A new bill in Congress aims to lower taxes on craft brewers, and at the same time raise the limit on how much beer a brewery can produce and still be considered a small brewery.
The bill, cleverly named Brewer's Employment and Excise Tax Relief Act, or the BEER Act, was introduced last week by Senators John Kerry (D-Mass.) and Mike Crapo (R-Idaho) . The bill would lower the tax small brewers pay on the first 60,000 barrels of beer from the current $7/barrel, down to $3.50. It would also lower the tax collected on production above 60,000, from $18/barrel to $16/barrel, with a cap for the lower rate at 2 million barrels. In addition, the ceiling on production that defines what is considered a small brewer would be raised from the current 2 million barrels up to 6 million barrels. Besides the 2 co-sponsors, the bill has 15 other Senate supporters
The senators argue that they are merely updating the tax, since rate for the small brewer tax has not been changed since the 1970's. They also argue that the 1,525 small brewers in the country create local jobs, with the industry as a whole employing almost 100,000 people. Because these small brewers must compete with large, multinational corporations, this bill will put small brewers on more even footing with the large players in the industry. The tax cuts will allow these breweries to expand, creating more jobs as well as creating increased demand for American grown barely, wheat, and hops. They estimate that the tax cut on production under 60,000 barrels will save small brewers close to $19.9 million dollars a year, and the new $16 rate will save brewers another $27.1 million in tax bills.
Given the nature of the bill, it is easy to figure out how much of a tax savings this bill, if passed would give to individual brewers. A savings of $3.50/barrel on the first 60,000 barrels would result in a tax savings of $210,000, should the brewer produce the full 60,000 barrels. The next $2 reduction in the rate for the next 1.94 million barrels would save brewers an additional $3.88 million per year in tax payments, once again assuming the brewer produced that much beer. So if this bill passes, a small brewer would now be defined as a brewer who produces less than 6 million barrels of beer per year, and those small brewers could save up to $4.09 million a year in tax payments.
So who is affected by this bill and how can investors act on this bill? Well known small breweries like Sierra Nevada, Harpoon, Magic Hat, and Yuengling are not publicly traded, and companies like Anheuser-Busch (NYSE:BUD) or Molson Coors (NYSE:TAP) are too large to get under the 6 million barrel limit. It seems that Boston Beer Company (NYSE:SAM), maker of Sam Adams, is the only well know brewer who would be covered by the rule changes. In 2010 the brewery shipped 2.2 million barrels of beer, and since Anheuser-Busch was purchased by InBev, Boston Beer Company is now the largest American owned brewery. Based in Massachusetts, the company hails from the same state as Sen. Kerry.
Based on Boston Beer Company having 13.6 million shares outstanding, a $4.09 million dollar tax break would add $0.30 to full year earnings. Multiply that figure by the 24.5 P/E multiple on the stock, and this tax break could add $7.36 to the share price, or 8.5% from its current price of $86. While the passage of this bill is uncertain, its passage would be a positive for shareholders in SAM. Investors in SAM should track this bill closely, given the potential benefits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.