The Duty Drawback Earmark

Tax policy should be simple. The government should tax just enough to fund core government functions.

Fairness in the tax code has always been a core of the American system. The government should not over tax consumers and corporations, or the economy will stagnate. The government should not give tax benefits to corporate friends and use the tax code to change behavior, because that is an abuse of the tax code. Right now, Congress is trying to sneak a tax change, in the form of refunds of duties, taxes and fees associated with the import of whiskey past the goaltender. If allowed, this legislation will blow a hole in the budget and funnel cash to big corporate friends of some in the liquor industry.

The issue comes as the hard liquor industry is pushing two pieces of legislation that would shift the tax burden from multinational corporations to the American people. These large companies want an effective tax rate of nothing when they import foreign produced spirits. The Senate bill is sponsored by Sen. Bill Cassidy (R-LA), S.1761, and it is innocuously described as a bill to harmonize the tariff schedule for whiskies. One House version, H.R. 4073, sponsored by Rep. Morgan McGarvey (D-KY), is titled the Duty Drawback Clarification Act, would do the same. The goal is to sneak this legislation into a larger package of bills to provide a special interest tax benefit to cronies at a cost to the taxpayer of billions in the form of something detractors call the “Duty Drawback Earmark.”These two bills are an earmark for the largest importers of foreign made whiskey. The legislation benefits a handful of large corporations and is unfair.

The system used to tax imports of whiskey is complex and an opportunity for accounting gymnastics that benefits those with lobbying muscle. Whisky is imported to the U.S. by large importers. If these importers export or destroy the same or similar products, they get a refund of duties, taxes and fees associated with the original import of the whiskey. They need a change in law to expand the use of this tax provision because they are trying to get credit for exporting a different product than is imported for purposes of qualifying for a tax benefit. This is unfair for a number of reasons.

First, under current law, commodities can only be substituted when their Harmonized Tariff Schedule (HTS) codes match. An HTS code is the system used that helps the government figure out customs duties on imports and are 10-digit codes. American bourbon and Irish whiskey have separate HTS codes because they are different products. Ironically, the manufacturers of American bourbon and Irish whiskey market them as different, yet for purposes of imports, the importers want to consider them the same. The companies that import are large multinational companies who want the harmonization because it will benefit them to the tune of billions. Different products should not be considered the same just so well-connected corporations can benefit.

Another aspect of the unfairness is that these companies are on the hook for the import duties, taxes and fees, yet they will get a refund that costs the treasury billions. If you are a massive company with large numbers of imports, then you can avoid the same excise taxes that are applied to smaller companies. This is not much more than an accounting gimmick to benefit big companies with the best lobbyists. This will effectively tip the balance of competition in favor of the large importers, because the recipients of the duty drawback earmark will use the extra cash to undercut pricing of craft distillers and pump money into marketing their products.

Tax policy can be complicated. When broken down, the Duty Drawback Earmark is unfair, a handout to cronies and costly to the treasury. Because of the unfairness of legislation that seeks to declare American bourbon the same as Irish Whiskey, legislation should be rejected that creates an accounting gimmick to benefit large corporations.

Steve Sherman is an author, radio commentator, and former Iowa House candidate. His articles have appeared nationally in both print and online.