Ahead of last week’s midterm elections, the Brewers Association’s (BA) federal and government affairs teams shared the trade group’s 2023 legislative priorities during a “Collab Hour” webinar.
BA general counsel Marc Sorini, senior director of federal affairs Katie Marisic and state government affairs managers Nancy Palmer and Sam DeWitt laid out the legislative fights ahead for the group and its members, including franchise law reform, direct-to-consumer shipping rights and tax equivalency efforts, as well as provided updates following the Department of Treasury’s report on competition.
Small Brewers Caucus to Lose at Least 40 Members
The BA Collab Hour was held five days before the midterm elections. Without knowing election results, the BA noted that it would be interacting with at least 60 new members of Congress in the next session, with seven senators and 53 representatives retiring, not running for re-election or passing away.
Forty of those congressional members were part of the Small Brewers Caucus – the “largest special interest caucus in the [House of Representatives]” – including caucus co-founder and chairman Peter DeFazio, Marisic said. DeFazio, who has served as the U.S. representative for Oregon’s 4th congressional district since 1987, announced his retirement last December.
“We’re going to be looking to build a lot of new relationships and doing a lot of education to make sure that the new legislators that are coming into the federal government understand what a small and independent brewer is,” Marisic said. “How you might be different or how you might be similar to other businesses, how you are regulated and anything that might potentially impede or help your business.”
That education will not only help the BA with future legislative efforts, but with protecting past legislative victories, including federal excise tax adjustments passed in 2017 through the Craft Beverage Modernization and Tax Reform Act.
“That is one of the things that really helped us educate members of Congress about small independent breweries and build political capital,” Marisic said. “But the thing about taxes – especially recalibrated taxes that result in lower rates for people – are that they can often be on the chopping block.
“Every year that we keep those recalibrated excise tax rates, a lot of work is done on the back end to make sure it’s not being as a pay-for,” she continued. “So it’s an ongoing win and something that we continue to educate Congress about.”
TTB Opens Comments for Proposed Rulemaking
In February, the Treasury, in conjunction with the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) released its report on competition in the beer, wine and spirits industries. The 64-page report detailed eight overarching concerns with the alcohol industry and recommendations to improve competition, including proposals for updated regulations from the Alcohol and Tobacco Tax and Trade Bureau (TTB).
During the webinar, Sorini predicted the next step would be an Advanced Notice of Proposed Rulemaking (ANPRM) from the TTB soliciting comments on how regulations can be “tightened up, modernized” and “clarified.” Like clockwork, the TTB released its ANPRM Thursday and will accept comments through March 9, 2023.
Sorini told Brewbound that the BA is “encouraged that the TTB kicked off this process more quickly.”
“I think many in the industry agree with us that the trade practice rules need updating and modernizing,” Sorini said. “The last material changes were made in 1995 – a time either before or at the dawn of many widespread current practices. Those new practices include B2C ‘third-party provider’ platforms, online B2B ordering systems, modern category management practices, and electronic couponing and ‘scans.’”
The BA is “at the start” of its process of gathering feedback from members and its Government Affairs Committee that will help draft its comments for the TTB, Sorini said. He noted that the trade group typically files comments on rulemaking projects closer to the “due date” (March 9), and that the TTB “frequently extends the comment period in such proceedings.”
While trade groups such as the Beer Institute (BI) and the National Beer Wholesalers Association (NBWA) expressed criticism earlier this year for the Treasury’s initial report, the BA applauded the reports recognition of laws that “inhibited the growth and competitiveness of craft producers,” and recommended the department re-examine state franchise laws, direct-to-consumer access and ways to battle slotting fees and other “discriminatory conduct” within the industry.
The BA has also highly encouraged the TTB to access its regulations around consolidation within the industry. Sorini called out the planned acquisition of Albertsons by Kroger, a $24.6 billion deal and major consolidation within the grocery industry. The proposed merger has received criticism from both stakeholders and regulators, threatening its planned closure by early 2024.
“Those things make it generally more inhospitable for craft brewers to operate,” Sorini said of the deal. “As we have been in the past, we’re going to be active in making sure that small brewers’ voices are heard when it comes to things like mergers that make it perhaps more difficult for us to access markets.”
The BA is also gearing up for a possible transition from voluntary alcohol facts disclosures, such as calories, to mandatory disclosures, which the Treasury is encouraging from the TTB. Similarly, the TTB will likely explore making allergen labeling mandatory.
“We’re on record as supporting mandatory allergen labeling – it’s good safety – but of course in all of these, small brewers’ interests need to be recognized,” Sorini said.
He pointed specifically to small batch offerings, noting that it might not “make sense” to have full testing requirements for products that a company is just “going to make one batch of.”
Beyond the Treasury report, other federal priorities for the BA include continued advocacy for the USPS Shipping Equity Act, which would allow beer to be shipped through the United States Postal Service. Additionally, the trade association will pursue ways to support the beer industry’s supply chain, including additional funding for the USDA Agricultural Research Services – which will support the health of hop and barley – and Section 232 tariffs on steel and aluminum.
State-Level: Self-distribution, Franchise Law Reform and Multiple Tax Fights
Palmer and Dewitt celebrated some of the BA’s state-level accomplishments in 2022, including fights against lowered excise taxes for ready-to-drink canned cocktails (RTDs) in Arizona, New Jersey, Washington and Vermont and grassroots advocacy in Illinois, New Jersey, California and Colorado.
In 2023, the trade group will continue to focus on those priorities, as well as self-distribution, franchise law reform and several tax fights.
Self Distribution ‘Compliments the Three-Tier System’
With existing legislation, 40 states and Washington, D.C., have “some form of self-distribution,” Palmer said. Moving forward, the BA plans to expand those allowances in those states.
Additionally, the BA will advocate for adoption in the states that don’t have a system in place – states that “are really putting their small brewers at a disadvantage not only to the larger brewers in the state” but also “brewers from out of state,” Palmer said.
The NBWA and its members have fought against self-distribution efforts in some states, arguing that it can interfere with the established three-tier system. However, wholesalers “regularly misidentify” how allowances interfere with the system, Palmer said.
“Self-distribution compliments the three-tier system in that there is no federal law historically that has created a three-tier system,” Palmer said. “At the federal level, it’s a two-tier system, wherein brewers and wholesalers may be wholly-owned by each other.”
Self-distribution does have the potential to interfere with franchise laws, Palmer said. She cautioned advocates to be aware of existing laws in order to put up the best argument for self-distribution.
“If you draft self-distribution legislation such that only new brewers can access it, but brewers that are currently in contract cannot, we’ve seen that creates potentially some problems,” Palmer said. “So when it comes to self-distribution, as a team at the BA, we would love to see any legislation that anyone is proposing to make sure that it lines up and can be used in conjunction with the state’s franchise laws.”
The BA will also focus on reforming some of those franchise laws, which the group believes are outdated as industry dynamics have changed.
Much of the existing franchise law structure was designed in the 1980s, when there were “very few small brewers,” Sorini said. At the time, the focus was on national brewers dealing with “mom-and-pop wholesalers,” placing the “legal burden” on brewers to show cause for termination of contract. Now, with the “proliferation of small brewers,” the “dynamic is reversed, and yet the law hasn’t kept up,” placing wholesalers “in the driver’s seat,” Sorini said.
“Most craft brewers really don’t have the resources to go up against their wholesalers in a legal proceeding and so, in effect, they are tied to their distributor,” Sorini said. “And the distributor really can decide whether it wants to hold the brand, even if it wants to hold the brand and do very little with it. Or, if they’re being nice, they might swap you so they get paid for another distributor.”
There was momentum behind franchise law reform a few years ago, with changes in Vermont, Maryland and Kentucky, but the COVID-19 pandemic halted that progress, Sorini said. Advocates are looking to 2023 as “the year to get things back on track.”
The BA is “not in favor” of repealing existing franchise law “outright,” Sorini added. The focus is instead on creating “termination mechanisms” that allow for not-for-cause termination, allowing smaller brewers to have “control over their brands.”
In a similar vein, the BA will continue its advocacy for DTC shipping, protecting existing allowances in states such as California, and bringing the practice to states without.
“We think it’s a good way for growers to build their fan base and build their customer base,” DeWitt said. “We understand that it may not pay dividends immediately for everywhere, but it does expand opportunity for those brewers, widens their marketplace and makes national and regional festivals more valuable.”
States Running on Deficit Should be ‘On Guard’ for Tax Increases
The BA will have several tax-related priorities in 2023, including fighting against beer tax increases.
Palmer warned brewers in states running on a deficit to be “on guard” for increases, which she said are usually a result of revenue concerns, rather than public policy. While there are arguments that tax increases fight public drinking, it “fail[s] to influence problem drinking,” Palmer said. Additionally, those increases tend to be “regressive taxes” where the “poor are paying more.”
If beer tax increases are brought up, Palmer suggested advocates place liquor in Legislatures’ sights, as the price of liquor has fallen and “might be a better target for policy intervention.”
On the other side, there are states that are in surplus – more common this year with the help of government funds from the pandemic. In those states, if there are also high excise tax rates, it may be time to “reset” and ask for rate reductions, Palmer said.
“It’s all about timing it right with the state budget,” she said.
Additionally, the BA will continue its fight against tax equivalency efforts for spirits-based RTDs.
The Distilled Spirits Council of the United States (DISCUS) has prioritized lowering state excise taxes for spirits-based RTDs, planning to propose changes in 10 states in 2023. The spirits trade group’s supporting argument is that “a drink is a drink,” and spirits-based RTDs with a similar ABV to malt- or sugar-based offerings should be taxed the same.
“We disagree with that wholeheartedly,” DeWitt said.
The BA and the Beer Institute (BI) fought equivalency efforts in Alabama, Arizona, Hawaii, Kentucky, Maryland, Washington and West Virginia in 2022.
“This is the first of many, many fights to come,” DeWitt said. “These attempts to lower taxes on RTD canned cocktails really is a never-ending battle.”
The BA believes lowered tax rates for RTDs will result in a loss of shelf and cold box space for beer. Additionally, the trade group argued that the theory often touted by DISCUS that lower rates will lower costs for the end consumer has “not come to fruition.”
This theory was highly debated in the past week following a report by Public Sector Consultants (PSC) analyzing spirits-based RTD prices in Michigan and Nebraska, two states that adopted lower excise tax rates. PSC’s study found that RTD prices in those states have increased exponentially since the adoption of lower rates, outpacing category price increases and inflation. DISCUS said the report is “misleading” and has called its credibility into question.
The battles between industries are not even close to being over, as the tax fight is not spirits’ “end game,” DeWitt added.
“This really is something that will go on and on and on,” DeWitt said. “Their end game is to lower taxes on the bottle of bourbon. They’ll lower the taxes on the bottle of gin. [They’ll] get those products on to convenience stores and grocery stores over the longer term. This is just a step in that direction.”