LOUISVILLE, Ky. — Among the flurry of bills passed and signed into law at the end of Kentucky’s legislative session was House Bill 5.
The legislation implements tax cuts for Kentucky’s multibillion dollar bourbon industry by gradually phasing out key funding, currently used by schools, fire and police departments across the state. Here’s what to know.
What is Kentucky’s bourbon barrel tax?
The barrel tax is a property tax on aging spirits in Kentucky. Distillers are taxed per barrel, year-over-year.
So, if a barrel of bourbon has been aging for 10-years, its owner has paid the barrel tax ten times.
Kentucky taxes distillers at a rate of $0.05 per $100 in value. On average, distillers pay about $200 per barrel.
That tax revenue has become vital to Kentucky’s bourbon-producing communities, who use the money to help fund local fire departments, police departments, emergency medical services, school districts and more.
What does the new law do?
When HB 5 becomes law in January 2026, Kentucky will begin to gradually phase-out the bourbon barrel tax, eliminating it by the year 2043.
The law also creates a tax exemption for the bourbon industry, excluding social media marketing from taxation.
HB 5 garners strong reaction from supporters, opposition
Many HB 5 supporters say the barrel tax hinders business prospects for Kentucky’s signature industry.
“It’s a barrier. It's an anti-growth, anti-competitive tax,” Jim Waters, CEO of the Bluegrass Institute for Public Policy Solution, said. “When we think about entrepreneurs–or startup craft distillers–we want to remove the barriers for them to come and invest in Kentucky.”
Waters said the tax cut is necessary to keep Kentucky competitive with benchmark states “increasing their piece of the distilling pie.”
Kentucky remains the marketplace leader, producing 95% of the world’s bourbon supply. The commonwealth’s booming sector is nearly a $9 billion signature industry.
Trailing behind are states like Tennessee, Illinois and Texas.
“Importantly, for Kentucky, the bourbon tax is the only type of tax in the world like this,” Waters said.
The Kentucky Distillers Association (KDA) called the barrel tax a “discriminatory tax.”
Ahead of HB 5’s passage, KDA said, “the success or failure of House Bill 5 will determine whether Kentucky's distilling industry continues to call the Commonwealth home, bringing jobs and tax revenue as it grows, or whether it is forced to look at other states for future growth or even potentially relocating existing facilities.”
“We don't want to see either current distillers move their barrels to another state or expand in another state, or move their operations to another state,” Waters said.
HB 5’s opposition is critical of the notion that a tax-cut is necessary to keep Kentucky’s booming bourbon industry competitive.
“Greed. That's my number one opinion. I think it's corporate greed,” Nelson County Judge Executive Tim Hutchins said. “[The bourbon industry] has record profits, record growth, record expansions and to me, it's just greed.”
As the bourbon sector celebrates, local governments scramble
2022 was a banner year for Kentucky’s bourbon industry.
The commonwealth marked a fourth consecutive year filling more than 2 million barrels of bourbon.
A record-high 11.4 million bourbon barrels are in the aging process and stored across 40 counties—all of which received a portion of the $40 million in barrel tax revenue paid by distilleries.
Of that, $26 million went to local school districts and $720,000 went to local fire departments.
When HB 5 takes effect, that tax revenue will slowly start to dwindle, pushing local governments to find alternative funding sources.
“After eight or 10 years, it’ll start going downhill. We use this tax to help supplement cities. And that's not going away,” Hutchins said. “At the end of the day, local taxpayers are going to pay up more money in the future.”
Hutchins predicts many municipalities will have to raise property taxes to generate revenue. Otherwise, he said some departments may see cuts.
“It's critical. It has such a long-ranging result,” Rick Bobo, president of the Kentucky Firefighters Association (KFA), said. “Looking at the fire departments involved in these counties, a couple are going to be devastated by this amount of money lost.”
Bobo said the barrel tax funds about half of Bullitt County Fire’s annual budget.
Several public officials have spoken on the long-term losses they anticipate seeing with the tax-cut:
- Bullitt Co. Public Schools: $3 million loss overtime
- Nelson Co. schools: $5 million loss overtime
- Nelson Co. Sheriff’s Dept.: $250,000 loss overtime
“Well, it's been a disappointing process. It's just a sad day at the end of the day. It's just wrong. I think it's just 100% wrong,” Hutchins said.
Both he and Bobo said their respective municipalities plan to meet this week to start discussions on revenue replacement plans.
While he supports the new law, Waters said he understands the concerns coming from local governments..
“It's a legitimate concern, but it's not a zero-sum game,” he said. “Just because this tax goes away, doesn't mean the investment is going to go away.”
Waters said new distilleries could bring opportunities for more Kentucky counties to benefit from the tourism surrounding bourbon.
The change will take effect in January of 2026 with a phasing out period, that will finish in 2043.