EK: Why is bourbon taxed more heavily than other spirits?My guess about why bourbon is taxed higher than other spirits? I would wager that distillers have to pay the taxes when they barrel the whiskey. Bourbon is generally aged. To be labeled straight bourbon, it must be aged at least 2 years, and most popular brands are aged 6 years. Therefore, it would be hard for a startup distiller to invest the money to barrel bourbon, keeping down competition. Maybe that isn't the case, but that is my gut feeling.
JY: I’m not exactly sure why it is. There have been preferences on things like rum to help the economies of the Virgin Islands and Puerto Rico. But I’m not sure why it’s so high on bourbon. It’s like 13 dollars per proof gallon while rum is a dollar or two dollars.
EK: Is the growth in the bourbon industry mostly domestic or international?
JY: Most of the growth has been because it’s a prized export. But you’re also seeing bourbon catching on among younger drinkers who are looking for a more adventurous experience.
EK: I was researching bourbon regulations to prepare for this interview, and I was actually surprised to see how many international protections American bourbon producers have. Canada mandates that all products sold under the name “bourbon” come from America. So does the European Union. But places like China don’t. So is there a trade issue here, or any problems with Chinese bourbon piracy, where they’re selling a lot of fake Jim Beam?
JY: That’s not one the distillers have actually raised with us. I don’t think China is one of the biggest markets, so I don’t think pirating has been much of an issue.
EK: How about domestically? I was surprised to see how strict the legal regulations around bourbon production are. Do many producers try to slip under the wire?
JY: They’ve been pretty easy to enforce. Of course, Kentucky is pretty vigilant about that. Bourbon has to be aged in charred white oak barrels. They need to be new not used. Other states are now getting into it, too. Iowa is one. But Kentucky has always said you can’t really make bourbon outside of Kentucky because it’s a combination of the barrels and the limestone-fed springs that give us the water. That’s our story and we’re sticking to it.
Update: Apparently, I'm wrong. According to the comments, the tax is paid when sold, thus the LIFO adjustment. But, the high taxes also make it less profitable and hurts return on capital, so it would still discourage startups.
The Congressional Bourbon Caucus - that's a classic! It conjures up an image of a bunch of politicos in a back room with their feet on desks drinking and cutting deals.
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