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Small BREW Act v. Fair BEER Act

February 13, 2015

Most folks paying attention to the craft beer industry have heard of the proposed Fair BEER Act and the proposed Small BREW Act.  And most folks probably know that the big breweries, like Anheuser-Busch (AB), support the Fair BEER Act, while craft breweries support the Small BREW Act.  But do you know why craft breweries support the Small BREW Act rather than the Fair BEER Act?  Well, just in case you are unsure, let’s figure it out together.

The first thing you need to know is that under current federal law a “small” brewery is defined as one producing not more than 2M barrels annually.  Why does this matter?  Well, because only “small” breweries are eligible for tax savings under current law.  You see, under current law, small breweries are charged a federal excise tax in the amount of $7.00 per barrel on the first 60K barrels produced, but large breweries are charged $18 per barrel on all barrels.  This means that under current law a small brewery could have tax savings of up to $660,000 on the first 60K barrels.

Current Law

Barrels Produced Tax Per Barrel Total Tax
First 60,000 barrels $7.00 $420,000
Next 1,940,000 barrels $18.00 $34,920,000
First 2,000,000 barrels   $35,340,000

Now, what would the Small BREW Act do?  First, it would change the definition of a “small” brewery from one producing not more than 2M barrels per year to one producing not more than 6M barrels per year.  You might be wondering how many U.S. breweries are in the 2M-6M barrels per year production range.  Well, there are not many.  In fact, as far as I know, there are only two – Boston Beer Company (BBC) and D.G. Yuengling & Son. But I imagine that there are quite a few breweries who want to be in that production range.

The second thing the Small BREW Act changes is the tax per barrel on the first 60K barrels for small breweries (in this case, breweries producing not more than 6M barrels per year).  Remember that under current law the tax is $7 per barrel for the first 60K barrels for small breweries.  The Small BREW Act reduces it from $7 per barrel to $3.50 per barrel for the first 60K barrels.  That’s $210K more in savings than under current law.  Sounds great, right?

Another thing the Small BREW Act changes is the tax per barrel for the next 1,940,000 barrels for small breweries.  Under current law the tax is $18 per barrel.  The Small BREW Act reduces it from $18 to $16 per barrel.  That’s a savings of $3,880,000.  It is important to note that the Small BREW Act does not reduce the tax rate for big breweries, which would continue to pay $18 per barrel for all barrels.

Small BREW Act

Barrels Produced Tax Per Barrel Total Tax Savings v. Current Law
First 60,000 barrels $3.50 $210,000 $210,000
Next 1,940,000 barrels $16.00 $31,040,000 $3,880,000
First 2 Million barrels   $31,250,000 $4,090,000

Here’s the text of the bill: Small BREW Act

So, for a brewery producing fewer than 6M barrels per year, these changes could save it up to $4,090,000.  Awesome, right?  Let’s not jump for joy just yet.  Let’s check out the Fair BEER Act.

Fair BEER Act

Production Rate Tax Rate
0 – 7,143 barrels No excise tax
7,144 – 60,000 barrels $3.50/barrel
60,001 – 2M barrels $16.00/barrel
2M – plus barrels $18.00/barrel

Here’s the text of the bill: Fair BEER Act

At first glance, this seems like a better deal for craft brewers than the Small BREW Act.   I mean, hey, no federal excise tax on the first 7,143 barrels.  And 90% of American breweries produce fewer than 7,143 barrels.  Here’s the thing, though:  under the Fair BEER Act, there is no production cap (unlike the Small BREW Act which would apply only to those U.S. breweries producing fewer than 6M barrels).  In other words, the reduce tax rate applies to all breweries.  Stated differently, big breweries, like AB InBev, would be eligible for the reduced tax rate on their first 2M barrels.   The Fair BEER Act also makes another significant, yet subtle, change to current law.  Presently, and under the proposed Small BREW Act, the reduced tax rate applies only to domestic breweries, i.e., breweries in the U.S.  The Fair BEER Act makes the reduced tax rate apply to not only domestic breweries, but also foreign breweries, i.e., imported beer.  Thus, under the Fair BEER Act, American craft breweries would have to compete with not only better-positioned mega brewers, but also better-positioned foreign breweries.

Why does this matter?  Because what this all boils down to is competitive advantage.   Even though small breweries might save more money under the Fair BEER Act, so would big breweries like AB, and that’s the problem.

The Brewers Association states, “Because of differences in economies of scale, small brewers have higher costs for production, raw materials, packaging and market entry than larger, well-established multi-national competitors.”  You see, if the issue is about a comparison of cost per unit of output as between small breweries and big breweries, i.e., economies of scale, then, as the theory goes, the Small BREW Act is more favorable to small breweries, since big breweries are afforded no savings under the Small BREW Act.  The big breweries call their Act “fair,” but they aren’t really comparing apples to apples.

Lastly, I think that the gist of this competitive advantage/economies of scale issue is that if AB were to save money in excise taxes it would be able to lower its prices for brands like Shock Top, and thus, theoretically, draw consumers away from true craft beer to “crafty” beer.

 

From → News, Tax

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