It’s the holidays! Raise a glass.
And if that glass happens to contain Washington liquor, take a good, long drink.
It could be your last chance to savor many local gins, vodkas, whiskeys, liqueurs and other spirits before a major tax break for small distilleries expires at the end of the year, potentially putting some boutique booze-makers out of business at a time when many are already struggling.
Come New Year’s Day, small distillers’ federal excise-tax bill will quintuple. As many as 30% could close their doors, according to the Washington Distillers’ Guild, a local trade group representing craft distilleries.
It’s also bad news for bar customers: Consumers are likely to feel the tax hike in the form of higher prices for their craft cocktails.
Dozens of local distilleries have gone under this year after falling behind in the industry’s fierce competition for shelf space in grocery stores and bars, according to the guild. Those who remain are bracing for the impact of the tax increase in the coming year.
“People get into this business because it’s fun,” said Nathan Kaiser, the founder and owner of 2bar Distillery in Georgetown, where he’s made bourbon since 2010. “But when you’re worried every day about how you’re going to make payroll, and on top of that, it’s like, ‘I need to pay how much in taxes next year?’ Well, it’s insane.”
Taxes on liquor are higher in Washington than anywhere else in the country, according to the Distilled Spirits Council, a national trade association. As much as 41% of the purchase price of a bottle of liquor is made up of state taxes. After Jan. 1, the federal excise tax will make up 4.3% of the purchase price. All told, on a $50 liter of Washington whiskey, taxes are $22.58, according to calculations from the Distillers’ Guild.
And small distillers here say they’re already struggling under state rules limiting how they can sell liquor.
A 2017 law, intended to help small producers, cut distillers’ federal excise tax from $13.50 to $2.70 per gallon on the first 100,000 proof gallons. (Proof gallons are in part a measure of a liquor’s alcohol content. One proof gallon equals the volume of liquor in which there is half a gallon of alcohol.)
Distillers pay excise taxes on liquor they sell or sample. The cost is indirectly passed on to the consumer.
The tax break, though, was never intended to be permanent. It sunsets Dec. 31 — at which point distillers will see their excise-tax bill rise back to 2017 levels.
“When the tax break went live in 2017, we were able to pay our people a little more. We were able to lay down a little more whiskey,” Kaiser said.
He expects his excise-tax bill to return to $61,000 next year, from roughly $12,000 now. But in today’s market, he says he can’t raise prices on his bottles to compensate for the higher taxes.
Still, he feels lucky: He said 2bar is doing well, as far as distilleries go, and his business will be able to eat the losses without too much belt-tightening. The three-person outfit had revenues of roughly $300,000 in 2018.
Other operations see a cloudier future.
Copperworks Distilling, on Seattle’s waterfront, took advantage of the tax cut to hire two new employees in 2018.
Now, said co-owner Jason Parker, “we’re clawing back the hours we added.” Parker has laid off one person on his team of six, and asked the others to reduce their hours.
“We’ll eventually weather the storm,” Parker said. “We just won’t have as many people involved in it.”
Given the deadline written into the tax break, though, couldn’t distillers see this coming?
“We had a high degree of confidence this would be renewed,” said Kaiser. In his role as vice president of the Washington Distillers’ Guild, he’s spent the past year lobbying federal elected officials to extend the tax break.
But guild members say they sense national legislators “are preoccupied with other issues right now” — like impeachment proceedings, said Mhairi Voelsgen, founder and CEO of broVo Spirits and president of the Distillers’ Guild.
“Not to minimize those issues,” she said. “But I don’t know if there’s a path forward right now.”
A bipartisan bill to extend the excise-tax break, co-sponsored by 326 House members, was introduced in February. It never left committee, but distillers hope it can be renewed in 2020.
Helped along by changes to state licensing rules, the number of craft distilleries in Washington skyrocketed after 2008, when the state’s first distillery since Prohibition opened its doors — Dry Fly Distilling, in Spokane. By 2015, Washington had 110 distilleries, more than anywhere else in the country.
The distillery boom was amplified by a local craze for craft cocktails, spurred in part by innovative bartenders like Murray Stenson at Pike Place Market’s Zig Zag. In 2010, the nation’s top mixologists crowned Stenson the best bartender in the country.
At the start of 2019, 132 licensed distilleries were operating across the state.
In the past year, though, 36 of those business have gone under, according to the Distillers’ Guild. Behind the closures are restrictions those in the industry say are just as important as the excise tax.
Distilleries can’t operate stand-alone tasting rooms, which limits where they can sell their wares. Within tasting rooms, distilleries have a 2-ounce-per-person service limit. They are not allowed to serve cocktails.
And when the state ended its monopoly on liquor sales in 2012, smaller distilleries said it grew harder to market their products. Before privatization, distilleries contracting with the state-run liquor stores “had one customer and that customer always paid on time,” Parker said. “Now, we have the theoretical ability to be in thousands of grocery stores, restaurants, bars — but we have to go to every one individually and sell it ourselves. The cost is insurmountable for many small businesses.”
Congress breaks for recess Dec. 20. It’s unlikely to take action related to craft distillers before then.
Local distilleries are looking at the wallets of Washington boozehounds as their last best hope to stay afloat after the New Year, Kaiser said.
That holiday eggnog? Maybe spike it with Washington liquor.