As part of the 2013-2015 budget, Gov. Jay Inslee has proposed closing tax loopholes for everything from real estate rentals to pharmaceutical warehouses and farm auctions. Some industries, including travel agencies and assisted living facilities, would see business-and-occupation rates double.
But almost every Washington brewery would see taxes more than quadruple for the beer they sell in the state. Brewers say that is an unfair burden to ask one small industry to bear, and that it will encourage brewers to sell more of their beer in neighboring states where taxes are significantly lower.
Earlier this week, House Democrats introduced their own budget proposal, which would also increase taxes for small breweries - although not by as much as the governor - while lowering the rate large breweries pay.
The brewing industry employs about 42,160 people in Washington and brings in about $4.3 billion to the state annually, according to a recent study by the National Beer Wholesalers Association and the Beer Institute. The industry paid approximately $946 million in state taxes in 2012, according to the study.
Breweries that produce fewer than 60,000 barrels per year have until now been getting a $15.50-per-barrel tax exemption on beer sold in Washington state.
Inslee's budget plan would eliminate that exemption, raising the tax for small brewers to $20.28 per barrel, from $4.78.
"Four times the tax is just astronomical. No industry can absorb that without there being dire consequences," said Heather McClung, co-founder of Seattle brewery Schooner Exact and president of the Washington Brewers Guild.
Breweries that produce more than 60,000 barrels per year would continue to pay $23.58 per barrel, which is the rate they have paid since an increase in 2010.
The governor has argued that eliminating tax loopholes is the best way to raise the $1.2 billion needed to pay for public education. Inslee says it's his duty to choose the state's priorities.
"When we give these tax breaks a hard look," he said in a statement, "they just don't measure up to our urgent need to better fund education, schools and our children."
Removing the exemption equates to a 6 cents-per-bottle increase for something that is a discretionary purchase for consumers, said David Schumacher, the governor's budget director.
"I'm not downplaying the fact that this is real money to this industry," Schumacher said.
But, he said, claims by small brewers that they would have to raise prices by 50 cents or a dollar per bottle are overstating the impact of removing the exemption, and if they do raise prices that much, they'll be pocketing the difference.
Brewers, however, say that if they're forced to raise prices on kegs they sell to restaurants and bars by $10 or $15 to cover the tax, that puts them at even more of a competitive disadvantage against the big breweries that have economies of scale and recently have begun producing beers that are branded to look like microbrews.
Washington's largest brewery, Redhook Brewery in Woodinville, knows what it feels like to pay that increased tax. It is the only Washington brewery that has paid it since the rate went up for large breweries in 2010.
"For the last two years, we've been absorbing the cost," said Steve Jones, the director of operations for Redhook.
He said the overall economic environment meant Redhook wasn't able to raise prices to make up for the $300,000 per year in additional taxes it has paid since the rate increase. The barrel tax represents nearly 40 percent of Redhook's state taxes each year.
Punishing breweries like Redhook for growing is wrong-headed, Jones said, and the brewery would like to see the per-barrel tax sunset this year as it's currently scheduled to do. He believes all breweries should pay the same tax rate, regardless of how many barrels of beer they produce.
"I don't think the government should put a cap on success," he said.
Washington used to be the No.1 state in the nation for the craft brewing industry, Jones said. Now Oregon holds that distinction.
"I don't know why the industry has been targeted. All I know is that it's affecting my operation, the industry and Washington state," Jones said. "Taxing like this will kill this industry."
The big breweries aren't the only ones that see the tax as an obstacle to business.
"It seems like a shortsighted and irresponsible way to raise money," said Dave Keller, who opened Peddler Brewing Co. with his partner Haley Woods in Seattle's Ballard neighborhood in early March.
Keller said removing the exemption would mean Peddler would pay $13,000 more in taxes this year than he had planned when he opened. Because his business is just starting out and sells beer only in a tasting room on the premises, he said the additional tax would mean he is unable to invest in new equipment and supplies.
"The concept of passing it on to a consumer doesn't work," he said. "It's not that simple. You can't charge $4.10 a pint. That's not how bars work."
Keller, who is an engineer at Boeing, said he and Woods planned to work their day jobs for about a year while they got the brewery off the ground. After that, they had hoped to run the brewery full-time.
"Obviously an extra $13,000 in taxes is not going to make that possible," he said.
Before 2010, large breweries paid about $3 more per barrel in taxes than microbreweries. However, a law passed in 2010 increased that difference to nearly $20 per barrel. Schumacher, with the governor's budget office, said Inslee's proposed change would bring back that $3 per barrel difference between small and large breweries, while still giving the microbreweries a small tax advantage.
But McClung of Schooner Exact said leveling the playing field between small breweries like hers, which makes about 3,000 barrels a year, and Anheuser-Busch, which makes about 100 million barrels a year, doesn't make sense.
"They spill as much beer in a year as I produce," McClung said.
She said when Schooner Exact opened in 2007, she and her husband were brewing about a keg a week in a couple hundred square feet. Now, the brewery is in a 10,000-square-foot space on First Avenue South in Seattle and employs 25 people.
"We keep adding jobs and reinvesting our proceeds into the business," McClung said. "All our proceeds are spent back here in the community."
She said Schooner Exact will soon begin distributing beer in Idaho and already distributes in Oregon, where the per-barrel tax is $2.60.
If the tax rate goes up in Washington, McClung said she would have to put aside misgivings she has about the carbon footprint from interstate distribution and shift energy into selling more beer in Oregon.
"It will be way more profitable," she said.
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