The future of Kentucky's 'bourbon barrel tax' could mean some local governments are stuck paying the tab
Marc Dottore is the owner and head distiller of Dueling Grounds Distillery, a small, craft distiller that sits in Simpson County, Kentucky, just five miles from Tennessee. The four-person operation produces gin and fruit liqueurs but its leading spirit is bourbon, producing about 200 barrels of the spirit last year. Dueling Grounds is just one of 95 distilleries in the state that make up the billion-dollar signature industry.
“Our signature spirit is bourbon,” Dottore said. “We make a hand-crafted, double pot distilled bourbon, all from grains that come from within this local area.”
Kentucky bourbon is known around the world and the industry wants to keep it that way. In 2020, Kentucky distillers produced 2.4 million barrels of bourbon and have 10.3 million barrels stored in warehouses in the state.
But industry representatives have been focused more recently on easing taxes on the spirit as it ages in barrels. Representatives have been at the state capitol in Frankfort lobbying for a tax break that would eliminate a property tax on the spirit as it ages in Kentucky warehouses.
House Bill 5 was approved by a House committee and stands to gradually repeal a property tax on aging spirits over 15 years, starting in 2026. But for the counties where bourbon is stored, the revenue generated by the bourbon barrel tax is vital. Those tax dollars are used for things like funding school districts, libraries, and emergency services.
The barrel tax is a property tax on whiskey aging in rick houses. The state rate is small at just $0.05 per $100 in value, but for an industry that is rapidly growing and counties that have hundreds of barrels of bourbon aging in rick houses, that amount adds up. It's a tax that distillers say might slow the future growth of the industry.
In Henry County, which is home to Angels Envy distillery and Rabbit Hole, county officials say they stand to lose millions of dollars annually if the bourbon barrel tax is repelled.
Former Henry County Judge-Executive John Brent retired in 2023 but presided in the county for 20 years, during the explosion of the bourbon industry. He said his county’s school system relies heavily on the bourbon barrel tax.
“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 dollars, they could see their budget go up by 50 percent thanks to this barrel tax.”
Henry County isn’t alone, as over 25 counties in the commonwealth stand to lose an estimated $30 million dollars in annual tax revenue that goes toward municipal services.
The assessed value of barrels aging in Kentucky was over $4 billion in 2021, according to the Kentucky Department of Revenue and last year distillers paid $33 million in taxes on barrels aging in the state. Those figures have county officials upset.
Fire departments and other emergency services also rely on revenue from the barrel tax to provide public safety in their community. Due to the highly flammable nature of spirits stored in rick houses county officials have expressed concern that budget cuts to fire departments could put public safety at risk. In 2019 a rick house fire burned for three days and destroyed property owned by Jim Beam in Woodford County. Whiskey fungus has also been a concern for county officials and residents who say it causes property damage.
This is not the first time the bourbon industry has lobbied for leniency from the state. In 2014 a tax break was given to distillers by the state in the form of a rebate but changes in corporate tax laws have restricted them from taking full advantage of the tax rebate.
Pam Thomas, a senior fellow at the Kentucky Center for Economic Policy, said it’s up to lawmakers to decide if the interests of the industry outweigh those held by local governments.
“The general assembly has to decide between further padding the profits of a highly subsidized and lucrative industry or protecting revenue sources for local governments,” Thomas said. “That's the real choice.”
Bourbon industry representatives and proponents of the bill cite growing competition from other states and fewer impediments to lure new distillers to the state as reasons to repeal the tax.
Kentucky Distillers Association President Eric Gregory said the state’s tax laws will continue to be an issue if it's not changed.
“We’re still working through an antiqued tax structure here in Kentucky that taxes aging barrels of spirits,” Gregory said. “We’re the only place in the world that does that, and it has become a barrier of entry for new distillers coming into Kentucky, especially small craft distillers.”
Gregory also said the group would be working with lawmakers to make sure there is a “common sense solution” to protect local governments from lost revenue.
To offset lost revenue, House Bill 447 was created as a companion bill that would guarantee funds for school systems from the state's budget reserve trust fund to compensate for the loss of the barrel tax. House Bill 5 also “sunsets” the bourbon barrel tax gradually over 15 years beginning in 2026 so local governments have time to adjust for the loss of revenue.
According to the Kentucky Distillers Association, there are 95 distillers currently in Kentucky, which is five times the number of distilleries since the organization began keeping track in 2009. The group says more than $5 billion dollars in capital projects have been or will be completed over the next five years.
In a report from the Henry County Local, County officials announced plans for a Tennessee-based distillery to move its operations to the county regardless of the outcome of the barrel tax.
According to Judge-executive John Brent, the bourbon industry is doing fine.
“They’re trying to present this as an industry in trouble and I think that's the farthest thing from the truth, you look at the growth in this industry all over the state and the warehouses that are already getting built,” Brent said. “Right now there’s not even enough in storage to meet the domestic demand, let alone the foreign demand.”
For some, like Dottore and Dueling Grounds Distillery the name associated with their bourbon is worth the lost revenue.
“If there was any flexibility to going over into Tennessee and storing. I would probably consider it because the tax rate is favorable but there's really not,” Dottore said. “And at the end of the day truthfully, for bourbon consumers … the Kentucky name means a lot.”