Kentucky's bourbon war brewing as local leaders bemoan barrel tax break for $9 billion industry

Kentucky’s legislature voted to completely phase out the property tax on the value of barrels of aging spirits. The action — taken in the final hours of this year’s session — was toasted by the booming bourbon industry but left a bitter taste among some local leaders whose communities rely on the tax money. Gov. Andy Beshear signed the measure soon after it reached his desk.

The state’s $9 billion distilling industry sees the bill’s passage last week as a milestone to help secure bourbon supremacy in Kentucky.

Supporters said without the action, distillers’ tax payments would have mounted amid surging inventories. They worried that producers would start building warehouses in other states, which could result in production moving away. The Bluegrass State is home to 95% of the world’s bourbon production, the Kentucky Distillers’ Association said. The barrel tax is assessed only in Kentucky, and its removal will stimulate more rounds of growth in a state where nearly 12 million barrels of spirits are aging in warehouses, it said.

“Kentucky distillers will finally receive equal treatment with every other manufacturer whose goods are not taxed during the production process,” the distillers’ association said in a statement.

But the industry’s victory came at a potential cost: fraying its relations with some local governments where they operate. Local officials told lawmakers that spirits companies were breaking promises they made when seeking approval for distillery projects. The producers touted the benefits to local governments from the barrel tax, they said.

“They brought the projections of what the payments would be for 10, 20, 30 years,” said Josh Ballard, a city council member in Loretto, home of the Maker’s Mark distillery. “They talked about our children and our children’s children would benefit by allowing them to build in our communities.”

Local officials acknowledged the benefits of having distilleries nearby, including the popularity of whiskey tourism. But they pointed to the strains that spirit production puts on local governments — from wear and tear on roads to the significant use of water and sewer systems — that they said will become greater financial burdens once barrel tax revenues evaporate.

“When is it going to stop?” asked Mayor Richard “Dick” Heaton of Bardstown, a hub of bourbon production. “When is enough enough with all the tax policy changes you all have made?”

The industry said it offered concessions to help cushion affected local governments, agreeing to a longer phaseout of the tax and protecting funding for schools, fire departments and ambulance services in counties where distilled spirits are stored.

For affected city and county governments, officials will have 20 years to “plan and diversify their tax bases,” the distillers’ group said. Distillers storing barrels in warehouses financed by industrial revenue bonds, to abate local property taxes, will pay barrel taxes as long as those contracts are in place.

The local officials and their supporters downplayed the barrel tax’s impact on Kentucky distillers, pointing to the industry’s unprecedented growth as demand for American whiskeys surges.

“This is a tax cut for a booming industry,” said Republican state Rep. Candy Massaroni of Bardstown. “And ultimately, this is going to put more of a tax burden upon my constituents.”

Under terms of the bill, the industry projects local revenues from barrel taxes, as they are phased out from 2026 through 2043, would not dip below 2025 baseline levels until 2039. That projection is based on 10% annual industry growth; if growth continues at higher rates, it would be later before revenues fall below that baseline.

Bourbon gets its flavor and golden brown color from aging, with most premium bourbons aging between six and 10 years, the distillers’ association said.

Last year the industry paid nearly $40 million in barrel taxes, about three times the amount in 2014, the distillers’ group said. Aging barrels of spirits are taxed at both the local and state levels. At the state level, it’s 5 cents per $100 of assessed value, it said. At the local level, it’s based on each county’s property tax rate. Last year, the total tax assessed value of all aging barrels in Kentucky reached a record level, surpassing $5 billion, the group said.

Based on the current trajectory for barrel filling and storage, those taxes are doubling every six to seven years, putting the industry on a course to reach $250 million in barrel taxes paid in 2039 without action to reduce taxes or move barrels out of state, it said. The distillers’ association said its member distilleries are in the midst of a $5.2 billion building boom.

Republican Sen. Jimmy Higdon, whose district covers the heart of bourbon country, said local officials “didn’t have dollar signs in their eyes” and were willing to receive much less revenue “to make this work.”

The Kentucky Center for Economic Policy said distillers already receive millions in economic development subsidies, income tax discounts and property tax exemptions. The distillers’ group said that even with the relief from the barrel tax, distilling remains Kentucky’s highest-taxed industry.

After achieving its tax policy victory, the industry appeared to acknowledge it has some relationship-mending to do. The distillers’ association said it hopes “communities and distillers can move forward together” to create more distilling jobs and attract tourists.