Holiday cocktail party season is just around the corner. But impending tax hikes and new tariffs are souring the mood for small businesses that sell French wine, craft spirits, and Spanish olives, and could mean higher prices for these and other holiday staples this year.
A new 25 percent US tariff on many European wines, liquors, cheeses, and other luxury agricultural products took effect Friday.
Meanwhile, craft distillers, brewers, and vintners are bracing for the Dec. 31 expiration of a two-year-old federal excise tax break designed to help grow the industry. If the tax breaks expire, many craft beverage makers say, growth will falter.
The fallout from the fiscal moves will hit at the most hectic — and important — time of year for small companies and consumers.
“We’re in for a hellish ride,” said Ihsan Gurdal, the co-owner of Formaggio Kitchen, which has locations in Cambridge and the South End.
Gurdal, who like other specialty food store owners is deeply unhappy with the tariffs, now expects to take a hit on the huge orders of parmesan and panettone he’s placed for the holidays.
“This is going to hurt the public and going to hurt the small producers” of cheese and other gourmet items he purchases abroad, he said.
Gurdal said it will also eventually impact American producers if they ramp up production, only to see demand disappear when the tariffs end.
“It’s all nickels and dimes in this business,” he said, referring to the food industry’s notoriously tight margins. “This really hurts.”
Some economists said customers prepping cheese platters and bar carts for holiday parties will bear the brunt of the tariffs’ financial burden.
“To me the story is not about producers whining, it’s really consumers that are going to be affected,” said Robert Stavins, a professor of environmental economics at Harvard’s Kennedy School of Government.
The United States imposed the tariffs, with the approval of the World Trade Organization, to punish the European Union for its illegal subsidies of European planemaker Airbus.
The tariffs are just the latest to hit vintners, beer brewers, and spirit distillers. They’re paying more for glass and aluminum imported from China, used to make bottles and cans, and China has also instituted retaliatory tariffs on US wine exports.
Distillers have also been contending with European tariffs on American whiskey imposed last year in retaliation for US tariffs on steel and aluminum imports.
The tariffs and potential tax hikes are a “double whammy” for wine sellers like Kevin Mehra, the chief executive of Boston-based Latitude Beverage Co., which purchases surplus wines from vineyards around the globe and bottles them under the 90+ Cellars label, among other brands. Mehra has two shipping containers full of Côtes de Rhône and Riesling en route from France, and he estimated he’ll have to pay an additional $15,000 in tariffs per container.
Mehra funneled his tax savings from the tax break into marketing, and that investment helped drive a 12 percent sales increase this year. But the uncertainty about whether the tax break will expire has him in a holding pattern; without knowing his tax liability for the coming year, he said, it’s tough to plan.
“It’s a hyper-competitive industry landscape, with slow to no growth, so it’s hard to take prices up” for each bottle he produces, Mehra said. The timing of the two challenges couldn’t be worse, he added. “We’re going into our busiest season, which is where we make all of our money.”
He fears the tariffs will still be in place as he prepares to ship bottles of rosé in January. The pink drink is a rare area of growth in the wine industry. But the tariffs could stunt it, he said.
The potential tax increase also worries distillers like Dave Willis, cofounder of Bully Boy Distillers in Roxbury.
Bully Boy saw its excise tax rate drop for its craft vodka, gin, and rum from $13.50 per proof gallon to $2.70 through the Craft Beverage Modernization and Tax Reform Act. The bill, over a decade in the making, was enacted at the end of 2017 to help promote craft alcoholic beverage businesses, and distillers were among its largest beneficiaries. Unlike beer and wine, no reduced tax rate existed for small distillers prior to 2018.
In Willis’s case, the tax break worked exactly as it was meant to. In the two years since it was imposed, Bully Boy moved to a larger facility in Roxbury, where it opened a new tasting room, and expanded its reach in New England by hiring full-time sales reps in three states. Willis said he paid $46,275 in excise taxes in 2018; without the tax breaks he would have paid $231,285.
The twin effects of higher taxes and tariffs could change everything for craft distillers like him, he said.
“I think there’s going to be a bloodbath if the rates reset to the higher level,” said Willis. “For the smaller guys it will be a horrifying wake-up call. That increase in tax rate for a lot of guys is their profit margin. That’s going to vanish.”
Matt Nuernberger of GrandTen Distilling in South Boston agreed.
“We finally got to the point where we beat national brands on taste, and we’re competitive on pricing, but now we’re back to being handicapped again,” he said. “It’s frustrating.”
It’s unclear when the tariffs might end. But Congress could still vote to renew the tax breaks, which appear to have bipartisan backing, before the year’s end.
“We have the support and executed our ground game,” said Bob Pease, the president and chief executive of the Brewers Association, which represents 3,500 craft breweries across the country. Now he just needs Congress to act.
But not everybody is sure that would be a good thing. Some argue that the tax break included provisions that awarded tax breaks to massive beverage-industry giants as well as small start-ups.
Adam Looney, a senior fellow at the Brookings Institute noted that there was a public health rationale for imposing taxes on liquor in the first place.
“For a long time we liked having high alcohol taxes because it deterred people from drinking too much, and we’re still happy to discourage people from smoking and vaping,” he said.
So if the trade wars and tariffs leave Americans drinking less booze, he said, that might not be a bad thing.
“Maybe it’s good if consumers feel it at the register,” he said.