Beer May Be In For a Tax Break -- Why This Could Be Bad for Some Brewers

Boston Beer and Craft Brew Alliance would get bigger tax breaks under a measure supported by Anheuser-Busch InBev. But that might not be good for the craft brewers in the long run.

Jan 6, 2014 at 4:10PM

There's been a debate about beer taxes under way on Capitol Hill, and 2014 could be the year it comes to a head. Smaller brewers are hoping to score a big win over behemoths like Anheuser-Busch InBev (NYSE:BUD), Molson Coors (NYSE:TAP), and SAB Miller -- and possibly big craft beer makers like Boston Beer (NYSE:SAM), Sierra Nevada, and Craft Brew Alliance (NASDAQ:BREW). But it might not shake out that way.

There are two measures on the table as we start 2014. Both aim to reduce excise taxes on beer. But one, the Small BREW Act, would do significantly more to give local and regional craft breweries a leg up on the larger competition. The other, dubbed the BEER Act, metes out the tax relief more evenly across brewers of all sizes.

The megabrewers would be the obvious losers if the Small BREW Act were adopted. But Boston Beer and Craft Brew would be better off, tax-wise, under the measure that the megabrewers are supporting. Why then, has Boston Beer thrown its support behind the Small BREW Act? One possibility is that Jim Koch and company think the threshold for "smaller brewer" could be raised to accommodate their growing operation.

But Boston Beer executives may also see this as more than a dollars-and-cents issue. These tax changes could alter the competitive landscape of the U.S. beer market. More on that to come.

Competing bills
First, let's take a quick look at the differences in per-barrel taxes between the two options. (The excise tax on beer now is $7 per barrel on the first 60,000 barrels a brewer makes. After that, it rises to $18 per barrel.)

Bill

0-15k barrels

15k-60k

60k-2m

2m-plus

Small Beer Act

$3.50

$3.50

$16

$18

BEER Act

$0

$3.50

$9

$9

Boston Beer will likely produce somewhere just north of 3 million barrels in 2013, given its historical numbers and shipment growth. Craft Brew will produce somewhere in the neighborhood of 740,000 barrels in 2013.

Let's look at an estimated federal excise tax per-barrel average under the two measures for Boston Beer and Craft Brew, based on those numbers.

Company

Small BREW Act

BEER Act

Boston Beer

$16.42

$8.87

Craft Brew Alliance

$14.99

$8.48

That's a significant savings for the two bigger craft brewers.

But it's not that simple
Let's take a step back and look at the implications for these tax changes. The Small BREW Act was conceived as a form of economic stimulus. The brewpub and microbrewery industry is exploding. Reducing taxes for these companies does two things: It gives the existing brewers more money to expand operations and hire more workers, and it reduces the barriers to entry for brewing start-ups. Proponents see this as a way to add fuel to the fire below the craft brew kettle.

So if the BEER Act would offer those smaller brewers those same -- or smaller -- cuts, why would brewers care if the bigger guys get a break, too? For that answer, we have to look at the competitive landscape. For a company like Anheuser-Busch InBev, shaving $9 in taxes from every barrel would allow the brewer to set even lower prices on its products. One of the key reasons the big brewers' crafty offerings like Blue Moon, Shock Top, and Leinenkugel have seen explosive growth is that they are usually placed next to craft brews on store shelves, but sell at a considerably smaller price.

The Small Beer Act might help to level that field a bit. The BEER Act, not so much. In a cutthroat market like today's U.S. beer industry, any leg up can go a long way.

Crossing the "Brew-bicon"
Boston Beer and Craft Brew know their real competition is with the megabrewers, not the brewpubs and microbreweries that would most benefit from the Small BREW Act. Both companies have done very well in a thriving, ever-expanding craft market. They've built themselves up by stealing away drinkers from the big brewers, slowly, but steadily.

Craft Brew executives say their niche is in what they call the "crossover" drinker -- someone who has been drinking Bud, or Miller Lite, or Heineken. Boston Beer executives may not use the same term, but much of the Sam Adams maker's success has been built on offering beers that are a step up, without being all that much more expensive than the big domestics and imports.

They know drinkers who cross over will dabble with many smaller brews, but few will cross back over the beer-drinking Rubicon -- let's call it the Brew-bicon -- and return to Bud, Coors, or Miller.

The Foolish bottom line
These tax measures have been getting kicked around in Washington for a couple of years. But 2014 could be the year that Congress takes action. Investors will want to watch to see how this shakes out, and how it could change the landscape of the battle for that crossover drinker.

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Fool contributor John-Erik Koslosky owns shares of Boston Beer. The Motley Fool recommends Boston Beer and Molson Coors Brewing. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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