Trendy craft beer sales are booming, and cities and states are hoping tax breaks will help them elbow their way into a seat at the bar.
Targeted tax breaks are a favorite tool for states looking to capitalize on a growing industry, and states from California to New York are all hoping to get a gulp of the estimated $250 billion economic boon brewers estimate they delivered in 2012. Lawmakers are doling out multimillion-dollar packages to keep and attract breweries.
But while the tax breaks flow, there is little evidence that these incentives are driving where craft brewers set up their businesses. Factors such as the availability of natural resources like water and the quality of the infrastructure needed to get the beer to the masses are likely playing a bigger role.
“You can never really know that the incentives actually changed the company’s behavior at all; more likely than not the incentives are just rewarding companies for activities they were going to do anyway,” said Matthew Gardner, executive director at the Institute on Taxation and Economic Policy.
Nonetheless, local officials are eager to provide every incentive for the growing industry to call their states and cities home, and tax breaks have been the tool of choice.
Beer brewing has been on the rise for the better part of the past 25 years. In 1991, the United States had fewer than 500 permitted breweries in active operation. By 2013, that number had skyrocketed by more than 600 percent, to 3,699.
Experts and lawmakers say the tax breaks are the go-to lure for states looking to attract a piece of the hot craft brewing industry.
Researchers at the Beer Institute, the industry’s national trade association, estimate states are competing for a sliver of the approximately $50 billion in federal, state and local taxes that brewers paid in 2012.
“It is a relatively high-profile business, and it is an easy-to-understand business; people get how jobs are involved, and it’s not surprising that people would like the idea on its face,” Gardner said. “Even from the perspective of a given state, there’s a zero-sum game problem there: Every time you cut taxes for one company or one industry, you have to make up for it somewhere else.”
That’s because states don’t have the option of passing an unbalanced budget. They operate in a kind of Newton’s law of fiscal motion: For every missing dollar of revenue, there is an equal but opposite dollar cut from spending.
But lawmakers and brewers say the incentives are part of a broader negotiation. The incentives are usually spread out over several years in order to ensure that the breweries bring jobs and investment to the local economy. They also hope that one hot new brewery can attract more trendy popular businesses to locate nearby.
This year the city of San Diego reached a deal with two expanding local craft brewers, AleSmith and Ballast Point. Both brewers needed to expand and were looking at new properties outside the city, so San Diego lawmakers offered a tax cut on future sales to entice them to stay.
The deal requires the breweries to pay any permitting and municipal fees related to the expansions upfront, and once they’re up and running, the city will reimburse the breweries through tax breaks.
“This is about more than locating great new breweries in the city; these agreements are a great deal for taxpayers,” said San Diego Councilman Mark Kersey. “Essentially, the city gets an interest-free loan while the breweries build their new facilities, and our local economy gets new jobs and economic activity for the full life of the operation.”
Brewers say the tax incentives are often offered only at the end of a long process of deciding where to invest. Several industry experts — including Jenn Vervier, the director of sustainability and strategy at New Belgium Brewing — said the craft brewing industry is highly dependent on natural resources and public infrastructure. Their abundance and quality are often major drivers in brewers’ business decisions, particularly since their operations and budgets are often very small when the brewery is started.
New Belgium, one of the top-selling craft brewers in the country, recently broke ground on a new East Coast brewing facility in Asheville, North Carolina. The city announced in 2012 that it would provide New Belgium with a seven-year, $3.5 million tax-incentive package based on the company’s planned $175 million investment. If the company doesn’t make the full investment, it doesn’t get the full package.
“Cities should go into those negotiations making sure they win, too,” Vervier said. “The city of Asheville will be a partner of New Belgium for decades to come; it had to be win-win for both of us.”
It isn’t clear that the tradeoff is necessary, given the health and structure of the growing industry.
Lagunitas Brewing, another top-selling craft brewery, christened a brand-new, 300,000-square-foot brewery on the West Side of Chicago earlier this year — without accepting a single tax break to get the project off the ground.
“There’s no economic reason for it on the macro scale,” said Tony Magee, owner of Lagunitas Brewing. “If I had wanted [tax incentives] in Chicago, all I would have had to say is, I’m looking at [a] building in Indiana and a building in Wisconsin.”
The new facility, an expansion far from the company’s Petaluma, California, home base, is tucked into a section of a former steel plant alongside a new film production studio and one of the city’s busiest freight rail arteries.
For the past several months, thousands of visitors have walked the long industrial corridor to the heart of the warehouse toward a tap room that sits amid sprawling grain silos and clanging bottling lines. The space will eventually have the capacity to put out 1.6 million barrels per year. It was all privately funded.
Magee said tax incentives were never even a factor in his decision to set up shop in Chicago.
Instead, he said the decision was based on freight costs, access to good water and Chicago’s reputation as a supportive, beer-loving town.
“If I stayed in California, I would forever be paying freight to get my beer across two and three mountain ranges, a desert and the Great Plains,” he said. “We have a needle now into the arm of Lake Michigan; that’s an important resource for a brewery. We sell water that’s been made more interesting.”
That calculation is not uncommon, said Scott Drenkard, an economist at the right-leaning Tax Foundation in Washington.
“I’m not going to pretend taxes never matter, but they might not be the most important factor for a business like a brewery,” Drenkard said. “But [taxes] are [a] cost that the political apparatus has control over. The political apparatus doesn’t really have a say over where your water comes from, but we do have control over taxes.”
Drenkard said craft breweries are a particularly attractive place for lawmakers to aim their tax breaks.
“Beer is almost universally consumed, so offering a tax break on something people use is going to make you popular as a policymaker, but that doesn’t mean it is good policy,” he said. “We don’t have to give tax carve-outs to everything we love.”
That isn’t stopping cities, counties and states across the country from offering tax deals to either get, or stay, in the brewing game.
San Diego and Asheville aren’t alone.
Henderson County, just south of Asheville, doled out a similar $3.75 million, seven-year package in 2011 to entice Sierra Nevada, the second most profitable craft brewery in the country, to open a large facility there.
In New York, the city of Baldwinsville and Anheuser-Busch InBev negotiated a deal in 2011 that would save the company $6 million in property taxes over 15 years just to stay put. Craft brewers in the state have access to a special credit.
States like Michigan are looking to get in on the hops rush as well. Lawmakers there are considering legislation that would provide credits for brewers and cider-makers that use locally grown ingredients.
But trends in tax incentives aren’t always predictable. Gardner said the escalating competition for breweries closely mirrors the way states were rushing to craft tax breaks for film productions as recently as five years ago.
Just four states offered tax breaks for films in 2000; just 10 years later, 39 states and Puerto Rico were offering targeted incentives to get producers rolling tape.
“If you’re a state or local lawmaker and you see other states offering breaks, it is human nature for people to say, gosh maybe we should do this, too,” Gardner said. “Today it’s craft brewers; who is it going to be tomorrow?”