Why Your Bar Tab Could Spike Under Tax Reform

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By Laura Davison

Most folks don’t talk taxes at happy hour, but that could change if Congress pursues an import tax proposal that could hit your bar tab.

Cocktail connoisseurs could end up paying more for spirits, such as scotch, mezcal and Irish whiskey, that by definition can’t be made in the U.S. But domestic drinks, including Kentucky-made bourbons and craft beers, could get a boost under the proposal, which taxes imports but not exports.

To be clear, the proponents of this border adjustment tax plan say that trade imbalances shouldn’t be greatly affected. Currency valuations will rise to cover the cost of the tax on imports, and a more expensive dollar will also make exports pricier on the world market, supporters say.

Translation: The cost of your Broker’s London Dry Gin in New York won’t change under the plan.

But retail groups don’t buy that economic theory. They say the border adjustments would hurt companies, and ultimately consumers, that rely on goods that can’t be made domestically for economic or geographic reasons.

‘Vengeful’ Results

“Beer, wine and spirits importers could end up paying the government more in taxes than they can reap in profits,” a lobbyist who represents importers said. “You can raise your profits, but that typically drives the consumer away to alternative products. This would have a vengeful effect on small-to-medium importers.”

Alcoholic beverages already pay excise taxes beyond what other imports pay, and laws require importers to sell to wholesalers that then distribute to retailers.

A bottle of French wine that normally sells for $10 would probably cost $13-$15 if the U.S. were to border-adjust imports and exports with the added taxes and margins for the wholesalers and retailers, the lobbyist said.

If prices were to increase that drastically, there could be shortages of the American-made substitutes for a few years, Duncan Fox, a Bloomberg Intelligence analyst for the beverage industry, said.

“I don’t think there would be enough whiskey around,” Fox said. “It needs to mature at least three years, so you can’t suddenly up the production of American whiskey to cover Irish whiskey and scotch.”

Vodka and gin could more easily recover, because American production could be ramped up to replace the more expensive imported versions, he said.

It’s Beer Time

American-made beverages, however, could see an export boost, since products that leave the U.S. won’t be subject to federal taxes. Foreign markets have been increasingly interested in U.S. craft beers. Export volume rose 16.3 percent in 2015, according to the most recent data from the Brewers Association.

“Exports continue to be important for an increasing number of breweries,” Bob Pease, the association’s president and chief executive officer, said.

The industry is gaining momentum as Europeans and Asian consumers realize there is more to American beer than Anheuser-Busch. This could be an opportunity to expand the market more if there is a relative tax advantage, another beverage industry lobbyist said.

American craft beers are perceived to be high-quality overseas, much as imported beers are perceived in the U.S., Tim Ramey, a beverage industry consultant, said.

“Frankly, I don’t know why you would think that about Corona, but whatever,” Ramey said.

But Pease said the Brewers Association, which helps facilitate sales by U.S. brewers to overseas buyers, is worried that the plan won’t comply with World Trade Organization rules. That could lead to retaliatory actions from trading partners and ultimately hurt exporters.

“The U.S. plays in the same sandbox as all these other products,” the lobbyist said. “Bourbon is in the same sandbox as scotch. Napa Valley competes with wines in France. Why penalize those who play with the same intellectual property rights as our products?”

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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