Three Minnetonka brewery owners say that a House budget proposal for a state tax increase on alcohol threatens plans for growth.
David Schatschneider stacked beer kegs at Lucid Brewing in Minnetonka. A cooperative among Lucid, Badger Hill and Bad Weather Brewing just doubled its capacity to 10,000 barrels per year by installing three new 60-barrel fermenting tanks at the brewery.
Owners of a trio of breweries based in Minnetonka worry that a provision in the House’s budget plan that drastically increases taxes on alcohol will harm its plans for expansion.
“This bill goes right after the guys that are growing, which is the dumbest thing in the world, in my opinion. … This bill tells me, ‘Don’t grow your business here,’ and I don’t know why you would do that to anyone,” said Lucid Brewing co-owner Jon Messier.
Currently, every barrel of beer produced in Minnesota is taxed $4.60, but that would be raised to $27.75 if the alcohol tax increase makes it into the final budget, which Gov. Mark Dayton had not ruled out as of West Extra’s press time. However, under the House’s proposal, these taxes would affect only breweries that produce more than 50,000 barrels per year. Breweries under that limit would recoup all of the per-barrel excise taxes through state tax credits.
Lucid, Badger Hill and Bad Weather Brewing all operate out of the same facility in Minnetonka. The breweries partner through an alternating proprietorship, which allows for them to share overhead costs while remaining separate companies.
Business has been good since Lucid became the first of the breweries to open in 2011. Last Monday, three new 60-barrel fermenting tanks were installed at the brewery, which doubled its collective capacity to 10,000 barrels per year.
Badger Hill owner Broc Krekelberg said that, although the tax increase wouldn’t immediately affect his company, if it were included in the final budget, he would be forced to rethink his whole business plan.
“We were looking at investing in our own building, building a taproom, and we’ve been talking to some other local businesses for partnerships. It was all designed to scale our operation beyond 50,000 barrels, but now we’re wondering if it would be more financially feasible to stay below that amount,” Krekelberg said.
Messier said Minnesota’s tax policy has him looking out of state. “If I look and see that my price is cheaper to the consumer just next door, that’s where I’m going to send [my beer], because there I can be more competitive against imports and other top-end brands,” he said.
Lucid recently signed with D-S Beverages, a distributor in Moorhead, Minn., in an effort to expand into North Dakota.
Right now, only Minnesota’s two largest brewers — Schell’s and Summit — are over the 50,000-barrel limit, but that could soon change.
Since 2011, 26 new breweries have opened in Minnesota; only 11 opened from 2000 to 2010. Nationally, the number of barrels produced by craft brewers increased 13 percent in 2011 and another 15 percent in 2012, according to the Brewers Association. Even with this growth, craft beer made up a mere 6.6 percent of the more than 200 million barrels of beer produced in the United States in 2012.
“Consumers are starting to change their buying habits. … If you look at craft beer growth across the U.S., it’s a very consistent trend we’ve been seeing over the last 20 years. It’s not a fad as much as it is people coming in and deciding to stay. They start to expect a high-quality product,” said Krekelberg.
He credits the “Surly Bill,” which allowed craft brewers to open taprooms at their breweries, as another huge reason for the industry’s growth.
Costs to society
Proponents of the alcohol tax increase say that the extra money collected could help defray the enormous cost of alcohol abuse for the state of Minnesota. A study released by the state Department of Health in 2011 found that “the economic costs associated with alcohol use in Minnesota are an estimated $5.06 billion.”
There hasn’t been an increase in the excise alcohol tax in Minnesota in more than 25 years, and an April 24 poll done by KSTP-TV found that 51 percent of Minnesotans supported the alcohol tax increase.
Proponents also say that the tax increase only would amount to a price increase of 7 cents per pint, but that claim has come under fire from the brewing industry. Krekelberg, who holds an MBA in strategic finance, said that analysis failed to account for the compounding of the cost increase as the beer moves from producer to wholesaler to retailer.
He said that realistically it would increase the cost of a pint by 15 to 55 cents, depending on whether companies along the supply chain would choose to lower their margins.
The Minnesota Senate did not include the alcohol tax increase in its budget proposal, and Dayton has come out against it, although when this story went to press he was still considering it as part of his final budget proposal.
State Reps. Paul Rosenthal and Yvonne Selcer voted against the House budget proposal that contained the tax increase, while Rep. John Benson voted for it.
Ben Johnson • 612-673-4499