LORETTO, Ky. — Starting in 2026, a tax on bourbon barrels that is paid to state and local governments will be phased out by a few percent each year. The tax is only assessed in Kentucky, and supporters believe its removal will stimulate even more growth in a $9 billion industry.

But the elimination of this tax could lead to tough decisions for elected officials in rural communities that distillers call home. 

Many of the state’s bourbon distillers are toasting the phase out on a barrel tax they were paying on their barrels of bourbon sitting in their warehouses going through the aging process. But that same phase out is leaving a bitter taste in the mouths of city and county leaders who now have to make up a good portion of their budgets.

Loretto, home to Maker’s Mark, is built literally on the tax dollars they collect from the aging bourbon barrels in warehouses.

“For the city of Loretto, the barrel tax represented nearly 70% of our budget,” said Loretto city administrator Josh Ballard.

But now, after last month’s passage of House Bill 5, which eliminates property the tax on bourbon barrels in Kentucky, Ballard says tough decisions are looming.

“We have sidewalk grants that are currently in place. We’re redoing the park. The money was just now starting to roll in from Maker’s Mark’s expansion, so we just now started being able to take advantage of that tax flow and all those projects are going to be canceled,” Ballard said.

Last year, distillers paid over $40 million in barrel taxes. Kentucky is the only state to levy such a tax. Supporters of HB5 say the phase out keeps Kentucky distillers from storing their bourbon elsewhere.

But Ballard says the tax has been around since the 1940s and doesn’t understand why it’s now a problem.

“They are manufacturing 2.4 million barrels of bourbon a year — that’s a record. They had record sales, they’ve got record amounts of new distilleries being added. Everything they’re doing is exploding with growth,” Ballard said.

The phase out of the tax will start decreasing by 4% starting in 2026 and by 2043 distillers will no longer pay the tax. Marion County Judge Executive David Daugherty says the effects won’t be immediately felt.

“We’re here to protect our kids and our kid’s kids and I think they are the ones that are going to be feeling the brunt of it. I think we’re going to get through it and pretty much be able to do what we’ve always done,” Daugherty said.

Daugherty says the barrel tax brought in around $2.6 million in revenue last year for Marion County and the county will miss out on even more revenue from newer distilleries which have yet to open.

“We’ve recruited a couple other distilleries that have yet to pay any of this tax. We assumed whenever we recruited them we’d get this revenue and it’s kind of why we did a lot of what we did for this industry,” Daugherty said.

The distillers agreed to protect funding for school districts, fire departments and ambulance services in counties where their bourbon is stored.

The Kentucky Distillers Association also says no other industry pays a property tax while their goods are still in the production phase.

By eliminating this tax, they believe distillers have an incentive to store their barrels in the Commonwealth, which they say creates more jobs.