication of the American Distilling Institute. Read his informative thoughts below.
Most distilleries, wineries and breweries have benefited from the last few years’ of lower Federal Excise Rates (“FET)” thanks to passage of the Craft Beverage Modernization Act by Congress. That Act temporarily reduced excise taxes for producers, especially craft producers. The initial reprieve led to a hiring spurt in the industry and investments in equipment and marketing for a large swath of the industry. Unfortunately that lower FET rate is set to expire this December 31, 2020, even after Congress extended it for one year. While this extension was a good first step for our industry, many of the owners I talk to in beer, wine and spirits across the US are holding their powder dry this year on a variety of expenditures, including hiring and equipment upgrades. They simply do not feel comfortable making long-term investment decisions or taking on more hiring without clarity and certainty of production tax rates after this year. It is difficult to make a decision on a piece of equipment that you must depreciate over 7 to 15 years when there is a real risk of your production tax increasing by as much as 80% in just 9 months. There is also concern about hiring new employees if you fear having to lay them off in January to pay for an 80% higher tax bill.
The country is battling a growing Coronavirus threat that is already having secondary and tertiary ripples throughout our industry. If consumers don’t feel safe going out to eat, they are obviously not in position to order a bottle of wine, a pint of beer or a cocktail at those same on-premise restaurants. Our partners in the on-premise trade are on the front lines of the potential reduction in consumer spending, but its impacts will be felt up and down their supplier chain, including in our industry. Likewise, the markets are reacting to a shock in the oil market and transportation sectors due to reduced travel. In response there are calls for fiscal stimulus coming out of Congress. The markets want action, and they want action that will get people spending and investing again…now.
One low cost way to jump-start spending and investment at the local level is to permanently enact the lower FET rates. This would have the immediate effect of freeing up capital held by wineries, breweries and distilleries waiting to upgrade their equipment. Those that have secured third party financing might feel comfortable enough to draw out against that line of credit to purchase the new equipment. Now would be the time given the historically low interest rates. Once the new equipment is on site it will most likely need to be installed with help of pipefitters, plumbers and electricians, creating more employment. For those debating about whether or not to sign that new lease to expand production, or to renew an expiring lease, the certainty of knowing the FET rates will not increase in just 9 months would free them up to take on the longer term risk. In struggling parts of the US this would be a boon for commercial and industrial property owners.
Certainty in taxes would equally lead to more hiring, both direct and indirect, helping to expand the employment base, or it could allow existing employees to get a raise, or better benefits from the employer. All of this action would happen using private sector money, and it would have no budget impact this year since the current lower tax rate is already in effect until December. The first time it would impact the Treasury would be next year, hopefully after this market turmoil has passed.
If Congress is going to put fiscal stimulus forward, let the private sector help. Many of us in the over 7,000 breweries, 8,000 wineries and 2,000 distillers across the US are ready and eager to make the next round of investments in our industries and in hiring. But given all that is going on in the market, the lack of certainty in reduced FET permanency is forcing capital to sit on the sidelines. Congress should help us unleash the next wave of investment across all 50 states with this one simple action of making the FET rates permanent.
Original Source: Distiller, 2020 (https://distilling.com/distillermagazine/amid-economic-turmoil-congress-should-act-to-make-fet-reductions-permanent/)