Agony of de-FET

acsa-programI’m in Nashville this week, attending the annual convention of the American Craft Spirits Association.  It is a great event, filled with informative classes, a plethora of booths for vendors to peddle their wares, and tasting events in the evening.

Not surprisingly, one of biggest draws in the event was the town hall meeting, where ACSA members had the opportunity to listen to and ask questions of Association officers and directors, and hear updates on current developments in the industry.  One such presentation that seemed to generate significant interest was the report by the ACSA’s lobbyist over efforts to obtain federal excise tax reform.

As discussed previously, the federal excise tax levied on spirits represents a significant burden on small distillers.  The burden ($13.50 per proof gallon of spirits) is wholly disproportionate to the amount of FET imposed on small wineries and small breweries.  And members of the distilling community have been trying for some time to get the applicable FET reduced in order to achieve parity among these three beverage lines.

The ACSA was influential in getting the Craft Spirits Modernization and Tax Reform Act of 2015 introduced into Congress, and pushed hard for passage.  In fact, the Association’s lobbying obtained some remarkable results, with 288 members of the House of Representatives and 51 members of the Senate signing on to the versions of the bill circulating among the two bodies before the end of the last legislative session.  But of course the last session did, in fact, end.  And it ended prior to passage of the Act.  So tax relief essentially went back to square one.

But square one didn’t last for long.  On January 30, 2017, Senator Wyden of Oregon reintroduced the bill in the Senate.  A corresponding version is circulating in the House as well, and as of this writing there are 10 co-sponsors of the bill in the Senate and 20 in the House.  According to the Association’s lobbyists, ranking members of both bodies anticipate taking up tax reform in May of this year.

When that occurs, it will not be a discussion of simply the FET burden on distilleries.  Rather, it will address the U.S. tax system more broadly.  Based on news reports and statements by the Trump administration, it seems likely that any proposed tax reform will include a border adjustment tax.  That tax could (possibly) encourage U.S. companies not to squirrel away their profits overseas.  But experts seem to agree that it would also be likely to make it more expensive to import products into the United States.  And of course when it comes to tax and economics, it is difficult to know anything with certainty or to fully anticipate the potential unforeseen consequences of changes in law – so we can expect the inclusion of a border adjustment tax to be controversial.

At present, many companies that import a lot of their products for sale in the U.S. are organizing opposition to such a tax, and Pernod Ricard’s chairman recently made comments suggesting that the tax would need to be passed along to consumers.

So where does that leave distillers in their search for FET relief?  It seems likely that any effort to address FET burdens will be incorporated into the broader conversation around tax reform.  Given the ambient level of partisan animosity, I suspect that democrats (who generally were supportive of efforts to address the FET burden during the last Congress) may be disinclined to support republican-led tax reform initiatives.  And if democrats don’t get behind the push for FET relief, will it be among the priorities of the republican initiative?

Well, we have a President who apparently doesn’t drink.  And the leader of the Senate finance committee also doesn’t drink (and hails from a state with relatively few distilleries).  Those don’t feel like particularly positive signs.  That said, from a purely rational perspective it seems like FET relief is more likely now than it has been at any time in the last 10 years.  The bill was widely popular in the last legislative session is a priority of the current administration and the current congress.  But of course rationality doesn’t always rule the day in Washington, D.C., so you never know.  Keep your fingers crossed.

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