Some Arizona breweries and distilleries could be forced to close or cut jobs if Congress fails to extend a tax cut for beverage producers before the end of the year. Since 2017, these business owners have received tax cuts between 50-80% depending on what kind of beverage they produce.
Now, those cuts are set to expire and business owners around metro Phoenix say the impact could be devastating for the beverage industry.
There's still time, however, to fight for an extension, which is exactly what Rob Fullmer has set out to do.
Fullmer is the executive director of the Arizona Craft Brewers Guild and is leading the charge in Arizona to extend the Craft Beverage Modernization and Tax Reform.
"In Arizona, 60% of our breweries are six years old or less and a lot of those are still in start-up mode where for the first one, two or three years, margins are going to be really tight," Fullmer says.
For some companies, the amount of money saved by the lower tax rate pays for a couple of pallets of kegs. For others, the savings equate to one or two employees' salaries and benefits, Fullmer says.
What to know about the tax cuts
In 2017, Congress passed the Tax Cuts and Jobs Act into law. One small, but mighty, section of the act — the Craft Beverage Modernization and Tax Reform bill — gave tax cuts to producers of beer, wine and distilled spirits.
While large producers received some tax relief as well, the bill was aimed at helping small businesses across the country grow and become more competitive.
For small breweries, including every brewery in Arizona except Four Peaks Brewing Company, the excise tax dropped from $7 per barrel to $3.50 while the tax on distillers production dropped from $13.50 per proof gallon to $2.70, an 80% reduction.
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For winemakers, the bill provided a small tax credit, rather than a tax cut. And while the credit certainly helps, Micheal Pierce of Bodega Pierce, a winery in Willcox, says a small sentence in the bill made the most difference for wine producers.
The bill altered the definition of table wine to include wines up to 16% alcohol by volume. This meant many more wines fit into the category, which is taxed at a lower rate.
Pierce says an extension of the bill would help Arizona winemakers grow their businesses and continue to provide jobs in rural communities.
'It's pretty insane how damaging this will be'
Jonathan Eagan co-owns Arizona Distilling Company in Tempe and is a vocal proponent of extending the tax cut. This summer, he traveled to Washington D.C. for a four-day public policy conference and sat down with almost every representative from Arizona to share his story.
Arizona Distilling Company started selling its popular spirits, such as Copper City Bourbon and Commerce Gin, eight years ago. When the tax cut went into effect in 2017, the extra money helped the distillery move into a new building and expand.
Now, if the higher tax goes back into place, Eagan says his company will have to layoff one employee, possibly two.
"If this bill sunsets, we will see a 400% increase in excise tax just for the privilege to produce," Eagan says. "It's pretty insane how damaging this will be for our business."
The potential fallout won't just affect Arizona Distilling Company. Currently, there are more than 20 distilleries in Arizona, all who fall under the small producer label and therefore face a potential tax increase on Jan. 1.
"If this does not go through, you are probably going to see 25-30% of the distilleries in this state going to shut down," Eagan says.
San Tan Brewing owner is 'scared'
When the tax cut went into effect in 2017, it allowed many small business owners to reinvest the savings in their businesses, including by purchasing equipment and hiring new employees. Now, two years later, business owners say taking away the tax cut would stall growth.
Anthony Canecchia owns San Tan Brewing, a company that produces large quantities of beer and a small amount of distilled spirits.
When asked how he feels about the potential increase, Canecchia responded with one word: "scared."
"A tax increase is just penalizing small businesses," he says. "It's like they gave them a piece of cake and took it away halfway through eating it."
Canecchia and his team had been experimenting with spirits for a while before they put them on the market. In 2017, considering the tax cut, it seemed like a natural time to start production, he says. San Tan Distilling started selling its spirits, such as Saint Anne's vodka and Sacred Stave whiskey and bourbon, in 2018.
Over the last two years, San Tan's customers have given the spirits line a great reception, which led Canecchia to invest even more money into the project.
Now, with whiskey aging in barrels and on track to be ready to sell in January, Canecchia is weighing his options if the tax increases. It would inevitably raise prices on San Tan spirits, he says, making the locally-made products less competitive on the market.
"It would completely change our pricing model," he says. "It would make my bottle of whiskey about 25% higher [in cost] than a normal, big producer that makes it for pennies when it costs me dollars."
Why Arizona's industry could be hit hard
The potential tax increase impacts craft beverage producers around the country, but because Arizona's industries are so young, many will be hit especially hard.
Since the tax break was lowered in 2017, 22 new breweries have started selling beer in Arizona. These breweries have never paid anything more than $3.50 per barrel, so a sudden increase to $7 would be an entirely new expense.
It the tax cut doesn't get an extension, Arizona breweries will pay $1.5 million in excise tax in 2020, according to Fullmer.
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Megan Greenwood is the sole owner of Greenwood Brewing. Her brewery building is set to open in early 2020, but she's been producing and selling beer to local restaurants for the last couple of years.
Greenwood started brewing at the end of 2017, right around the time the tax cut was passed. It helped her launch Greenwood Brewing since the lower tax rate reduced some of the barriers to entering the industry, she says.
But knowing this tax cut was potentially temporary, Greenwood built contingencies into her business plan. The added expense won't impact employees as she doesn't have any yet; for Greenwood Brewing, if taxes go up, she'll have to reshuffle money already allocated to other expenses.
"For me, it's being able to stay alive to the next day," Greenwood says, "it's really just keeping the lights on."
How could the tax cut get extended?
As of Dec. 9, 326 representatives across 49 states support an extension of the tax cut. In Arizona, eight out of nine representatives have expressed their support according to the Brewers Association website.
A total of 73 senators across 45 states showed support at the last count, including both Arizona Sens. Martha McSally and Kyrsten Sinema.
“Kyrsten is a cosponsor and longtime supporter of the Craft Beverage Modernization and Tax Reform Act. Arizona breweries create jobs, invest in our communities, and deserve real and permanent tax relief before January 1st," Hannah Hurley, a spokeswoman for Sinema wrote in a statement to The Republic.
So if there's support for the extension across the political spectrum, why are craft beverage producers so worried? While the end of the calendar year is always a busy time in politics, the Senate and House of Representatives are particularly busy at the moment.
Producers are worried the bill might not make it to the floor at all, removing any opportunity for it to get a vote. The bill isn't large enough to stand on its own, so it needs to be attached to a larger bill as a rider.
"Our job is to get as many co-sponsors as possible," Fullmer says, "to convince party leadership at the top to decide this is something they will allow to be debated."
'We are all on pins and needles'
Beer producers have been by far the most vocal group in Arizona, getting the word out about the possible tax increase and asking for supporters to help by contacting their representatives.
But just because local brewers have banded together doesn't make it easier for Fullmer when brewery owners call to ask how he feels about the bill's chances of extension.
"I have to tell them the least risky answer," Fullmer says. "Plan for it not to pass."
On the other hand, Fullmer does have hope. He's heard rumors from the Brewers Association of a one-year extension. The fact that it's being discussed leads Fullmer to believe that it might be an option on the table.
For now, Canecchia says, "We are all on pins and needles."
Reach the reporter at tirion.morris@arizonarepublic.com. Follow her on Twitter at @tirionmorris, on Facebook at Tirion Rose and on Instagram at tirionrose.
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