COVID-19, Wildfires and Now a Tax

Photo: Jason E. Kaplan

An outcry over a proposed beer tax exposes a crisis in craft brewing.

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In early September, when wildfires that swept across Oregon blanketed thick smoke across the state, Jeff Althouse was contemplating lost revenue from the closure of his taprooms in Portland and Eugene.

The shuttering of both locations for a week resulted in a loss of $20,000. The disruption to his business from the wildfires was yet another obstacle he has faced in 2020 – a year which he describes as the most challenging in his 16 years as a small-business owner of Oakshire Brewing.

Althouse had only recently introduced outdoor seating at his taprooms after being shut since March. The coronavirus pandemic led to the closure of the state’s 400 breweries, and many have struggled to recover financially. The gradual easing of restrictions, which allowed pubs to do outdoor seating and limited indoor seating in certain parts of the state, has not yet led to a full recovery in sales. The recent wildfires were another serious setback.

But breweries are now facing what they say could potentially be a nail in the coffin for many: a proposed state tax on beer, wine and cider, which the state would use to plug a funding gap for mental health treatment and counseling.

The tax increase would be a large one. The Oregon Health Authority has proposed raising $293 million in the next two years. That would mean increasing the tax rate from $2.60 per barrel of beer or cider to $23.40 per barrel (7 cents per 12-ounce drink).This is about an 800% increase, according to the Oregon Liquor Control Commission.

The Oregon Health Authority proposes distributing the additional tax revenue to behavioral health services, including mental health and substance-use disorder treatment and prevention.

It’s revenue that is sorely needed, says Jonathan Modie, spokesperson for the health authority. Oregon has some of the highest rates of serious mental illness, substance-use disorders and suicide in the country. This is coupled with critical gaps in mental health services, says Modie.

Predictably, the proposed tax has caused an outcry among craft breweries, which point out the bad timing given their financial woes.

Althouse’s revenue is down about 40% over the past year. Revenue from draft-beer sales is down 90% in the second and third quarters. Although sales to grocery stores and retailers have increased, they have not made up for the lost revenue from the closure of the taprooms, he says. To get by, the brewery sells beer to go and does home delivery. It even managed to release a handful of new styles of beers in July and August.

Althouse laments that the new proposed tax comes on top of the Corporate Activity Tax, which was implemented in Oregon in April. This new tax, which aims to raise $2 billion for education spending, imposes a levy on gross receipts, or sales of products or services. Althouse estimates the Corporate Activity Tax constitutes an extra $5,000 in taxes.

The founder says that the small size of Oakshire – which has $2.5 million in revenue – means it will make it even more difficult to compete with larger brewers.

“For companies of our size, the economics of the business are extremely challenging. It takes a lot to solve these continued changes in our financial model,” says Althouse.

Larger breweries are also quick to criticize the proposed tax. Deschutes Brewery has seen its revenue decline by 50% at its Bend location and by 70% at its Portland pub compared with pre-COVID-19, says CEO Michael LaLonde.

The brewery employs 325 compared with 500 before the pandemic started. It operates outdoor seating and can accommodate a maximum 100 people indoors, including staff, which “continues to restrict our revenue,” says LaLonde.

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“Already 47% of our costs are taxes, including income tax, employee tax, federal excise tax, state excise tax on beer. This would increase cost of beer on the shelf,” says the CEO, who estimates the levy would lead to a cost increase of between 50 cents and $1 on a six-pack of beer.  

According to the Tax Foundation, Oregon’s beer tax ranks 45th among states, points out Modie at the Oregon Health Authority. He adds the last time tax was raised on beer was in 1977.

The pandemic has increased off-premise sales of beer in grocery stores and retailers, which is some consolation to larger brewers that dominate wholesale distribution. Increased sales of canned beer are the one “bright spot” of the past few months, says LaLonde. Half of the company’s revenue now comes from sales of canned beer.

But the uptick in retail sales only benefits breweries that have been able to switch to canning. A shortage of aluminum because of increased demand for packaging means that cans can be hard to come by. And it is too expensive for most small breweries to install a bottling operation.

The Brewers Association, a trade group for small and independent craft brewers, estimates 20% of breweries nationally are on the verge of bankruptcy. In Oregon recent closures include Ross Island Brewing, Base Camp Brewing, Grixsen Brewing, Salem Ale Works and 3 Sheets Brewery & Taproom.

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Ken Whiteman, co-founder of Pfriem Family Brewers and vice president of Oregon Brewers Guild, says the new tax “would be a disaster for Oregon craft beer.”

Whiteman estimates it will take at least a year and a half for revenues at his business to recover to pre-pandemic levels. The Hood River brewery took on some loans and an equity investment to shore up its finances. “While we may bounce back in two years, it will be something that lives with us for a long time,” he says.

In some ways, the pandemic has accelerated the demise of breweries that were already facing an uncertain future because of the slowing growth of beer sales. Changing tastes, especially among young people, mean that breweries have had to pivot to selling other kinds of alcoholic drinks, such as hard seltzers and craft cocktails.

“We have seen craft beer come to a slow grind. It hasn’t been a growth area,” says Whiteman. “It has definitely gotten more competitive, and it is not growing as it once did.”

Beer-industry lobbyists have until Dec. 1 to persuade lawmakers to either scrap the tax, delay it or push for a lower rate.

“We feel confident the majority of legislators we have spoken to do not support it,” says Christina LaRue, executive director of the Oregon Brewers Guild. She adds that legislators who support a tax prefer a smaller rate than that proposed by the Oregon Health Authority.

“If Gov. Brown includes any type of increase in her budget that she recommends to Salem in December, we are preparing to fight for a small increase, if it has to be any at all,” says LaRue. 

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