Kentucky lawmakers have advanced a bill that would eliminate property taxes on aging spirits in the Commonwealth. House Bill 5 would gradually eliminate property taxes on distilled spirits starting in 2026 and phase out the tax over the next 15 years. The bill advanced out of the House Monday and now heads to the Senate.
Opponents of the bill say removing the “bourbon barrel tax” would eliminate vital funding for libraries, emergency services, and schools in dozens of counties where distillers store their bourbon, and further rewards a thriving industry where tax breaks aren’t needed.
Over 25 counties in the commonwealth stand to lose an estimated $30 million in annual tax revenue that goes toward county libraries, schools, and emergency services from property taxes generated by the barrel tax. A fiscal note included in the bill shows local governments could lose more than $232 million in tax revenue by 2039.
Former Henry County Judge-Executive John Brent said his county relies heavily on taxes which are next to nothing for the billion-dollar bourbon industry.
“So what is an absolute pittance to the distillery is huge to us,” Brent said. “To put that in perspective, our school system's annual budget is about $11 million, and they could see their budget go up by 50 percent thanks to this barrel tax.”
Due to the expected loss of revenue in school systems, lawmakers passed House Bill 447 which would guarantee funds from the state's budget reserve trust fund to compensate for the loss of the barrel tax.
Proponents of HB5 cite growing competition from states without a similar spirit tax and fewer impediments to lure new distillers to the state as reasons to repeal the tax.
Eric Gregory, President of the Kentucky Distillers Association, said changing how spirits are taxed remains one of the biggest goals of the organization.
“We’re still working through an antiqued tax structure here in Kentucky that taxes aging barrels of spirits, we’re the only place in the world that does that,” Gregory said. “It has become a barrier of entry for new distillers coming into Kentucky, especially small craft distillers.”
The state's bourbon industry is in the midst of a boom and generates nearly nine billion dollars in revenue in the state, which opponents of HB5 argue should be taken into consideration by lawmakers before passing a tax break that would impact local governments
"I also feel it is extremely unfair for the state of Kentucky to think about eliminating our local taxes that go to our schools and fire departments and EMS when they're taking in some sort of a liquor tax," Brent said. "It seems to me they could give their money back if they're really worried about losing the (distillery) industry."
The assessed value of aging barrels in Kentucky was over $4 billion in 2021, according to the Kentucky Department of Revenue. Last year, distillers paid $33 million in taxes on barrels aging in rickhouses across the state.
Pam Thomas, a senior fellow for the Kentucky Center for Economic Policy, testified against the bill.
“Today’s vote is the culmination of years of lobbying against one of the few taxes the bourbon industry still pays,” Thomas said in a statement. “The revenue from these taxes fund local governments, schools, roads and emergency services that allow distilleries to operate. Cutting that funding would result in a cut to services or a tax shift to the residents of these areas.”
The bill now heads to the Senate. The General Assembly adjourns on Friday before a veto period.
