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How Republican tax reform eliminated special interest carve-outs — and created a bunch of new ones

A new tax cut benefiting alcohol manufacturers was lauded by the industry, but belied Republican promises to eliminate special treatment for chosen businesses.

Rep. Erik Paulsen holding a press conference at Insight Brewing in Minneapolis on January 5.
Office of Rep. Erik Paulsen

At Insight Brewing in Minneapolis earlier this month, 3rd District GOP Rep. Erik Paulsen was raising a glass to the Republican tax bill, signed into law by the president just weeks prior.

The assorted craft brewers and beer boosters in the room were, in turn, raising a glass to Paulsen: the Eden Prairie congressman successfully included a provision in the tax legislation that slashes the taxes that brewers — as well as winemakers and distillers — pay to the federal government.

For years, the alcohol industry had been lobbying for lawmakers to cut excise taxes, an additional sales duty they face. In prior sessions of Congress, Paulsen had introduced legislation that would have done just that. That the alcohol tax cuts got wrapped up in the Tax Cuts and Jobs Act, which permanently cuts taxes for corporations and makes other big adjustments to the tax code, is a victory for the booze business and for Paulsen.

But tax reform wasn’t supposed to be like this: long before they introduced it, Republicans promised that their plan to overhaul the U.S. tax code would rest on making the system “flatter and fairer” — that it would remove special tax breaks and carve-outs for people and corporations, broadening the country’s tax base in the service of greater efficiency and, crucially, economic growth.

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In June 2016, Speaker Paul Ryan introduced his so-called “Better Way” blueprint for changing the tax code, which claims the system had become “completely and totally broken,” and “delivers special interest subsidies and crony capitalism.”

Eighteen months later, when Republicans celebrated the law’s passage, they said the bill eliminates carve-outs and plum breaks for those pesky “special interests.” But that same bill contains targeted advantages not just for the alcohol industry, but other groups, too, from Florida citrus growers to U.S. legacy airlines.

Booze industry advocates say the savings generated by the legislation will enable entrepreneurs to expand, hire, and innovate. But their break could undermine Republicans’ arguments that their tax bill — which they will be touting during the crucial 2018 election — actually makes the tax code flatter, fairer, and freer from special interest influence.

Boon for booze

In December, as the U.S. Senate was crafting its version of tax legislation, the provisions governing beer hitched a ride on the bill, and they were ultimately included in the bicameral compromise bill that passed just before Christmas.

The measure cuts the federal excise taxes that brewers pay, a tax burden that grows larger the more product a brewer moves. By dollar amount, the country’s biggest brewers will slurp up most of the savings from the tax bill: operations that produce more than two million barrels a year will enjoy a $2 tax cut on their first six million barrels, representing a potential savings greater than $12 million a year.

But it’s the country’s smallest operations that may feel the tax cuts most: for businesses that produce under two million barrels a year, the federal tax burden drops to $3.50 a barrel from $7 for the first 60,000 barrels sold.

Advocates say that savings will make a huge difference for smaller operations looking to grow. Bob Pease, CEO of the Brewers’ Association, a trade group for craft brewers, said that small brewers are leading a renaissance of manufacturing and enterprise in cities and towns across the country. “To me, the bill reflects a modernization of the tax code,” he said. “It reflects the positive attributes that small brewers are bringing across America.”

Lauren Bennett McGinty, Executive Director of the Minnesota Craft Brewers Guild, said in a statement that “Minnesota’s craft breweries serve as strong, local economic engines, and this tax reform will help these small businesses continue to flourish and grow.”

The tax bill’s benefits flow beyond brewers: winemakers and distillers will see an excise tax cut under the legislation, too. Excise tax rates for liquor fall to $2.70 per gallon — down from $13.50 — for the first 100,000 gallons produced. More winemakers will have access to expanded tax credits, saving them money.

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Overall, the Republican tax bill could save the beer, wine, and liquor industry as much as $4.2 billion over two years, the time period for which the new excise tax cuts are authorized.

The language of the bill’s alcohol provisions hews closely to the stand-alone legislation introduced previously in the House by Paulsen, and in the Senate by Sen. Roy Blunt, a Missouri Republican.  

Paulsen hailed the successful inclusion of the language in a statement, saying the craft beer industry is “doing amazing things for local economies across the country, and Minnesota, in particular, is a prime example of what its success means for jobs and economic growth… Now, it will be easier for local breweries to focus on growing their business and the local economy by expanding, creating more jobs, and fostering a sense of community.”

Simplification drive goes flat

The merits of the alcohol tax reductions aside, how did they make it into a broader package that was supposed to curb —not add — to advantages enjoyed by specific industries?

On the floor of the House in December, just before the Tax Cuts and Jobs Act passed the chamber, a triumphant Speaker Ryan said that “for years now, the tax code has been skewed to the well-connected, full of special carve-outs and loopholes… Reform means we bring down rates at every level, and clear out loopholes.”

Throughout the fall, as Republicans tried to sell the public on their tax plan, they argued in favor of cutting popular deductions and breaks enjoyed by individuals and corporations in service of this goal of reform.

This argument was employed as Republicans sought to do away with the state and local tax deduction — a significant money-saver for taxpayers in higher-tax jurisdictions — and the ability to deduct interest from mortgage payments, a break popular with homeowners and the home-building and real estate industries.

Defending the GOP’s designs on the state and local tax deduction in October, Ryan said that “the general interest is going to have to trump over the special interest.”

In December, arguing against retaining the SALT deduction, 2nd District GOP. Rep Jason Lewis said “the question is, do we want very high rates with some interests getting a carve-out and others paying higher rates, or do we want a fairer, level playing field?”

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“When the tax code is filed with exemptions and carve-outs, vested interests continue rent-seeking and want to keep them,” he said.

The Tax Cuts and Jobs Act did limit the SALT and mortgage interest deductions, but it enacted new provisions in addition to the tax cuts on alcohol, like one that gives a tax incentive for Florida citrus growers to replant trees after last year’s hurricanes. The final version of the bill preserved other breaks — many of which were cut in the House plan — like one that eases the tax burden on pro sports owners looking to use public funds to build new stadiums.

To the Brewers’ Association’s Pease, the bill’s provision on beer is not a break, but an overdue correction of an unfair policy. “I know people want to look at the craft beverage bill as a ‘tax break,’” he said. “We don’t look at it like that. We look at it like, the federal excise tax on beer was put in place in 1862 to help pay for the Civil War. It’s an extra tax, that very, very few other businesses or industries are burdened with.”

Lobbyists for the alcohol industry also proved persuasive in the fight over the tax bill last fall. In general, the tax bill was a lobbying bonanza: the nonprofit watchdog Public Citizen found in a report that the majority of Washington’s 11,000 registered lobbyists reported working on the legislation.

In total, the alcohol industry’s various trade groups spent $22 million on D.C. lobbying in 2017, with much of that total bankrolling efforts on the tax bill. A report from the Intercept news site found that key Republican senators have deep connections to the alcohol industry: Blunt, the Missouri senator who sponsored the excise tax cut legislation in the past, has a son who is a registered lobbyist for MillerCoors, which pushed hard for provision. Additionally, Arizona Sen. John McCain’s wife, Cindy, owns a major beer distributor.

All about that base-broadening

To observers and tax policy experts, the inclusion of the alcohol tax cuts and other industry-specific provisions isn’t inherently bad, but it does undermine Republicans’ claims that their law constitutes real reform to the tax code.

Alan Viard, a tax expert at the American Enterprise Institute, a center-right D.C. think tank, the permanent cut of the corporate tax rate to 21 percent is the “heart and soul of this law.”

“There’s not that many new industry-specific tax breaks,” he said, “but there’s not the elimination of very many of them, either. It is a missed opportunity to broaden the tax base.”

Marc Goldwein of the Committee for a Responsible Federal Budget, a nonpartisan think tank, told the New York Times that “The whole purpose of tax reform is to eliminate tax breaks to simplify the tax code and reduce rates… But from what I can see, they only repeal one significant tax break, and very few if any tiny ones.”

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Viard says that actually doing the “base-broadening” of the tax code that Republicans talked about — the painful and politically unpopular work of eliminating deductions and advantages that some taxpayers and industries enjoy — is a sign of real tax reform.

The fact that not a lot of it was done in this bill, which had the backing of a Republican Congress and Republican president, suggests this work will be hard to do in the future, Viard explains. “Base-broadening is always hard. There are concentrated interest groups that will resist having their tax preferences taken away… having lower tax rates and a more efficient economy is a diffuse benefit that doesn’t draw concentrated lobbying support,” he said.

Viard says that any reform that truly eliminates loopholes and targeted provisions would need bipartisan backing to survive, as the last sweeping tax reform package did, in 1986. And it might happen only if the just-passed bill balloons the deficits and creates a crisis down the road.

“We’ve seen here now that a Republican-only tax bill is not going to do much in way of base-broadening,” he says. “In some sense, we shouldn’t be surprised.”