House Labor & Commerce committee to consider tripling the excise tax on craft brewing in Alaska

Written by Ryan Makinster on May 3, 2017

In a memo dated March 6, 2017, Rep.  Paul Seaton, R-Homer ,asked the House Labor & Commerce Committee, chaired by Rep. Sam Kito, D-Juneau, to consider legislation to repeal or amend the small craft brewer exemption. The exemption pertains the first 60,000 barrels of beer sold in state by a brewery that meets the federal definition of a small brewery.

If this suggestion is adopted, the excise for small craft breweries will leap from $.35 a gallon to $1.07 a gallon, effectively tripling the tax Alaska craft breweries pay. In his memo, Paul Seaton states that that this change will equate to $2.6 million in tax revenue to the state.  What isn’t mentioned is that $2.6 million will do nothing to address the state’s fiscal gap of over $2.5 billion dollars. In addition, he fails to mention that it has the ability to stifle expansion in a growing value-added manufacturing industry, something the Alaska desperately needs as it tries to diversify its economy.

What is also overlooked is the economic benefit this industry plays in Alaska and the much greater positive effect a vibrant craft brewing industry has on the state’s overall economy.  In 2015, the year of the most recent economic impact study, the industry was responsible for approximately 1,400 direct and 2,300 combined direct and induced jobs.  In the same year the industry generated $340 million in direct income as well as a combined income of $492 million. This economic engine was responsible for $47 million going into the pockets of Alaskans who work in the industry while contributing $33 million to Alaskans who support the brewing industry and $16 million to Alaskans through induced spending.

In addition to the substantial economic impact these businesses play in the Alaska economy, these small businesses are an important part of Alaska communities. Alaska craft brewers are good community members who donate cash, beer, and merchandise to local and statewide causes and organizations. Many breweries in Alaska have and continue to win national and international awards, bringing acclaim to Alaska and its brewing industry. In addition, the brewers advertising and distributing outside the state, showcase Alaska and its residents to the nation and the world.

“Amending and updating this statute would create a level playing field for the alcohol industry,” Seaton said in his memo to the committee. What this proposal actually does is give large out of state brewers a leg up when competing with small Alaska businesses.  Besides not having the economy of scale large outside breweries have, the cost to produce beer in Alaska is substantially higher. Out of state breweries ship the finished product for distribution in state, effectively paying for shipping of the final product once. Alaska breweries on the other hand must ship in their main ingredients like hops, barley and malt as well as their bottles and cans; a much larger amount of shipping by weight than the finished product. In addition, almost all of their heavy industrial equipment is shipped from out of state suppliers. For anyone that has ever paid for shipping from the lower 48, you know how expensive it can be. Imagine how expensive it is for the tons of ingredients and equipment required for a brewery to operate in Alaska.  Due to this fact, Alaska breweries operate on a smaller margin than outside breweries and if the excise tax is tripled, the price of Alaska craft beer will have to rise to accommodate the new taxes.  As with all products, there is a pain point for consumers and eventually they will choose a lower priced product rather than indulge in the higher price craft products, although they would prefer to support local.

Finally, as has been pointed out by many members of the industry including brewers, wholesalers, retailers and customers, the excise tax paid is not a 1-to-1 correlation to the final price of the product. Although the tax, in the proposed case of an additional $.71, is assessed on the product, the wholesalers will adjust their markup based on a percentage of the total cost to them including the tax, not just add $.71 to their cost. Repeat this again at the retailer level and the increase to the consumer will be substantially higher than the proposed $.71.

The craft brewing industry is one of the only growing value-added manufacturing industries in the state of Alaska. To risk harming this successful and vibrant industry for little financial gain to the state  which will not make a dent on Alaska’s fiscal crisis is not only short-sighted, but misplaced.

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