Kentucky bourbon makers fear hangover from Obama's corporate tax overhaul

Kentucky bourbon makers say President Obama’s corporate tax overhaul could hobble their industry and cause major economic hardship in the Bluegrass State.

The makers of Woodford Reserve, Jack Daniels and Evan Williams are worried about the elimination of an accounting method that allows companies to lower their tax burdens by boosting the costs associated with inventory held for a long period.

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Obama’s Treasury Department sees the “last in, first out” (LIFO) accounting rule as a loophole. By eliminating it and other tax provisions, Obama would pay to lower the top corporate tax rate from 35 percent to 28 percent.

Bourbon makers, however, argue their taxes would skyrocket if the decades-old accounting system is discarded and the lower corporate rate doesn’t make up for that.

The system benefits bourbon makers especially because it allows them to count their most recent inventory costs against new revenue, which results in a lower profit margin. Without LIFO, bourbon makers would have to count inventory costs when bourbon was initially distilled and before it is aged.

For a bottle of 12-year-old bottle of bourbon, this makes a big difference given inflation.

To fight the change, bourbon makers like Brown-Forman and Heaven Hill have enlisted members of the Congressional Bourbon Caucus such as Rep. John Yarmuth (D-Ky.) and Geoff Davis (R-Ky.).

“This could cost a lot of jobs,” Yarmuth said, noting there are 9,000 people employed in distilling in Kentucky.

Bourbon makers also have a powerful ally in Senate Minority Leader Mitch McConnell (R-Ky.).

“Sen. McConnell, like the President’s own Small Business Administration, opposes the President’s proposed tax hike on job creators,” spokesman Don Stewart said.

He cited a 2009 letter from the Small Business Administration’s Office of Advocacy saying that that LIFO repeal could “force many small businesses to close.”

Though a corporate tax overhaul could be years away, Yarmuth and others in the caucus are worried LIFO could become a bargaining chip at the end of this year when Congress and Obama look to replace $1.2 trillion in automatic spending cuts triggered by the failure of the debt supercommittee.

Eliminating LIFO would raise $52 billion over 10 years, according to Obama’s 2013 budget. Obama has called for its elimination in his last three budgets.

At a House Budget Committee hearing last week, Yarmuth demanded Treasury Secretary Timothy Geithner turn over to lawmakers an analysis examining the costs and benefits of eliminating LIFO. On Friday, Yarmuth said he had yet to receive a response.

Yarmuth said that the administration needs to look at whether the negative effects on smaller industries would actually reduce tax revenue over time.

The LIFO provision is used by more than bourbon makers. Major oil and gas companies frequently employ it as well to reduce their tax burden.

Yarmuth said exemptions for aged products like whiskey, wine and cheese could make sense.

“The American bourbon whiskey industry has been a really positive growth story, despite the uneven economic conditions,” Max Shapira, the president of Heaven Hill said. “Ten years ago, many industry analysts wanted to consign whiskey to the great liquor store in the sky.”

He said that bourbon is facing growing global demand, including in Asia, and that repealing LIFO at this time would hurt the ability of Heaven Hill to grow its exports. The Obama administration is trying to double U.S. exports over a four-year span.

Shapira said Heaven Hill has over a million barrels of bourbon aging in inventory so changing the way that inventory is valued would create huge “phantom profits,” and result in a massive tax hike.

“Would it put us out of business? Probably not” he said. “Would it impede our ability to apply capital…toward expansion? Surely it would.”

Heaven Hill pays an effective tax rate close to 35 percent, he said.

“This massive retroactive tax increase is grossly unfair,” Brown-Forman spokesman Phil Lynch said. He noted that under law, all bourbon must be aged at least two years, so makers have no choice but to keep inventory for a long time.

Lynch said that the change would not shutter Brown-Forman, but the effects could be great and may involve job cuts.

He said the company is fighting to remain American owned and operated, but the LIFO change could put it at a greater disadvantage compared to international liquor companies. As it is, Brown-Forman has paid effective tax rates north of 31 percent for several years, Lynch said.

At this point, Brown-Forman is not pushing for a special exemption from the LIFO change and is standing with other affected industries to block the change entirely.

Brown-Forman is part of a lobbying coalition that includes Exxon Mobil, wholesalers, wineries and grocery stores.

Working against the affected distillers is the fact that major player Jim Beam, which distills Maker’s Mark, does not use LIFO and is sitting out the fight.

Spokesman Clarkson Hine said Jim Beam is still evaluating the Obama tax plans.