Kentucky Statehouse Mulls Eliminating Barrel Tax
The Kentucky state legislature is currently considering House Bill 5, which would phase out Kentucky’s unique tax on inventories of distilled and aging spirits. The “Bourbon Barrel Tax” is an ad valorem tax, basically a property tax that assesses bourbon in a warehouse in much the same way as real estate is assessed. Kentucky, home to a $9 billion bourbon industry, is the only state in the US that taxes whiskey production in this way. The bill proposes a gradual phase out of the tax, starting in 2026 and concluding in 2039.
The legislature has attempted to modify or repeal this tax several times over the years. In 2014, the bourbon industry scored a minor victory with a measure that allowed them to apply the Bourbon Barrel Tax as a credit against state income taxes. However, the state then switched to a different formula for determining those taxes, eliminating any value the Bourbon Barrel Tax credit gave them.
Attempts to repeal the Bourbon Barrel Tax always run afoul of the entrenched interests that benefit from the taxes, namely the counties in which all that aging bourbon is stored. Taxes on the bourbon industry are a major source of revenue at both the state and local level in Kentucky; more than a few old jokes in the Commonwealth underline that the leaders of all those dry counties were more than happy to have a bourbon industry to tax, just so long as it wasn’t in their county.
However, for those counties that do host bourbon-making, the tax is a major source of revenue for local coffers. At present, 1/3 of the counties in Kentucky host some part of the bourbon-making enterprise, but the Bourbon Barrel Tax is relevant only to the warehousing and aging of the product, and warehouses may be located in a county separate from the stillhouse and bottling plant. Although the bourbon industry, through their trade group the Kentucky Distillers Association, maintains that the tax is a job-killer and anti-competitive, local authorities counter that the industry is in the midst of boom times and the industry is in no need of tax relief.
