George H. W. Bush was elected President, in part, due to his famous line: “Read my lips. No new taxes!” The U.S. economy was on fire during the Reagan years, due in part to the fact that President Reagan lowered taxes and removed the price controls put into effect during the Carter era. The 80s were a time of great economic growth for the country, which drove beer sales to new highs.
Soon after Bush Senior was elected into office, however, he walked back his pledge to the U.S. voters, and raised taxes on a number of items, including taxes on beer. Bush doubled the U.S. federal excise tax on beer. His broken tax promise was one of the major points in his failure to gain reelection for a second term. Needless to say, overall beer sales slumped, and remained that way for some time.
In a major strategic marketing move, both the U.S. importers of the Modelo brands, The Gambrinus Co., and Barton Beers, decided not to pass along the tax increase to their consumers, with both companies absorbing the increase in their own margins. Corona, which had been on a roll since introducing the clear, longneck bottle, was still struggling to regain their momentum due to a previous vicious rumor spread about the beer. The great majority of all the other beers in the market, however, passed on the tax increase to the American consumer. Corona did not raise prices, and soon the brand’s sales regained its lost momentum and took off again. The rest is history.
The new tax bill recently passed by Congress, and signed in law by President Trump, includes the long attempted reduction in FET taxes which reduces the current tax rate to $3.50 per barrel on the first 60,000 bbls. produced for breweries with production of under two million bbls. The new tax bill also reduces the FET to $16 per bbl. on beer, up to six million bbls. produced. The law is under a “sunset rule” of two years, meaning these taxes will be reinstated unless the beer industry can show a positive return from the tax cut.
So the question is: what will happen as a result of these tax rollbacks? It is no secret to anyone that much of the current negative beer sales trends are a result of high pricing. Price increases for the craft industry as a whole were postponed last fall, with anticipated increases due this spring. Will these craft brewers see the tax reduction as a price increase? Because their margins have just been aided by the passage of this tax relief, the brewers will not increase any PTW in an effort to increase sales.
No doubt some brewers will raise prices, but will they increase spending in their marketing or add additional field people? Some crafts will raise PTW and pocket the margins, and their respective wholesalers will see that immediately. These craft brewers might use the two-year window, not as a positive, but as a negative.
Both Gambrinus and Barton took a huge chance over 25 years ago with unbelievable results. The industry will be watching, as will Congress, to see how this tax reduction plays out. If it fuels the industry’s growth, and brings additional jobs and taxes, then one can count on the lower tax rate remaining. If, however, the craft industry becomes greedy, then one can expect a return to today’s tax rates.
Read my lips: no new taxes…