H.R. 1 As Economic Policy Part 3 Alcohol Excise Tax Provisions

H.R. 1, the Republican 2017 tax bill has a number of provisions related to alcohol excise taxes.

Generally speaking, the tax rates on beer, wine, mead and distilled spirits is reduced for calendar years 2018 and 2019, and some technical requirements for compliance with these tax laws are relaxed. The details are below the fold.

In general, short term tax changes are discouraged unless they are a short-term response to a serious economic downturn and respond to a one time event in the real world like a natural disaster or major terrorist act.

Alcohol taxes are generally considered regressive, on the assumption that the incidence of the tax falls mainly on the consumer and not the producer/importer of the product, so generally, they would be considered good for the economy. This real world economic experiment will reveal whether the incidence of the tax is mostly on the consumer or the producer. If alcohol prices fall, the consumer bears most the tax. If alcohol prices don't fall, the producer bears most of the tax.

Other economic conclusions about alcohol taxes also assume that the consumer bears most of the incidence of the tax. There are negative health and crime effects associated with excessive alcohol consumption and alcoholism that are arguably enhanced if alcohol is cheaper. This natural experiment will also test the economic impact of federal alcohol excise taxes on consumption rates and problematic consumption of alcohol.

It is also plausible that the excise tax changes in the bill, while substantial relative to the total amounts of these taxes, are small enough relative to the retail price, that the tax changes don't have a significant impact on consumption rates or consumer economic impact to the point where even a natural economic experiment can't discern the difference because economists lack sufficient precision in the tools it uses to measure the impacts of the excise tax adjustment.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: -4.2 (spread over two years).

1. Production period for beer, wine, and distilled spirits (sec. 263A of the Code)

The bill excludes the aging periods for beer, wine, and distilled spirits from the production period for purposes of the UNICAP interest capitalization rules. Thus, under the provision, producers of beer, wine and distilled spirits are able to deduct interest expenses (subject to any other applicable limitation) attributable to a shorter production period. The provision does not apply to interest costs paid or accrued after December 31, 2019.

2. Reduced rate of excise tax on beer (sec. 5051 of the Code)

The bill lowers the rate of tax on beer to $16 per barrel on the first six million barrels brewed by the brewer or imported by the importer. In general, in the case of a controlled group of brewers, the six million barrel limitation is applied and apportioned at the level of the controlled group. Beer brewed or imported in excess of the six million barrel limit would continue to be taxed at $18 per barrel. In the case of small brewers, such brewers would be taxed at a rate of $3.50 per barrel on the first 60,000 barrels domestically produced, and $16 per barrel on any further barrels produced. The same rules applicable to controlled groups under present law apply with respect to this limitation.

For barrels of beer that have been brewed or produced outside of the United States and imported into the United States, the reduced tax rate may be assigned by the brewer to any importer of such barrels pursuant to requirements set forth by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services and the Secretary of the Department of Homeland Security. These requirements are to include: (1) a limitation to ensure that the number of barrels of beer for which the reduced tax rate has been assigned by a brewer to any importer does not exceed the number of barrels of beer brewed or produced by such brewer during the calendar year which were imported into the United States by such importer; (2) procedures that allow a brewer and an importer to elect whether to receive the reduced tax rate; (3) requirements that the brewer provide any information as the Secretary of the Treasury determines necessary and appropriate for purposes of assignment of the reduced tax rate; and (4) procedures that allow for revocation of eligibility of the brewer and the importer for the reduced tax rate in the case of erroneous or fraudulent information provided in (3) which the Secretary of the Treasury deems to be material for qualifying for the reduced tax rate. Any importer making an election to receive the reduced tax rate shall be deemed to be a member of the controlled group of the brewer, within the meaning of sec. 1563(a), except that the phrase “more than 50 percent” is substituted for the phrase “at least 80 percent” in each place it appears in sec 1563(a). Under rules issued by the Secretary of the Treasury, two or more entities (whether or not under common control) that produce beer marketed under a similar brand, license, franchise, or other arrangement shall be treated as a single taxpayer for purposes of the excise tax on beer. The provision does not apply for beer removed after December 31, 2019.

9. Transfer of beer between bonded facilities (sec. 5414 of the Code)

The bill relaxes the shared ownership requirement of section 5414. Thus, under the provision, a brewer may transfer beer from one brewery to another without incurring tax, provided that: (i) the breweries are owned by the same person; (ii) one brewery owns a controlling interest in the other; (iii) the same person or persons have a controlling interest in both breweries; or (iv) the proprietors of the transferring and receiving premises are independent of each other, and the transferor has divested itself of all interest in the beer so transferred, and the transferee has accepted responsibility for payment of the tax.

For purposes of transferring the tax liability pursuant to (iv) above, such relief from liability shall be effective from the time of removal from the transferor’s bonded premises, or from the time of divestment, whichever is later. The provision does not apply for calendar quarters beginning after December 31, 2019.

10. Reduced rate of excise tax on certain wine (ssec. 5041 of the Code)

The bill modifies the credit against the wine excise tax for small domestic producers, by removing the 250,000 wine gallon domestic production limitation (and thus making the credit available for all wine producers and importers). Additionally, under the provision, sparkling wine producers and importers are now eligible for the credit. With respect to wine produced in, or imported into, the United States during a calendar year, the credit amount is (1) $1.00 per wine gallon for the first 30,000 wine gallons of wine, plus; (2) 90 cents per wine gallon on the next 100,000 wine gallons of wine, plus; (3) 53.5 cents per wine gallon on the next 620,000 wine gallons of wine. There is no phaseout of the credit.

In the case of any wine gallons of wine that have been produced outside of the United States and imported into the United States, the tax credit allowable may be assigned by the person who produced such wine (the “foreign producer”) to any electing importer of such wine gallons pursuant to requirements established by the Secretary of the Treasury, in consultation with the Secretary of Health and Human Services and the Secretary of the Department of Homeland Security. These requirement are to include: (1) a limitation to ensure that the number of wine gallons of wine for which the tax credit has been assigned by a foreign producer to any importer does not exceed the number of wine gallons of wine produced by such foreign producer, during the calendar year, which were imported into the United States by such importer; (2) procedures that allow the election of a foreign producer to assign, and an importer to receive, the tax credit; (3) requirements that the foreign producer provide any information that the Secretary of the Treasury determines to be necessary and appropriate for purposes of assigning the tax credit; and (4) procedures that allow for revocation of eligibility of the foreign producer and the importer for the tax credit in the case of erroneous or fraudulent information provided in (3) which the Secretary of the Treasury deems to be material for qualifying for the reduced tax rate. Any importer making an election to receive the reduced tax rate shall be deemed to be a member of the controlled group of the winemaker, within the meaning of sec. 1563(a), except that the phrase “more than 50 percent” is substitute for the phrase “at least 80 percent” in each place it appears in sec 1563(a).

The provision does not apply for wine removed in calendar quarters beginning after December 31, 2019.

11. Adjustment of alcohol content level for application of excise tax rates (sec. 5041 of the Code)

The bill modifies alcohol-by-volume levels of the first two tiers of the excise tax on wine, by changing 14 percent to 16 percent. Thus, under the provision, a wine producer or importer may produce or import “still wine” that has an alcohol-by-volume level of up to 16 percent, and remain subject to the lowest rate of $1.07 per wine gallon. 

The provision does not apply to wine removed after December 31, 2019.

12. Definition of mead and low alcohol by volume wine (sec. 5041 of the Code)

The bill designates mead and certain sparkling wines to be taxed at the lowest rate applicable to “still wine,” of $1.07 per wine gallon of wine. Mead is defined as a wine that contains not more than 0.64 grams of carbon dioxide per hundred milliliters of

wine, which is derived solely from honey and water, contains no fruit product or fruit flavoring, and contains less than 8.5 percent alcohol-by-volume. The sparkling wines eligible to be taxed at the lowest rate are those wines that contain not more than 0.64 grams of carbon dioxide per hundred milliliters of wine,1168 which are derived primarily from grapes or grape juice concentrate and water, which contain no fruit flavoring other than grape, and which contain less than 8.5 percent alcohol by volume.

The provision does not apply to wine removed after December 31, 2019.

13. Reduced rate of excise tax on certain distilled spirits (sec. 5001 of the Code) 

The bill institutes a tiered rate for distilled spirits. The rate of tax is lowered to $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, $13.34 for all proof gallons in excess of that amount but below 22,130,000 proof gallons, and $13.50 for amounts thereafter. The provision contains rules so as to prevent members of the same controlled group from receiving the lower rate on more than 100,000 proof gallons of distilled spirits. Importers of distilled spirits are eligible for the lower rates.

The provision does not apply to distilled spirits removed after December 31, 2019.

14. Transfers of distilled spirits (sec. 5001 of the Code).

The bill allows distillers to transfer spirits in approved containers other than bulk containers in bond without payment of tax. The provision does not apply to distilled spirits transferred in bond after December 31, 2019.