Turning tradition to luxury

May 25, 2009

by Ivan Raconteur

What we know about pending legislation is too often based on a collection of sound bites that may never get at the substance of what is being proposed.

I was reminded about this recently when I received (from a few sources) an e-mail letter that was written by Mark Stutrud concerning an attempt by the Minnesota legislature to increase revenue by raising taxes on beer.

Stutrud is founder and president of Summit Brewing in St. Paul.

Although the proposed legislation was vetoed by Governor Tim Pawlenty, it is worth reviewing what the legislators tried to do.

Stutrud pointed out that the legislation (House File 885) had been described as the “dime a drink tax,” but he explained that the impact would have gone far beyond that.

In 2008, Summit’s gross sales were $15 million, and the company paid $1.04 million in federal and state excise tax, according to Stutrud.

This amounts to 7 percent of the company’s costs.

By comparison, some of the company’s other costs include 22 percent for packaging, 11 percent for labor and benefits, and 5 percent for utilities and energy.

The cost of raw materials has increased significantly over the past two years, from 11 percent to 17 percent.

The proposed legislation would have increased the excise tax by 144 percent, from $4.60 per 31-gallon barrel to $11.21 per barrel.

The company’s annual state excise tax would jump from $244,000 to $594,000.

The company’s $924,000 in federal excise tax would bring the total to $1.52 million.

This would increase the total excise tax to 10 percent of the brewery’s cost, nearly the same percentage as labor, according to Stutrud.

He said the 144 percent increase in state excise tax would have eliminated the company’s projected net profitability for 2009, 2010, and 2011. It would also have eliminated company growth and projected new employment.

Stutrud pointed out that these increases would have affected consumers as well, since the excise taxes are included in the price paid by distributors, and then retail sales taxes and additional retail tax on alcoholic beverages are added when the product is sold.

In addition to the excise tax increase, the proposed legislation would have doubled the rate of alcoholic beverage retail tax from 2.5 percent to 5 percent.

These increases could have the effect of turning traditional beverages into a luxury in Minnesota.

Some might ask why this issue is important and why we should care.

Some people do not enjoy beer, and some who do don’t buy locally-produced beverages.

One could make an argument for the importance of the diversity and quality of local products, but we can look at it simply as a matter of economics.

One would hope that even non-drinkers could see the benefit of supporting local companies.

As Stutrud’s figures indicate, these companies pay a lot of taxes.

The profits that they earn typically stay in the communities in which they do business.

Local businesses also support other local businesses.

There has been a lot of talk lately about helping businesses and creating jobs, but legislation like this seems to contradict those goals.

Stutrud said the proposed excise tax on beer unfairly targets a single industry, and it is difficult to argue with that.

Minnesota is already taxed higher than neighboring states.

According to the Minnesota Craft Brewer’s Guild (of which Summit is a member), the total state beer tax generated per barrel of beer (including state excise tax and beer sales tax) is $33.12 in Minnesota, compared to $18.25 in Wisconsin, $24.90 in Iowa, $27.15 in North Dakota, and $27.51 in South Dakota.

According to Stutrud, nearly 40 percent of the cost of a beer in Minnesota is tax.

He added that it costs more to have a beer, a glass of wine, or a cocktail in some Minnesota cities than it does in New York City, Los Angeles, or Miami.

This disparity could make it difficult for Minnesota businesses to compete when trying to attract conferences and other events to the state.

When the US government doubled the rate of excise tax in 1991, 60,000 jobs were lost in the brewing industry and related industries.

It doesn’t sound like raising taxes does much to support business or create jobs.

The tax code in this country, both at the state and local level, is out of control.

Our elected officials seem bent on helping some industries and penalizing others, which is neither fair nor sensible.

Simplifying the tax code to make it not only fair but transparent, so taxpayers can see and understand what is really going on, seems like a good idea, but it is difficult to imagine our legislators supporting anything that makes that much sense.