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

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

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.

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.

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?”

“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.”

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.”

Comments (7)

  1. Submitted by Curtis Loewe on 01/17/2018 - 11:47 am.

    Paulsen is the Problem

    US Rep Erik Paulsen fails to tell you that because of the new Federal Tax bill (which he helped craft on the House Ways & Means Committee) over 10 million hard working Americans will lose their health care and the deficit will increase by $1.5 Trillion ! The tax bill gives much more to the rich and crumbs to the middle class.

    Yes, we needed to lower the corporate tax rate to remain competitive in the world economy. When President Obama suggested lowering the rate to 22% House Republicans including Erik Paulsen said “NO that would bust the budget and increase the deficit”…..but now with Republican control of the Federal government it is just fine to blow up the budget because the next thing that Paulsen and his bandits want to do is to hack away at Social Security and Medicare. How bold of Paulsen harm our Seniors so the rich can get more.

    Sums up my view that Paulsen is the Problem and he is not interest in bipartisan legislation just the GOP trickle down. This November the good citizens of the 3rd District can send Erik Paulsen to the private sector because he has been a career politician !

    • Submitted by Vici Oshiro on 01/17/2018 - 05:12 pm.

      corporate taxes

      Curt, You’ve got it right – again. I support cutting the corporate tax rate IF AND ONLY IF we also pass the legislation needed to collect it. Now too many corporations pay little or no taxes because they squirrel away their profits in off shore tax havens. Cut the rate and then collect the taxes!

    • Submitted by Nick Foreman on 01/18/2018 - 04:12 pm.

      Benefits for medical device companies (who leave the US)

      And beer companies. That is the extent of his “work” in Congress. He makes trump look more busy

  2. Submitted by Dan Landherr on 01/17/2018 - 12:25 pm.

    Why would brewers capture any of that savings?

    A simple economic analysis would say that absent the excise tax, competition would drive the price lower and consumers would benefit. The producers only benefit if they are able to keep prices at the same level. If they are able to keep prices at the same level and increase profits then we don’t have a competitive marketplace and instead have a cartel operating in the liquor industry. What is the public interest in giving more profit to a liquor cartel?

  3. Submitted by Ray Schoch on 01/17/2018 - 01:54 pm.

    Surprise

    Indeed, we shouldn’t be surprised. The Republican Party has abandoned fiscal responsibility in favor of a toxic combination of ideology and campaign contributions from assorted lobbying groups. The resultant bill represents tax “reform” in much the same way that your Aunt Jane changing her will to give more of her assets to your smarmy relative than to you represents inheritance reform. Nothing about the new law suggests “reform,” only “redistribution,” and in this case, as has happened several other times in recent years, the redistribution is from the bottom and middle to the top.

  4. Submitted by Dennis Wagner on 01/17/2018 - 05:59 pm.

    As a high volume Craft beer drinker

    Haven’t seen prices drop to us consumers! Same old, same old: They chose winners and losers, guess giving the brewers a couple bucks, Paulson thinks he is being charitable, or mea culpa for screwing us on everything else. He just stripped us of states rights, property and income tax, so we lose $100’s if not $1,000’s on income and property tax deductions, which we used to help our communities, guess his perspective let them rot. He clearly chose winners and losers, suppose Mr. deceptive figures we can go cry in our beer as the millionaires & billionaires go laugh about how they screwed us taxpayers, over their Cabernet!

  5. Submitted by John Evans on 01/17/2018 - 07:42 pm.

    Paulsen gives big cake to mega corps, crumbs to craft brewers

    First, lowering the excise tax that small brewers pay lowers a barrier to entry into the market. This is a good thing.

    But more than 92% of the beer sold in the US is sold by just two transnational mega-corporations. MillerCoors, which the article mentions as a major player owns at least 25 of the brands you see at the liquor store, including, for instance, Leinenkugel’s.

    But MillerCoors is a joint venture of Molson Coors and SAB Miller, which competes only with Anheiser Busch InBev for global dominance. Several of the largest “craft” brewers and all of the foreign beers are owned by one or two companies.

    So guess where almost all the benefit goes? Local breweries get some nice crumbs, but they’re only crumbs from the big fat cake the Erik Paulsen baked for the two transnational giants that own the brewing business.

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