Over pleas from local governments, KY legislature moves to phase out bourbon barrel tax

The state legislature passed a bill on the last day of session that would completely phase out a tax on distilled spirits, one that many bourbon-producing communities say is a vital source of revenue.

The Senate passed the bill 24-13 and the House passed it 60-39.

The complaints from officials were strong and persistent on Thursday, but after last-minute changes that appeased some public school-supporting organizations and left some city and county leaders still disappointed, both chambers passed the measure.

The bill would completely phase out any property tax revenues for city and county governments collected on distilled spirits that are stored in those counties and cities. The bill attempts to hold harmless school districts that currently collect on the tax by freezing the rate at which the tax is levied while also taking into account any increases in state funds, which would reduce the revenue received from the industry.

The phase out schedule for counties and cities was extended in the new version of the bill, from 2039 to 2043.

Further, a new sales tax exemption, excluding social media marketing — which includes ads on social media advertising giants like Facebook — would be established under the bill.

The original bill estimated that local governments would lose out on $249 million over the course of several years as a result of the bill.

Gov. Andy Beshear has yet to stake out a position on the bill, but House leadership has previously expressed confidence that he will sign the bill.

“We’ve been told that he may even sign it this evening,” House Speaker David Osborne, R-Prospect, said lat Thursday night.

Pros and cons

Bardstown Mayor Richard Heaton joined local officials from Marion County to testify against the bill in committee on Thursday.

“When is it going to stop?” Heaton asked. “When is enough enough with all the tax policy changes you all have made over the last several years?”

Heaton said that distillers, while they provide a great benefit to the city, also place a tremendous burden in the form of wear and tear on the roads and significant use of water and sewer systems.

The Bluegrass Institute for Public Policy Solutions (BIPPS) released a statement praising the General Assembly for passing the bill, calling it an “anti-competitive tax.”

“Lawmakers rightly resisted the temptation to put off this vote by pointing to the current strength of Kentucky’s bourbon industry. Instead, they recognized that other states without the competitive disadvantage of a barrel tax are aggressively seeking a bigger piece of the nation’s distilling pie and removing it is necessary for Kentucky to remain the world’s bourbon capital for future generations,” the group said in a statement.

The Kentucky Center for Economic Policy disagreed. Pam Thomas, a senior fellow at the center and former staffer on the Senate Appropriations & Revenue committee, questioned the necessity for eliminating the tax on social media advertising and called the tax phase out a power grab.

“Kentucky’s distillers already receive millions in economic development subsidies, income tax discounts and property tax exemptions, and are achieving record growth despite paying the barrel tax that HB 5 would repeal. This legislation is a giveaway to the bourbon industry that will deeply harm the budgets of the affected localities and take monies from the entire state budget, which will have to make up local education dollars uncollected from future growth,” Thomas said. “The industry is pushing for this new tax giveaway because they are powerful and they can, not because they are needy and they must.”

Senate Appropriations & Revenue Chair Chris McDaniel, R-Ryland Heights, said the legislature did not intend to tax companies like Google when it expanded the sales tax base to “telemarketing services” to target spam calls and messages.

Discussion on the floor

Some opponents framed the tax cut as a corporate handout to an industry that doesn’t need one.

“We’re choosing an industry, we’re choosing liquor, over public education for the children of Kentucky. I find that problematic,” Rep. Sarah Stalker, D-Louisville, said.

Rep. Candy Massaroni, R-Bardstown, called the bill a “tax cut for a booming industry” that would ultimately burden communities like hers.

Sen. Robin Webb, D-Grayson, pointed out that many communities have agreed to help bourbon companies in their efforts to avoid other taxes given the expected revenue from the barrel tax. Taking the barrel tax away would make for a raw deal, she said.

“It’s not going to hurt the industry to continue to honor the representations made to the local communities and counties where they went out and got incentives,” Webb said.

Despite final passage, some advocates like McDaniel warned that the industry should do more to appease local communities that have spoken out against the bill.

“You guys have a lot of bridges to build and a lot of investments to make… I think there’s work to be done to rebuild those relationships that have been damaged,” McDaniel said.