Keeping the bourbon flowing

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State wants to help distillers with tax credits

By Scott Wartman

The Kentucky Enquirer

The growing popularity of bourbon has sparked big dreams along the Ohio River and among the state’s leaders in Frankfort.

An idea that began when Ken Lewis saw a surge in bourbon sales at his Party Source liquor store in Bellevue has taken shape with the stainless steel fermentation tanks now standing in front of his store on Ky. 8.

These will become part of “The Nth” distillery sometime next year and produce alcohol that will sit in charred-oak barrels for five or more years before becoming a new brand of Kentucky bourbon – the only one produced in Northern Kentucky.

Gov. Steve Beshear and other Kentucky leaders hope to help Lewis and Kentucky’s other 16 distilleries with tax credits and promotion to foster Kentucky’s signature liquor industry.

“The seven large distilleries, Maker’s Mark, Heaven Hill, every single one of them are all expanding because of the nature of aging bourbon to meet a need in the future,” Lewis said.

“The heavyweights are doing their homework. The boom is not only pronounced now but has legs for investing in the future. It strongly influenced my family’s decision to start a distillery. I feel certain the boom will continue way into the future.”

A healthy market for Kentucky's bourbon

Kentucky’s bourbon industry appears as strong as it’s ever been in its 200-year history with production increasing from 450,000 barrels in 1999 to 1 million barrels last year. The 4.9 million barrels currently stored in Kentucky is the most in 30 years.

The number of visitors to distilleries on the Kentucky Bourbon Trail topped 500,000 in 2012 for the first time since the trail was created in 1999 and increased 15 percent from the previous year. The Nth will join the Bourbon Trail and could draw 40,000-50,000 people a year, Lewis said.

“Bourbon can be made in any of the 50 states, but Kentucky bourbon carries a premium price and cache,” he said. “Just like you can make cabernet anywhere, but California and Napa Valley cabernet is a premium.”


A tax no other alcohol manufacturer pays

But the makers say the property tax the state imposes on barrels puts them at a disadvantage compared to other states.

Beshear wants the General Assembly to pass a tax credit for these barrels, something that has failed in recent sessions. The state and counties collect a combined $14 million annually in property taxes off the stored barrels, said Eric Gregory, president of the Kentucky Distillers.

“It is a tax no other alcohol manufacturer pays, a property tax for every year a bourbon barrel sits in a warehouse,” Gregory said. “It is not paid by scotch. It is not paid by Tennessee whiskey – that one really hurts. It puts the signature bourbon industry at a disadvantage.”

The proposed property tax credit would still give local schools the revenue they now receive, and it would require the distillers to pour the money back into improvements to the distilleries.

“They wouldn’t just be walking off with the credit,” Beshear said in a recent interview with the Enquirer. “They would have to put that money back into equipment and facilities in Kentucky. It puts them on a little more level playing field than they are right now.”

Critics of Kentucky’s tax on bourbon barrels point out that California offers several tax breaks to foster its wine industry and has the second lowest excise tax rate on wine in the country.

“California wants to encourage growth,” said Jim Rutledge, master distiller of Four Roses Bourbon in Lawrenceburg. “They want the industry to stay in California. Kentucky right now has some of the highest taxes in the country (for spirits). A tax credit will do us good, allow us to grow our business.”

Kentucky now places the third highest tax burden on distilled spirits among the 33 states that don’t require sales from state-owned liquor stores. That’s because Kentucky is one of only two states that imposes both a wholesale and excise liquor tax, bringing the total tax burden on distillers to $6.85 a gallon, Gregory said.

“California wine taxes are among the lowest in the country. When you think of traditional beer states -- Wisconsin, Colorado, Missouri -- their taxes are among the lowest,” Gregory said.

“Kentucky seems to tax beverage alcohol, whether it’s spirits, wine or beer, at a higher rate than most every place in the country. I think our state government looks at us as a source of revenue and not a signature industry, but I believe that’s changing.”


International demand for bourbon is up

Distillers say Kentucky can reap the rewards of a growing number of people overseas consuming Kentucky bourbon. Kentucky exports the spirit to 126 different countries.

“Anywhere outside the United States or Canada, you order a whiskey and you automatically get scotch,” Lewis said. “If 1 percent of those people say bourbon, Kentucky goes dry overnight. That’s how big the international market is.”

Rutledge travels around the world frequently promoting Kentucky bourbon. He has worked in the industry for 47 years and for the past 18 years as master distiller at Four Roses Bourbon.

“When I go to Europe, Kentucky is put on the map for two things,” Rutledge said. “It is not thoroughbreds. It is Kentucky bourbon and Kentucky Fried Chicken. When I’m talking to people in London and Glasgow, Scotland or France and Spain, all the people know bourbon is from Kentucky.”

Editor’s note: Reprinted with permission through the Kentucky Press News Service.