What Does Changing the Federal Beer Tax Mean for California’s Brewers

Currently many beer industry trade groups (e.g Brewers Association ) are working to reduce the tax brewers pay to the federal government per barrel of beer. This post looks specifically at H.R 4278, which both lowers the tax on the first 60,000 barrels of beer to 3.50 from the current $7.00 and raises the ceiling for this break from 2 million barrels to 6 million barrels.

To begin with, I’m going to start with a traditional economic view of how a tax on producers impacts the market. As anyone who sat through an economics class will recall, these sorts of analysis start with a chart of a supply curve and a demand curve. Where those two curves (straight lines in the case of my chart) intersect is called the equilibrium. This point determines both the market price of the product and the quantity produced.

A traditional supply and demand chart showing the impact of a producer tax

The above chart shows two states: before the tax on the producer and after the tax on the producer. Where the red and green lines intersect represents the market equilibrium before the tax. Where the red dotted line and the green line intersect represent the market equilibrium after the tax. As the chart shows, a tax on the suppliers causes a reduction in the amount of product they supply to the market and an increase in the market price consumers have to pay for each good (e.g. pint of beer). The shift is directly related to the tax.

If we reduce the tax, the result will be a shift back towards the pre-tax equilibrium, which will reduce the price to consumers and increase the amount produced by the suppliers.

How does all of this apply to small California brewers?

First, we can say that if the Federal Beer Tax is reduced, more beer will be supplied to the market in California and the market price of that beer will be lower (in aggregate).

My business partner and I have developed a database based on public records that allows us to say what impact the change in tax will have for California Brewers.  The following graph is based on our database of brewer production, and shows the impact of the proposed law change on Federal beer taxes paid by California brewers:

2006 to 2009 Impact of Proposed Federal Beer Tax Reduction

In aggregate, the proposed change would have reduced Federal Beer tax on California brewers by about 17% per year.  Unfortunately, the beer when talking about microbreweries or brew pubs the aggregate isn’t very useful.  In our report, we show that the median microbrewery or brew pub in California produced approximately 500 barrels in 2009.  That means the proposed tax represents a 50% reduction for those firms (approximately $1750).


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