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Barrel Tax Bill Under Consideration in Kentucky Legislature

Kentucky state lawmakers have just 11 legislative days left to consider a bill that would phase out the state’s “barrel tax” on barrels of aging Bourbon. House Bill 5 would start phasing out the tax in 2026 and end it completely in 2039, and is pending in the Kentucky House Appropriations and Revenue Committee.

Kentucky is the only state that taxes inventories of maturing spirits, and the tax raised approximately $40 million for local governments in 2021. Distillers have the ability to take a credit for the barrel taxes they pay against their corporate state income taxes, but income tax cuts in past years have made it so that they pay more in barrel taxes than they do in state income taxes.

The bill is the product of the General Assembly’s “barrel tax task force” that met last summer in Frankfort to hear testimony from stakeholders, including the Bourbon industry and local government officials. It would continue the current 100% credit through 2025, but distillers would only receive a 3% credit starting in 2026 with incremental increases each year until 2039, when the tax would be eliminated. That would significantly increase the amount of money the tax generates in the first 10 to 12 years of the phaseout, while gradually reducing it in subsequent years.

Eric Gregory of the Kentucky Distillers Association issued qualified support for the bill in a statement:

“Eliminating the job-killing inventory tax on aging barrels requires consideration of the distilleries that pay it and the local communities that benefit from it.  Kentucky’s signature Bourbon industry believes the phase-out schedule in House Bill 5 ultimately benefits local communities across Kentucky by more than doubling the industry’s tax before any reduction occurs. In fact, most local communities will see no reduction from current revenues for at least the next 10 years. 

While the bill will initially and significantly increase our tax liability, we appreciate the leadership of A&R Chairman Jason Petrie and Speaker David Osborne to put forth a proposal to slowly phase out the discriminatory tax. 

The success or failure of House Bill 5 will determine whether Kentucky’s distilling industry continues to call the Commonwealth home, bringing jobs and tax revenue as it grows, or whether it is forced to look at other states for future growth or even potentially relocating existing facilities.  

Thank you to the legislature for addressing this crisis. It is imperative that the Kentucky General Assembly end the tax on a $9 billion homegrown industry that employs 22,500 Kentuckians and attracts millions of tourist visits to Kentucky each year.”

Local leaders blasted the bill during a news conference Monday in Bardstown, claiming the elimination of the tax will lead to cuts in local services and public schools. Published: February 28, 2023

Links: House Bill 5 | Kentucky Distillers Association