As distillers build bourbon inventory and fill out records, KDA warns tax structure for barrel aging must change

The number of barrels of Bourbon in Kentucky hit a record 11.4 million in January.

The industry marked its fourth straight year filling more than two million barrels, while paying a record $40 million in barrel taxes. Including other aging spirits, the state’s total inventory is nearly 12 million barrels. The assessed value of all barrels also hit a record high this year of $5.2 billion.

While barrel records are usually cause for celebration, Eric Gregory, president of the Kentucky Distillers’ Association, warned that the impact of aging barrel taxes is more of a cause for concern. Kentucky remains the only state to tax barrels of aging spirits.

“We are thrilled that our local and historic industry continues to thrive, but these numbers could have been much higher if Kentucky did not have a major barrier to entry for new distilleries in the form of this barrel tax” , said Gregory.

(Photo by KDA)

Year-to-date, Kentucky has fallen to 12th in the nation for the number of distillation operations, according to federal statistics from the Tax & Trade Bureau (TTB). There are now more than 2,300 distilleries in all 50 states, while Kentucky has less than 100. Last year, Kentucky ranked 29th in the nation for the rate of adding new distilleries.

Kentucky’s share of distilleries nationwide has fallen from a high of 24% to just 6%, and Kentucky’s percentage of distilling jobs has fallen from 43% to just 30%, even as the state produces 95% of the world’s bourbon.

In the past five years alone, barrel taxes have more than doubled, increasing by 102%. Kentucky distillers are paying nearly $40 million in barrel taxes this year, up $7 million from last year.

“We are only asking to be treated like every other manufacturer in Kentucky – and perhaps the world – whose products are not taxed during the production process,” Gregory said. “Barrel taxes impede growth, penalize success, and compromise the state’s ability to attract new distillers to the birthplace of Bourbon.”

The new production figures are based on inventories reported as of January 1, submitted to the Kentucky Department of Revenue for tax purposes and include all Kentucky distillers.

Kentucky Stats:

• Total barrels of Bourbon: 11,406,135
• Number of Bourbon barrels filled in 2021: 2,619,633
• Total inventory including Bourbon and other spirits: 11,982,965
• Rateable value of all barrels for tax purposes: $5,207,221,744

Kentucky Bourbon has experienced phenomenal growth since the turn of the century. Production has skyrocketed 475% since 1999. The state’s aging Bourbon inventory has more than tripled during that time, while the assessed value of all barrels is now $5.2 billion, a staggering increase of $780 million over 2021.

The Bluegrass State continues to benefit the Kentucky economy by $9 billion each year, with the industry supporting more than 22,500 jobs with an annual payroll exceeding $1.2 billion per year, and attracting millions of tourists from all over the world on the Kentucky Bourbon Trail.

A key export, distilling has the highest employment factor in the state among major manufacturers, purchasing at least 17 million bushels of corn and other grains each year, mostly from Kentucky farm families. The industry is also investing more than $5.2 billion in new stills, warehouses, bottling lines, tourism experiences and more.

Distilling is also the highest taxed of all major manufacturing industries in the Commonwealth, paying over $285 million in local and state taxes each year. That’s $180 million more in taxes every year now than what distillers were paying a decade ago.

Kentucky distillers also pay more than $1.8 billion in federal liquor taxes, by far the highest of any state.

Of the 11 states ahead of Kentucky in number of distilleries, all but the licensed state of Washington have a significantly lower liquor tax rate than Kentucky, Gregory said. The Kentucky tax rate is $8.41 per bottle; California, which leads the country in number of distilleries, costs $3.30.

“We’ve proven time and time again that Bourbon is a great investment for Kentucky,” Gregory said. “But we can’t ignore the fact that over 2,200 distilleries have made the business decision not to locate here, despite our rich traditions and ready-to-use infrastructure.”

Gregory said now is the time — when the industry is healthy — to remove barriers to growth like the barrel tax and continue to modernize Kentucky’s liquor laws.

“It is essential that distillers, community partners and elected officials work together to attract more distillers and investment to the Commonwealth, because there will come a day – hopefully not in our lifetime – when bourbon will not be as popular as it is now.

Kentucky Distillers Association