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Tax hikes are threatening Minnesota’s microdistilleries

I wrote recently about how Minnesota’s liquor laws are throttling its distilleries. Sadly, the situation might be about to get worse.

A report in the Rochester Post Bulletin warns that “Microdistilleries in Minnesota are bracing for a “perfect storm” materializing at the start of the new year.”

With federal distillery taxes slated to increase fourfold at the start of 2020 and Minnesota’s tight distilling laws, some microdistilleries are uncertain if they’ll turn a profit — or even stay open — next year.

“(It’s) becoming impossible for us to survive and compete,” said Joel Vikre, co-founder of Duluth’s Vikre Distillery. “I honestly don’t know what we’re going to do next year.”

President Donald Trump’s 2017 tax bill that brought $1.5 trillion in tax cuts included an act reducing the federal excise tax for distilled spirits — or the amount of tax distillers pay per proof gallo

Under the bill, distillers pay $2.70 per proof gallon for the first 100,000 proof gallons created. Any proof gallon made after this up to 22.13 million gallons is then taxed at $13.34 per proof gallon. All spirits made after 22.31 million proof gallons are taxed at $13.50 per proof gallon.

But the three-bracket tax plan isn’t permanent. It’s set to expire at the end of 2019, bringing the tax back up to a flat $13.50 per proof gallon — no matter how much or how little a distillery produces.

In the Winter 2019 issue of our magazine Thinking Minnesota, I wrote about how tax cuts and had played a role in enabling craft brewers to thrive. The Vikre Distillery illustrates that the same is true for microdistillers.

Although the distillery opened its Canal Park location in 2014, Vikre said the passage of the tax bill was its first “prayer of making any money.” It was also the point at which craft distilleries “exploded” in the state, he said.

And, with taxes about to go back up, they are under threat.

Even with a majority of Congressional members being supportive of another three-bracket distillery tax law, Vikre said it likely won’t pass as they’re in the midst of impeachment hearings.

Members could take action and apply a law retroactively after the new year starts. “(But) there’s no guarantee we’re going to be able to stay in business and keep paying all our people while they’re coming up with a retroactive solution,” he said.

At the Duluth Whiskey Project, CEO Kevin Evans is expecting a “dramatic” increase in taxes for his new business.

He has operated out of Vikre’s space since Duluth Whiskey opened in the past year. Evans was eyeing his own distilling space, but now revenue will likely go to taxes instead of future development.

“(I) got in this industry with eyes wide open, knowing it’s highly regulated and highly taxed,” Evans said. “It’s just part of the game.”

I wrote recently in response to those who say “If you can’t pay $15 and hour you don’t deserve to be in business”. Again, Vikre shows how, in the real world, that is less easy to do than it is when spouting off online. It is the employees who will bear the brunt.

Vikre said they can’t pass the tax increase on to its customers, as microdistilleries are competing with mass-producing, national brands. To mitigate costs, it may have to reconsider what it pays its 35 employees, he said.

Jon Kreidler, who co-founded Tattersall Distilling, said the Minneapolis distillery is also bracing for upcoming changes.

He’s expecting its federal taxes to increase by almost half a million dollars.

“It’s gonna hurt us pretty bad. To be completely honest … we’re going to have to make some serious cuts and really change up our business to be able to stay afloat,” Kreidler said.

Sometimes, when you make the point that high taxes harm business, it can sound a little abstract. The cases of Minnesota’s microdistillers put faces to the theory.

John Phelan is an economist at the Center of the American Experiment. 

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