Whether you enjoy a glass occasionally or have sworn off brown liquor since college, there is no denying that bourbon distilling has once again become a big business for the state of Kentucky. Horses and coal put the state on the map, but bourbon is what is drawing the largest crowds, leading distillers to undergo capital improvements of over $2.3 billion collectively along the bourbon trail.
Distilleries in Kentucky employ just over 20,000 people with annual payroll of close to $1 billion. Recent estimates show 9.2 million barrels of bourbon currently aging in rickhouses, a little over two barrels per Kentuckian, generating property tax revenues of approximately $29 million annually. While this is good news for the State’s finances, it is causing issues for distilleries big and small. Kentucky is the only state with a barrelage tax, which may ultimately be accountable for the sudden growth of distilleries outside of Kentucky. In 2014, the Kentucky legislature passed a corporate income tax credit to help offset the taxation, however, the rapid increase in aging barrels has greatly reduced the benefit of the tax credit. The value of aging barrels was around $3.8 billion in 2020, an increase of $400 million since 2019 and twice the assessed value of barrels in 2010.
Booms and busts
Prior to 2019, the previous peak of barrels in rickhouses was in 1968 when the state had 8.7 million barrels aging. Bourbon started losing its luster in the 1970s and was out of favor through the 1980s when rum and vodka took over the top spots nationally. During that time, much of the bourbon produced in Kentucky was exported overseas. However, prominent bourbon distillers saw an opening for another domestic bourbon boom in the late 1990s, when the Beverage Testing Institute in Chicago obtained a bottle of Pappy Van Winkle in 1997 and gave it a score of 99 out of 100 – the highest rating ever given to a whiskey. Anticipating the resurgence of bourbon enthusiasts, the Kentucky Distillers Association started the Bourbon Trail in 1999 with ten distillers. Today there are 38 distilleries only 20 minutes from each other, and the total barrelage has increased 164% since 2000.
Crafting and shipping
The Kentucky Bourbon Craft Tour brought 1.4 million tourists to Kentucky in 2018. Craft distillers, much like craft beer brewers, are popping up around Kentucky and across the country attracting a diverse population of younger bourbon drinkers. Many of these smaller labels lack the equipment, storage facilities and aged stock to support a full line of bourbon, and therefore, source barrels of bourbon distilled at larger distilleries to craft their supply. Benefitting craft distillers in the state, the Kentucky legislature enacted a law in December, 2020 that allows bourbon to be mailed by distillers and liquor stores to individuals outside the state. This is somewhat of a sticky wicket however, where larger distillers could frustrate their national distributors by selling directly to the public. The Kentucky law is only reciprocal with states that have similar laws, and is subject to age restrictions by virtue of having the purchaser sign for the mailed spirits. This shipping should increase income of Kentuckians in the bourbon and liquor businesses as well as produce more revenue for the state.
Kentucky has a history of strong bourbon exports, which declined by 35% in 2020, after tariffs were imposed on U.S. spirits as a result of unrelated trade disputes. Bourbon shipments to the European Union (EU) dropped by 50% last year. The tariff situation may worsen in June if the EU, which has been Kentucky’s largest global market, doubles tariffs on American whiskey to 50%. The Kentucky Distillers’ Association is calling on the Biden Administration to deescalate the dispute and resolve the tariff situation. The bipartisan Congressional Bourbon Caucus is also working hard in Washington to resolve the issues straining the export business. “This is about standing up for an industry that’s vital to our Commonwealth and promoting American spirits around the world. The production, distribution, and consumption of Bourbon creates and supports thousands of good jobs in my district alone and is a key driver of our local economy,” Congressman John Yarmuth said to KY Forward in February of this year.
How long will it last?
While global demand is currently in question, we expect domestic demand to remain strong, as it did through the pandemic, and to continue to provide Kentucky with revenue through various economic situations. The bourbon industry has certainly seen busts in the past, but this time may be different. In a recent interview for the new book Pappyland: A Story of Family, Fine Bourbon, and the Things That Last, author Wright Thompson asked Julian Van Winkle, III, Pappy’s grandson, when he expected the current bubble might pop, and he answered, “I thought it was going to pop years ago. I’m stunned we’re still doing this.” Cheers to a long road of bourbon revenue ahead. See you on the trail.