Incredible Details About Bourbon’s Economic Impact

THE MOST INTERESTING DETAILS FROM THE KENTUCKY DISTILLING ECONOMIC IMPACT REPORT

The Bourbon Experience has captured what preparers described as the most important and interesting findings in the most recent Economic Impact report accounting for the current industry conditions in 2021. Preparers have been providing this report each year since 2009 and often refer to the vast changes that have occurred in the time since then. The full report is titled; The Economic and Fiscal Impacts of the Distilling Industry in Kentucky, 2021 prepared for the Kentucky Distillers’ Association (KDA) by Paul Coomes, Ph.D. Economic Consultant, and

Emeritus Professor of Economics, University of Louisville, and Barry Kornstein, Economic Consultants with assistance from Rob Monsma, January 19, 2022. In this Bourbon Experience Blog post we drill down to the truly interesting details of the explosive growth of the industry, what it means for Kentucky, and some things you may not know about the hidden costs and taxes involved when producing and aging the fine spirits we all enjoy.

Distilling in Kentucky continues its incredible two-decade growth wave. Almost every important economic measure is up over our prior studies – facilities, production,

employment, payroll, investment, inventory, taxes generated.

Kentucky produces and ages 95 percent of the bourbon sold and consumed in the world. In 2009 our first report identified 19 distilling establishments in eight counties, directly supporting about 3,000 jobs. In 2021, we were able to identify 95 establishments in 40 counties, employing approximately 6,000 people.

Those direct distilling jobs support many other jobs around Kentucky, due to supplier linkages with other industries and to the spending and re-spending of employee payrolls in communities around the state. We estimate that the total annual economic impact of the distilling industry is 22,540 jobs, with annual payroll of $1.23 billion, producing $8.94 billion of economic output.

Among the most important and interesting findings in the most recent economic impact report which accounted for industry conditions in 2021 are:

The state database on licensed distillers reveals 95 distilling locations operated by 75

companies in Kentucky as of 2021, with several more license applications in the pipeline.

This is five times the number of distilleries documented in our original 2009 study, with

most of the growth due to the emergence of craft distilleries. There are distilleries now in

40 counties. While craft distilleries are distributed throughout the state, large “heritage” distilleries remain concentrated in the “amber triangle” region of Central Kentucky

between Lexington, Bardstown and Louisville, but also as far away as Owensboro.

Kentucky distillers produced 2.4 million barrels of Bourbon in 2020, and now have a

record 10.3 million barrels stored in warehouses. Adding in brandy and other aging spirits

brings the total barrel inventory to nearly 11 million.

In 2020 there were approximately 6,000 people working directly in Kentucky’s distilled

spirits industry, with annual wages and salaries of $602 million. Federal economic

statistics indicate that over the last two decades, the number of distilling establishments in Kentucky tripled, with an 83 percent growth in employment, and a 250 percent growth

in wages and salaries. For the first time, average annual pay per job surpassed $100,000.

The full economic impact of the distilling industry includes the linked activity of suppliers and new household spending. In our original study, focused on 2008 activity, we

estimated the total economic impact in Kentucky to be 9,848 jobs and $442 million in

payroll. For 2020, we estimate that the total economic impact has grown to 22,540 jobs and $1.23 billion in payroll – more than double that of 12 years prior.

The distilling industry in Kentucky has been rapidly adding jobs over the past two decades, while on net, the remainder of the state’s manufacturing industry has shed employment. However, due to the enormous rise of craft distilleries in other states, Kentucky’s national share of distilling jobs has slipped from 43 percent to 30 percent from 2001 to 2020. Likewise, the state’s share of distilling jobs has slipped from 24 percent to 6 percent in the last 20 years. Kentucky’s share of national distilling payroll has remained in the 45 to 50 percent range, due to the location of several major industry headquarters in the state.

Kentucky distillers shipped $391 million of products abroad in 2020. The industry’s

exports are dominated by whiskies, with Bourbon the main component. The noticeable

decline in 2020 was due to the heavy retaliatory tariffs imposed on whiskey by the

European Union and China, reducing Kentucky whiskey exports by $170 million. Other

products exported by Kentucky distillers include brandy, liqueurs, cordials, vodka, rum,

and gin.

The distilling industry stands out from others in terms of the unusually high tax burden as it relates to the portion of output, with taxes accounting for 21 cents per dollar of output. Only three other industries generate a higher tax share – wholesale petroleum, commercial fishing, and tobacco manufacturing – and all are much smaller than distilling in terms of Kentucky employment and payroll. The wine industry is taxed at 3.2 cents per dollar of output; breweries are taxed at 8.2 cents per dollar output. For most manufacturing sectors, the portion of each dollar of output that goes to taxes is less than a penny.

The distilling industry is estimated to directly or indirectly be responsible for about $286 million in state and local tax payments in Kentucky annually. The total includes local and

state property, taxes, local occupational taxes, and Kentucky state individual income and

sales taxes. State government accounts for 80 percent of the total tax revenues, with 20

percent going to local government entities.

Kentucky remains the only jurisdiction in the world that taxes aging spirits in the barrel,

largely because in other states and countries it is viewed as a part of the production process. For 2021, the Kentucky Department of Revenue estimates local and state governments would collect $33.2 million in taxes on barrels aging in inventory, and that inventory is assessed at $4.4 billion. Another $10.4 million in property taxes were paid last year on distillers’ real estate and equipment.

Kentucky distillers paid more than $1.8 billion in federal excise tax on alcohol production in 2020. That means the Commonwealth’s signature industry accounted for 22 percent of

alcohol excise tax paid nationally, by far the largest share by any state.

The value of real and tangible property owned by Kentucky distillers has quadrupled in the last decade, while the value of the distilled spirits inventory aging in barrels has nearly tripled in that time. These increasing values mean distillers are paying considerably more in more real and tangible property taxes, resulting in a marked increase in impact of the distilling industry over that time.

KDA members reported capital spending of $1.9 billion over the last five years, almost equally split between construction and other items, such as machinery, equipment, and

furnishings. Moreover, they plan to spend $3.3 billion over the next five years for a total of $5.2 billion in capital investment over a 10-year period. Every KDA member, whether a large Heritage producer or a small Craft distiller, reported significant investments. This is by far the highest investment spending we have documented over our five studies since

2009.

Distilling continues to have the second-highest job multiplier across 329 manufacturing industries with activity in Kentucky; the only one with both more jobs and a higher

employment multiplier than distilling is light truck and utility vehicle manufacturing. Our

IMPLAN custom regional input-output model is used for estimating the economic impact of distilling, the most conventional method available for such analyses. These models can

predict the impact of changes in one industry on all other industries in a regional

economy. The most common summary measure of an industry’s economic impact is called a multiplier, which is the ratio of the change in the total economy to the change in

the industry.

A hypothetical $10 million new distillery construction project, based on the report’s economic models, would create 85 direct construction jobs with a $4.9 million estimated payroll. In total – with direct, indirect and induced effects combined – the project would lead to

$17.5 million in sales increases across Kentucky firms, 130 new jobs, and a $7.2 million

payroll increase statewide.

Corn production grew faster in core distilling counties the past two decades than it did statewide, data indicate. This correlated growth was especially apparent in Nelson,

Shelby, Washington, Mercer and Marion – where large, heritage distillers are located.

Nelson County is, of course, home to many heritage distilleries. Marion County is home to

Maker’s Mark distillery and has seen a tripling of corn production over the past 20 years.

KDA now has four levels of membership: Heritage, Proof, Craft and Educational. Heritage

members have an inventory of over 50,000 barrels. Proof members have an inventory of between 10,000 and 49,999 barrels. And the Craft members have fewer than 10,000 barrels.

Moreover, as another sign of growth in the industry, there are 16 new Craft distilleries in the

pipeline for membership in the KDA.

Unlike most other distilled spirits, Kentucky Bourbon is aged in barrels and stored in

warehouses for years before being bottled and shipped to customers. State and local

governments tax this property while it ages, and therefore we have public data available on the

amount placed into barrels annually, as well as the inventory of barrels by age. Data go back

decades, and we show the recent history in the charts below, all in terms of 53-gallon

containers. One can see the drawdown in barrel inventory through about the year 2000, and

then the effects of the recent surge in demand, with subsequent investments in production

facilities, new warehouses, and barrel inventory. Indeed, annual production last year was double what it was just a decade ago.

About 2.4 million barrels of new Bourbon were produced and added to warehouse inventory in

2020, the most recent year available. There were 10.3 million barrels of Bourbon aging in

Kentucky warehouses as of December 31, 2020. Adding brandy and other aging barrels of

spirits, there are nearly 11 million barrels aging in Kentucky warehouses. The value of all

inventory in bonded warehouses (which includes bulk inventory and cases being held for

shipment as well as distilled spirits in barrels) was assessed for tax purposes at a record $4.4 billion in 2021. Inventory subject to county-level property taxes (mostly in barrels) was assessed at $2.55 billion in 2020, when the total bonded warehouse assessment was $3.84 billion.

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