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Excise Tax Reduction, part 2


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Had a very good meeting Thurs. with Frank Coleman and three of his associates from DISCUS, as well as key decision makers from Anchor Steam, St. George/Hangar One, Charbay and Essential Spirits. Along with some state issues that DISCUS wants to discuss with makers in various states, we talked fairly extensively about our reduced tax proposal.

Turned out that DISCUS reps also had taxes on their mind -- the proposed increases that various House members are working on now.

They would like our help to block any increases. We told them that we would be willing to help but would like their help in turn to get a reduced tier for small producers. They seemed very open to this arrangement -- as every $1 increase would cost their members $260 mil -- and asked us for a formal proposal.

The most aggressive form of that proposal was the one we have all contributed to creating on this forum. I've attached a copy of what I shared with DISCUS members at the meeting. The California group is going to meet again on Thurs. to finalize a proposal to send to DISCUS. Fritz Maytag, who went through this process on the beer side and spoke eloquently about the need for reduced rates particularly for the newer operations, will be critical for helping us think through a tenable proposal and championing it with DISCUS.

The one sticky issue that we all need to keep in mind is where we would propose Congress find the money to pay for our tax cut. Apparently, this type of fiscal conservatism will become a big issue -- pay-as-you-cut -- by the time our proposal reaches members' desks. Thankfully, we're only looking for a relatively small amount of money -- $7 mil or $0.03 of the current excise tax rate -- to create a 20% tier.

Next Steps:

- Download and carefully read the attached proposal -- this is the strong base for small producers

- Get to know your House of Representatives members -- especially if they're on the Ways & Means Committee

- Find out who in your circle knows anyone in the U.S. Congress -- reps, aides, secretaries, anyone (aides are key -- like with distributors, they do all the actual work)

- Send a small check ($50-250) to your House of Representatives members -- especially if they're on the Ways & Means Committee

Will update the forum with new developments as they take place.

Please add your own updates re above Next Steps as you take them. DISCUS may help us get this tax reduction passed, but it's 95% up to us!

Melkon Khosrovian

spiritsmaker

melkon@modernspiritsgroup.com

213.949.3569

Modern Spirits LLC

Reduced_FET.pdf

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The best argument for how you pay for it is that it is all new revenue. The purpose of the new taxation tier is to promote the industry and, by so doing, increase tax revenues from a base of zero. That's the fundamental argument for the whole proposal. It's not a tax cut if there was nobody there paying any taxes in the first place.

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Totally agree with the above comment. The best arguement is that this is NOT a reduction in existing revenue, but a means to encourage the development of an entirely new tax paying industry. We may be making the same basic product as Big Alcohol, but we are not in the same business. Our legislators need to be educated that this is not an "alcohol" issue. The impact of "micro distillery" industry development reaches far beyond simple alcohol sales. The effects are felt in the taxes paid by tourists (spending money at the distillery and in nearby rural areas), visitors' buying spirits (sale tax), rural development (most of the micros are in rural areas), agriculture (our raw materials, when possible grown locally), and employment (all levels and especially entry level jobs for local workers). All along the way the participants are paying additional taxes that would not have been paid without the existance of the micro distillery.

R

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Great points! Without a reduced tier, many of the small producers won't survive this economic downturn and new producers will not enter to help grow the handcrafted segment. In other words, current additional excise tax income from new small producers will diminish and not much new income will materialize because segment growth will stall.

Who can help pull together this analysis, preferably under the ADI moniker?

Without this analysis, it'll be very tempting for members of Congress to see it as a black & white issue of a reduction in current excise income. Even with this analysis, they still may see it as a reduction but we need to give them some context to see things differently.

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Also look at the possibility for supporting agriculture. Every micro-distiller needs raw materials. We're here helping support our family farmers as well as support our local economies. Some states have passed micro-distiller laws to specifically support their agriculture. It's just one means among many.

Also, while much of the liquor sold comes from Big Liquor, we're little puny liquor, small individual businesses. We get to follow all the same regulations as a big liquor establishment, and yet we're 1/100th or 1/1000th the size.

Not to get too political, but I don't see them wanting to tax Exxon Mobil for their $11 billion profits for a quarter.

From this Feb 1, 2008 NT Tyimes article:

http://www.nytimes.com/2008/02/01/business/01cnd-exxon.html

Exxon Mobil earned more than $1,287 of profit for every second of 2007.
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Guys -- great feedback and agree 100%.

Can anyone help with analysis that lays this out?

I'd be interested in helping out with the analysis and moving this idea forward. Day job is in economic development. I'm not sure how many operations would start specifically as a result of the lower tax structure. I think the biggest benefit will be the amount of businesses that stay open during the extremely lean start-up period where every penny needs to be stretched.

Which committee would this go to?

Ryan

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I'd be interested in helping out with the analysis and moving this idea forward. Day job is in economic development. I'm not sure how many operations would start specifically as a result of the lower tax structure. I think the biggest benefit will be the amount of businesses that stay open during the extremely lean start-up period where every penny needs to be stretched.

Which committee would this go to?

Ryan

Thanks for your help, Ryan.

Target House committee is Ways & Means.

Here are some numbers that Bill Owens shared with me this morning that could get the analysis started:

- Small DSPs in U.S.: 151 operating + 25 in licensing phase = ~175 small producers (95% <10 years old)

- Average capital invested in facility and startup operations: $500,000

- Average number of employees: 3

- Average facility size: 3,000 sq ft

- Total sales for small producers: <500,000 9L cs

- Total sales for top 5 producers: >300,000 9L cs

Let me know what else you may need to produce a coherent picture of the situation. Don't need anything extra fancy, but enough to demonstrate that the handcrafted segment has:

- Added to excise revenue by helping expand the marketplace with new offerings

- Created new manufacturing businesses with high multipliers

- The potential to expand the spirits category even further with hundreds of U.S. based businesses that could contribute 1-2% of total sales and generate hundreds of millions in economic value to the country through manufacturing jobs and tens of millions in new excise revenue to the federal government

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If it would be helpful to draw a revenue growth comparison I recommend using the analogy of "small business vs. large corporation"

Small Business in the US accounts for nearly 75% of the GNP. Right now the majority of liquor is sold by the big distilleries and import conglomerates. With tax incentives our base of smaller distilleries may eventually, collectively contribute more tax revenue to the government and growth may also bump up the number of higher tax bracket companies that exist.

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If it would be helpful to draw a revenue growth comparison I recommend using the analogy of "small business vs. large corporation"

Small Business in the US accounts for nearly 75% of the GNP. Right now the majority of liquor is sold by the big distilleries and import conglomerates. With tax incentives our base of smaller distilleries may eventually, collectively contribute more tax revenue to the government and growth may also bump up the number of higher tax bracket companies that exist.

This might be a tough sell. Today, nearly 30 years after beer received its reduced excise rate, craft beer (most of which pays the higher rate) accounts for <4% of the market. Micro-distillers accounts for <2%. BUT, our manufacturing is U.S. based vs. imports, which creates substantial direct benefits to the U.S. economy through employment, capital purchases, leases, etc. and even more indirect benefits up and down the value chain with goods and service suppliers to manufacturers.

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This might be a tough sell. Today, nearly 30 years after beer received its reduced excise rate, craft beer (most of which pays the higher rate) accounts for <4% of the market. Micro-distillers accounts for <2%. BUT, our manufacturing is U.S. based vs. imports, which creates substantial direct benefits to the U.S. economy through employment, capital purchases, leases, etc. and even more indirect benefits up and down the value chain with goods and service suppliers to manufacturers.

Then it would appear that making the case of supporting local agriculture (i.e. US Farms) may be the best incentive for providing we artisan distillers tax breaks. Give us the tax breaks so we can USE the crops rather than subsidize to hold them in storage. Whether the farmers would be willing to relinquish some of their subsidies in order to see their product be used in a product would be the sticking point.

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Here's a page of stats on the craft beer industry for 2007.

http://www.beertown.org/craftbrewing/statistics.html

They say the annual dollar sales volume for craft beer was $5.7 billion. If sales tax averages 6%, that's $342 million.

Also, you should point how, for example, every brewpub, is a business that's generating sales tax revenue for the states, business tax revenue at state and federal level, employment taxes, etc.

The idea is that it's a way to stimulate economic activity that will lead to an increase in other tax revenues down the road. The government provides tax incentives to all sorts of industries all the time.

We should also be advocating against a tax increase on spirits because:

  1. spirits producers are not just mega-corporations, they're also small "mom and pop" sized operations that can't afford a tax increase
  2. any tax increase will be passed on to the consumer, and we shouldn't be putting any additional stress on the consumer at this time
  3. small spirits producers are a new industry that will create American jobs, not overseas ones

Have all your current customers send the Chairman of the House Ways and Means Committee, Representative Charles Rangel, and email saying they don't support a liquor tax increase. Here's the contact page for House Speaker Nancy Pelosi. Tell your customers to contact them too. You can be certain that if you have to charge an extra $2 a bottle, that will be much more to the consumer when the distributor adds onto it, and the retailer onto that.

http://waysandmeans.house.gov/contact.asp

http://speaker.house.gov/contact/

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