OUCH – proposed beer tax increase hurts

As part of his recently announced revenue enhancement proposals to offset the repeal of the state’s personal income tax, West Virginia Governor Jim Justice proposed a beer tax hike of 431% designed to produce $26 million in increased revenues. This move could be a devastating blow to the state’s nascent small brewing industry. If beer tax increases are inevitable, Brilliant Stream strongly advocates that the state follow the tiered-rate, federal beer excise tax model instead of the flat across-the-board increase proposed by the governor.

Big Jim proposes big tax increase

The governor’s proposed tax increase would raise the state’s beer excise tax (barrel tax) from $5.50 per barrel to $29.25 per barrel. The $23.75 per barrel increase in the tax rate (431% increase) seems extremely punitive. It would appear that someone in state government surely dislikes small breweries and beer drinkers. If the governor’s proposal is adopted, WV’s beer excise tax would be second highest in the nation, bested only by Alaska. But more importantly it would be a true outlier — hugely higher than the national average state beer tax and way hugely higher that any of the surrounding states.

For comparison, here are the gallonage tax rates in surrounding states¹.

• Kentucky – $2.50 per barrel or $0.08/gal.
• Maryland – $2.79 per barrel or $0.09/gal.
• Ohio – $5.58 per barrel or $0.18/gal.
• Pennsylvania – $2.60 per barrel or $0.08/gal.
• Virginia – $7.96 per barrel or $0.2565/gal.

The $26 million annual tax increase would be passed on to West Virginia beer consumers. But wait, there’s more, This $26 million in extra cost passed on by the brewers to the beer wholesalers gets marked up, and then that extra cost to the retailer gets marked up too. As a result, West Virginia beer consumers could easily get stuck with $50 million or more in additional costs each year. But the damage to beer drinkers pocketbooks would pale next to the damage the tax increase could do to our small breweries

Small business more sensitive to excise taxes

Tax policy experts generally recognize that excise taxes are inherently unfair and are bad for employment because they force more of the tax burden on a single industry, making it less competitive and more difficult to achieve profitability. A 4,000 barrel-per-year local brewery would pay $95,000 more in excise taxes each year — money it couldn’t then use to purchase more equipment or hire more employees.

Something state leaders are not considering is that West Virginia’s brewery industry is very fragile when compared to the industry in other states. West Virginia’s breweries produce only about 0.5 gallons per 21+ adult annual. The national average for a state is many times more. The significance of this number is that our 28 WV family-owned breweries are all very tiny operations, as breweries go. They operate on very tight margins. Due to this tiny size, they do not have the economic might or resiliance of a larger brewery to withstand a big attack on their cash flow. An immediate 431% increase in the excise tax could cripple them.

A better approach

A much better approach for the legislature would be a tiered excise tax modeled after the federal excise tax law — a model that has been embraced by the brewing industry. For small breweries (up to 60,000 barrels a year production), the federal beer excise tax is $3.50 per barrel. It then jumps up in stages to $18 per barrel on very large brewers. If the governor and legislature are dead set on increasing West Virginia’s beer excise tax, they should follow the federal lead. Using the federal model, they could maintain our current excise tax rate for small brewers at $5.50 per barrel, and then raise it in steps for larger brewers. Doing this would protect the state’s fragile 28 small, family-owned brewing businesses, while still bringing in more revenue since large brewers sell the giant’s share of all beer sold in the state each year.

Over the past decade, the small brewery industry has been one of the few bright spots in the state’s sagging manufacturing sector. It seems counter productive to penalize them when they have been on a growth spurt producing new jobs and income for West Virginia communities and bringing more tourists into the state. The governor also proposed other steep excise tax increases for wineries and distilleries The combined effect would likely be greatly increased retail prices for consumers and less sales for beer, wine and distilled spirits.

¹ Federation of Tax Administrators, January 2021