Monday, February 16, 2009

Some Math

Madison Beer Review dropped a doozy this morning: some brain donors in the Oregon state legislature just proposed raising the beer excise tax to $49.61 per barrel. Let's look at two examples that illustrate why such a move would destroy one of the top craft beer industries in the country.

First, let's assume a brewpub generates $1.5M per year in sales and that its net income is 5% of total revenue. In other words, the profit is $75,000. We'll also assume that 60% of revenue is from food, 30% is from house beer and 10% is from other stuff (wine, spirits, merchandise, etc). That means the brewpub's house beer generates $450,000 in revenue. At $4 per pint, that translates to 454 barrels of beer sold. Oregon's current beer excise tax is somewhere around $2.60 per barrel. By raising it to $49.61 per barrel, the brewpub will owe an additional $21,342.54 in tax revenue each year. That will drop the net income to $53.657.46, or 3.6% of total revenue. It would make economic sense for this pub to stop brewing and turn the brewery square footage into additional seating.

Next, let's assume a production brewery sells 10,000 barrels of beer at $80 per half-barrel keg. That's $1.6M in revenue. If we assume the brewery's net income is 10% of total revenue, it annual profit is $160,000. The change in excise tax would force the brewery to pay the government an additional $470,100 per year. Whoops, that's $310,000 more than the brewery can afford! If I owned this brewery and was suddenly faced with paying the government $24.805 for every keg of beer that I sold for $80, I'd liquidate the company's assets immediately and find another way to make a living. Seriously.

In short, brewpubs will suffer and production breweries will die if this bill is passed. Total excise tax revenue from beer will drop and people in the state will drink imported beer. I think public outcry will force this bill to be efficiently rejected. Oregonians, be ready to get on your legislators' cases as soon as some special interest whore slips this tax hike into your state's next budget proposal.

1 comment:

Madison Beer Review said...

Great analysis Joe. From what I've seen Wisconsin's proposed tax hikes are not nearly as steep as Oregon's proposal, but would still bring up our taxes from the $2 it is currently to closer to $2.50 or $3; though it is unclear at this point whether the subsidy/credit for small breweries (50K barrels) would remain. Provided that subsidy/credit remained at $1, really it's a tax on Miller/Leinie's/New Glarus and wouldn't impact smaller breweries - it would only provide a disincentive to grow beyond 50K barrels.