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A Plan That Hits Joe Sixpack in the Gut – Brewers, Distributors Campaign Against Beer Tax

Proposal to Reimpose ‘Temporary’ Tax is a Leading Contender as Solons Look to Balance Budget – 'Beer Clock' Ticks Off the Minutes

"Beer clock" ticks off the minutes and hours before the state's beer tax expires, on the End the Beer Tax Now Coalition website.

“Beer clock” ticks off the minutes and hours before the state’s beer tax goes away, on the End the Beer Tax Now Coalition website.

OLYMPIA, April 9.—Beer drinkers everywhere say you never buy beer, you only rent it, but some lawmakers seem to be saying beer taxes ought to be forever. A big beer tax that was supposed to expire in June now appears to be a leading idea as the governor and the Legislature go hunting for new revenue to make the books balance. And you might say the beer biz is doing its best to foam-ent revolt.

Right now it is in froth about a proposal from Gov. Jay Inslee that would continue a beer tax that was set to expire in June — into perpetuity — and also would extend it to all brewers in the state, big and small. Small brewers descended on the statehouse Monday in an attempt to head off a House budget proposal that may well embrace the same idea. Meanwhile on the Internet, the beer biz has a Web page with a clock that ticks the hours and minutes until the state’s temporary beer tax is supposed to expire. Whether the effort will inspire the state’s legions of beer drinkers to rise up from their recliners is an open question. But you might say this is one tax that hits Joe Sixpack in the gut.

“Our coalition is getting larger with the budget that Gov. Inslee rolled out,” says Steve Jones, director of operations at Redhook, Washington state’s largest brewery. “We’re working with the Senate and we’re holding town halls to get the word out that this is not a well-rounded approach. We’re getting public support. And it’s refreshing.”

A Promise Was Involved

Brown: Taxes were temporary.

Brown in 2010: Taxes were temporary.

This time, at least, there’s a little advance notice. Three years ago Washington lawmakers dramatically increased Washington’s beer tax from $8.08 a 31-gallon barrel to $23.58, about 50 cents a six-pack – though at the time they limited the tax hike to brewers that sold more than 60,000 barrels in the state of Washington, effectively exempting the microbrews and eliminating a part of the cost advantage that mass-market brews enjoy on supermarket shelves. It was part of a package of taxes that emerged in the final hours of the 2010 legislative session, without warning or public hearing, adopted by majority Democrats at the statehouse amid a roiling debate on the House and Senate floors.

Beer wasn’t the only target. That tax hike, worth a total $800 million the first year, also hit candy, gum, bottled water and soda pop, as well as “service businesses” – doctors, lawyers, accountants, real estate agents and others. What made the whole inelegant solution a little easier to accept was the fact that nearly half of the increase was supposed to expire on June 30, 2013.

“We know that 43 percent of this package is temporary,” declared then-majority leader Lisa Brown, D-Spokane, during a debate on April 12, 2010. “We know that it is less than 10 percent of the budget-balancing solution.”

Now fast-forward three years. The soda-pop, candy and bottled water taxes are already gone, wiped out by a successful initiative campaign mounted by the soft-drink industry. The $16 million campaign they mounted for I-1107 in 2010 makes lawmakers reluctant to try those taxes again. But as lawmakers this year face another budget problem of $1 billion or more, suddenly those other temporary taxes are looking like an easy way out. In her lame-duck budget proposal last December, outgoing Gov. Christine Gregoire suggested that the business and occupations tax surcharge on service businesses be continued – worth some $534 million over the next two years – as well as the beer tax. Gov. Jay Inslee took it a step further in his budget proposal two weeks ago, suggesting that it be extended to all brewers. All told, Inslee’s proposal would mean $127 million in new beer taxes over the next two years.

And whether a promise is being broken has somehow become an incredibly complicated issue. For his part, Inslee insists isn’t breaking his own widely-perceived campaign promise not to raise taxes because tax rates would stay the same. “The amount people will be spending on beer is the same tomorrow what it was yesterday, so I’m fulfilling my commitments to a T,” he  declared at the March 27 news conference announcing his plan. As for whether he is breaking other people’s promises, made before he got there — that the taxes would go away – Inslee really doesn’t answer. “I don’t really think that is going to be a significant issue to the people of the state of Washington,” he says.  And if it’s between beer and K-12 education programs, “I just don’t know any good beer drinker that is going to take that position.”

There is big political opposition within the Legislature, however. The Senate, under the control of a fiscally conservative Republican-leaning coalition, has nixed all talk of new taxes. A budget proposal that passed the Senate Saturday doesn’t raise a one. And of any tax-increase proposals on the table this year, continuation of the temporary taxes is probably the least favorite of the bunch, says Senate Republican Leader Mark Schoesler, R-Ritzville. “Temporary should mean temporary.”

Making a Case

Leave aside the question of whether the Legislature really needs to raise taxes, whether it’s a good idea to single out a particular industry to solve a statewide problem, and whether any promise made in politics is really a promise – those are the kinds of questions it takes a politician to answer. And forget the entirely new complication created by Inslee’s proposal to extend the tax to every brewer in the state. The beer industry faces the same basic problem as do the accountants, the lawyers and the real estate agents. If there is a harm in raising taxes, in this case the harm has already taken place, because the higher tax rates have already been in place for three years. Which might make the beer tax easier to swallow than a new tax on any other class of industry.

“If there has been any negative impact, it was probably initial and immediate,” says Nick Federici, lobbyist for the Our Economic Future Coalition, the umbrella group of organizations that hopes to see the Legislature pass some sort of a tax bill this year. “I don’t buy the idea that continuing this tax causes any additional negative impact on the economy that hasn’t already been there. The good that can come from it is tremendous — $100 million a biennium can keep people from being homeless, can educate their kids, can go for so many important things. So I think the way the governor talked about it makes sense – this is a balancing act. What is the return on investment? What is the cost and benefit? And I think it is a positive balance.”

So that’s the challenge for the beer industry – to make the case that there is something worse about this one than anything else. Some in the biz argue that there is a beer-centric argument that can be made.

Redhook Can’t Keep Covering

Steve Jones, Red Hook director of operations.

Steve Jones, Redhook director of operations.

Start with the fact that Washington produces 75 percent of the nation’s hops crop – the essential ingredient in any brew. Maybe Washington isn’t the big beer producer it used to be, as mass-market brewers have consolidated and moved production of Rainier and Olympia out of state – and when was the last time you heard the West is Lucky country? But you can also say beer flows through Washington’s veins, with all the small breweries that have been established over the last 30 years, accounting for about a fifth of sales. And that doesn’t count the state’s biggest brewer, Redhook, the most successful of the bunch, with a 190,000-barrel brewhouse in Woodinville. Because Redhook sells just over 60,000 barrels of beer in Washington annually, it is stuck paying the tax, just like the big boys in the biz.

Jones says Redhook has been absorbing the tax increase for the last three years, by reimbursing the wholesalers who actually pay the tax when they distribute to stores. If it hadn’t done that, its premium brew would have been at such a price disadvantage it would have taken a big hit in sales. That represented a $300,000 cost — but it can’t keep doing that. When lawmakers caught the industry off guard in 2010, he says, “it was definitely a shock for the industry and a shock for Redhook – Redhook being a Washington-based company and taxing us at a higher premium and really putting a cap on our success.”

If Redhook passes the tax along and boosts the price of a six-pack to as much as nine dollars a six-pack, its sales will surely fall, Jones says – perhaps enough to fall below the 60,000-gallon threshold, meaning that it wouldn’t pay that hefty surcharge after all. That’s a weakness of the Gregoire plan, but one that the Inslee proposal doesn’t face because it makes all brewers pay. Still, the tax just seems out of line, Jones says. Neighboring states don’t have taxes anywhere close to Washington’s – Oregon’s tax is $2.60; Idaho’s tax is $4.65.

Big brewers, meanwhile, say their sales took a big hit when the tax increase was imposed – in part because the microbrews suddenly looked more attractive by comparison. Steve Gano of MillerCoors told the Senate Ways and Means Committee in February that the big brewers saw their sales reduced 18 percent in Washington when the tax was imposed, while sales nationally fell 1 percent. And there is an irony to it all: Beer-industry sources say they decided not to run a rollback initiative back in 2010, as the pop distributors did, in part because they were spending big that year to defeat a complicated liquor-privatization initiative backed by Costco Wholesale that also would have changed rules for beer distribution. But also it had to do with the fact that they believed the tax was temporary.

Distributors, Sellers are Hit

Hardest hit were those further down the sales chain. Craig Stein, a beer distributor in Vancouver, Wash., told the committee his company took a $9 million hit and had to cut employment from 163 workers to 140. Dan Levine, a former beer distributor from Seattle, says his total sales volume declined 10 percent the first year and he started losing sleep – and sales didn’t bounce back the second. He said he saw the handwriting on the wall, and decided to sell out.  “You can’t tax something to death, and that is what I think they are trying to do,” he said in a call from Mexico, where he said he is enjoying retirement. “I know three or four wholesalers in Washington that are thinking about selling to out-of-state guys today.” The end result – more industry consolidation.

Meanwhile, convenience store operators say they took a big dive, mainly because they operate at low margins and are sensitive to any decrease in sales. Said 7-Eleven operator Roger St. George of Hoquiam, “It is hard to explain to our customers why their beer prices went up, because they are paying for education – it is just something that doesn’t seem relevant to them.”

The biggest effect was to cause people to switch from higher-priced brews to lesser ones, says state Sen. Mike Hewitt, R-Walla Walla, a former beer distributor. And he’s not really sure what will happen to beer pricing if the tax surcharge goes away. But really the whole idea of extending the taxes leaves a sour taste – and whatever Joe Sixpack does, you can count on a certain segment of the Legislature to take up his cause. “The Legislature should follow through on what it said three years ago, when it said its intention was for the taxes to expire,” he said. “How can anybody trust government if it doesn’t do what it says it is going to do?”


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