Today’s infographic shows How Much Does The Government Make From Alcohol? It was created by Inuit, the makers of Turbo Tax. It “illustrates how much money individuals are being taxed to consume alcohol, and subsequently how much the Federal and State governments are generating in tax revenue. There is also a breakdown of how different types of alcohols are taxed in the various states, as well as international comparisons — to put thing in perspective.”
Today’s infographic is a map of the State Beer Excise Tax Rates for each of the fifty states as of January 1, 2013. It was created by the Tax Foundation as one of their weekly maps. It’s just the state excise taxes brewers must pay, and doesn’t include either federal excise taxes or any local excise taxes. Tennessee has the highest state excise taxes and Wyoming has the lowest, a fact that the anti-alcohol folks like to exploit and whine about as often as they can whenever these maps show up online, never discussing context or the total taxes each state brewer pays. Not surprisingly, since oftentimes these are also referred to as sin taxes, six out of the highest ten states are in the south, with Florida at #11 and Mississippi at #13. California’s near the middle.
Given that the anti-alcohol folks, and especially my churlish neighbors Alcohol Justice, are continually beating the drum about alcohol taxes being too low, this news is not going to be particularly welcomed with open arms. A British think tank, the Institute of Economic Affairs (IEA), recently took a close look at the effect of higher taxes in alcohol and their report, Drinking in the Shadow Economy, found that the British “Treasury is losing as much as £1.2 billion every year to the illegal alcohol industry.” That, they conclude, is one of the effects of higher taxes on alcohol, because it creates an incentive for people to go outside the law and the safe world of regulated alcohol to make a quick buck. They found that “the illicit alcohol market is also closely associated with high taxes, corruption and poverty. The affordability of alcohol appears to be the key determinant behind the supply and demand for smuggled and counterfeit alcohol.” So place too high taxes on alcohol, and you invite in the wrong element, which we’ve seen in the U.S. before during Prohibition, and which we’re seeing right now with the war on drugs. If that futile policy was reversed, we’d save as much $13.7 billion annually by legalizing, regulating and taxing just marijuana, not to mention we’d remove the criminal element, make it safer and drastically reduce burdens on police, the justice system and prisons.
But back across the pond, the study also notes that the “demand for alcohol is relatively inelastic,” meaning people generally don’t drink less when prices go up, they instead find new ways to address the rising prices. As study after study has concluded, tax hikes are regressive and almost always hit poorer families the hardest, while not eliminating the problem the proponents of such measures claim they will fix.
But here’s that again, said another way:
Our analysis indicates that the affordability of alcohol does not have a strong effect on how much alcohol is consumed. Once unrecorded alcohol is included in the estimates, it can be seen that countries with the least affordable alcohol have the same per capita alcohol consumption rates as those with the most affordable alcohol.
I suspect that’s the case here, too. We know that price hikes cause people living near borders with other states to simply buy their alcohol in the next state over, causing further economic erosion. I don’t know if we have the same issue with counterfeit or illegal beer. Certainly there’s still Moonshine, but beer is probably not profitable enough on its own to warrant illegal breweries flaunting the tax code, not to mention how labor intensive and technology-dependent it is.
Another interesting portion of the report, answering the question “Why Tax Alcohol?”
Temperance and public health campaigners typically dismiss the black market as a problem that can suppressed through rigorous enforcement and tougher sentencing. At worst, they view a growing unofficial market as a price worth paying for a more sober society. This view is rooted in the belief that affordability is the main driver of alcohol consumption and that increasing prices by raising excise duty is therefore the single most effective way of reducing alcohol sales.
Ceteris paribus, economists would expect there to be some truth in this assertion, but there is too much real world evidence to the contrary for it to be taken as an iron rule. For example, alcohol consumption has fallen in most European countries since 1980 despite alcohol becoming significantly more affordable (OECD, 2011: 275).19 In Denmark, Sweden and Finland, the sudden drop in alcohol prices that resulted from EU accession did not bring about the kind of surge in alcohol consumption that the price elasticity models predicted.
A comparison of European countries suggests that affordability has a negligible and statistically insignificant negative effect on recorded alcohol consumption (see Figure 12). Moreover, as Figure 13 shows, when unrecorded alcohol consumption is included in the analysis, affordability does not appear to be a decisive factor in determining alcohol consumption from one country to the next.
Then there’s this long passage addressing some of the philosophy behind taxation which seems to fly in the face of much of the neo-prohibitionists propaganda playbook:
Contrary to temperance rhetoric, high alcohol taxes are not necessarily good for public health because, although excessive alcohol consumption undoubtedly carries risks to health, so too does moonshine. Counterfeit spirits and surrogate alcohol frequently contain dangerous levels of methanol, isopropanol and other chemicals which cause toxic hepatitis, blindness and death. These are the unintended consequences one associates with prohibition, albeit at a less intense level than was seen in America in the 1920s.
It should not be surprising that excessive taxation encourages the same illicit activity as prohibition since the difference is only one of degrees. As John Stuart Mill noted in 1859: ‘To tax stimulants for the sole purpose of making them more difficult to be obtained is a measure differing only in degree from their entire prohibition, and would be justifiable only if that were justifiable. Every increase of cost is a prohibition to those whose means do not come up to the augmented price’ (Mill, 1974: 170-171).
But in a less frequently quoted passage, Mill appears to approve of taxing alcohol to the apex of what we now call the Laffer Curve. Appreciating that governments need to raise funds and that these politicians must decide ‘what commodities the consumers can best spare’, Mill argues that taxation of stimulants ‘up to the point which produces the largest amount of revenue (supposing that the State needs all the revenue which it yields) is not only admissible, but to be approved of’ (Mill, 1974: 171).
This message tends to resonate more powerfully with politicians than Mill’s more libertarian pronouncements. Drinkers generally prefer low alcohol prices. Temperance campaigners nearly always demand higher prices. The politician, however, usually seeks to maximise tax revenues and will only react to the shadow economy when it becomes a serious threat to state finances. Nordlund and Österberg summarise the politician’s dilemma as follows:
‘Domestic economic actors can, of course, support the rules and regulations imposed by the state for controlling unrecorded alcohol consumption, but for these actors a better solution in combating unrecorded alcohol consumption would be the lowering of alcohol excise taxes… In most cases the state is not willing to follow this policy, as lower alcohol excise taxes in most cases mean lower levels of alcohol-related tax incomes. However, if the state is no longer able to control the amount of unrecorded alcohol consumption by different kinds of legal administrative restrictions the only remaining way to counteract, for instance, huge increases in travellers’ border trade with alcoholic beverages or an expansive illegal alcohol market is to lower the price difference between unrecorded and recorded alcohol by decreasing excise taxes on alcoholic beverages.’ (Nordlund, 2000: S559)
It scarcely matters to the politician whether unrecorded alcohol comes from legal or illegal sources. In either case, the treasury loses out on revenue. In Britain, HMRC estimates that the alcohol tax gap could be as much as £1.2 billion per annum, plus the costs of enforcement, and that this is largely because ‘duty rates on alcohol are far higher in the UK than in mainland Europe’ (National Audit Office, 2012: 2, 10). This is the price the state must pay for excessive taxation, but the politician is also aware that these high alcohol taxes raise £9 billion a year (Collis, 2010: 3). Being in possession of these facts he may conclude that reducing the illicit alcohol supply through tax cuts will probably reduce net alcohol tax revenues.
We argue that such a focus on maximising tax revenues is short-sighted and carries significant risks. Failing to deal with alcohol’s shadow economy threatens not only the public finances, but also public health and public order. Unrecorded alcohol has, as Nordlund and Österberg note, ‘the potential to lead to political, social and economic problems’ (Nordlund, 2000: S562). In addition to the health hazards presented by unregulated spirits, alcohol fraud in the UK is, according to the HMRC, ‘perpetrated by organised criminal gangs smuggling alcohol into the UK in large commercial quantities’ (HMRC, 2012: 8). Alcohol smuggling and counterfeiting is linked to other illegal activities, including drug smuggling, prostitution, violence, money-laundering and — in a few instances — terrorism.
In the press release, the IEA concludes:
“The government’s focus on maximising tax revenues is short-sighted and dangerous. Aside from losing money by encouraging consumers to find cheaper illicit alternatives, public health and public order are also being put at risk by high prices. Policy-makers ought to take the threat of illicit alcohol production seriously when considering alcohol pricing in the future.”
“There is a clear relationship between the affordability of alcohol and the size of the black market. Politicians might view the illicit trade as a price worth paying for lower rates of alcohol consumption, but this research shows that the amount of drink consumed in high tax countries is exactly the same as in low tax countries.”
“Minimum alcohol pricing might seem like a quick fix to tackle problem drinking, but it is likely to cause many more problems by pushing people towards the black market in alcohol.”
While a fairly emphatic statement against higher taxes on alcohol, I assume that many will still wonder how applicable it is to the United States economy and society. Honestly, I’m sure there are differences, but the overall concept seems sound, at least to me. We can haggle over some of the details, but the idea that higher taxes isn’t always the answer just has the ring of truth to it.
The Tax Foundation, a Washington think tank dedicated to al things taxable, had last week for their weekly Monday Maps on the Tax Foundation’s blog an infographic on State Beer Excise Tax Rates as of September 1, 2011. Alaska has the highest tax rate and Wyoming the lowest. And, of course, the chart doesn’t include the federal excise taxes breweries have to pay or any local taxes, either. Still, it’s always interesting to see the differences laid out on the map.
I was watching a documentary today about the Library of Congress and they talked about how the library is digitizing their collection, so I took a look at the website and discovered this little gem from 1937. Post-prohibition, apparently our government experimented with different methods for ensuring that breweries paid the correct amount of taxes. The “beer meter” was one such device they came up with, shown below.
The caption below is cut off in the original in the library’s collection, which is why it ends mid-sentence.
And now a beer meter. Washington, D.C., May 1. To aid Uncle Same in collecting the tax on the millions of barrels of beer brewed in this country every year, the National Bureau of Standards has designed a master beer meter for use of the alcohol unit of the Bureau of Internal Revenue, U.S. Treasury. Government inspectors employ this master meter in checking the accuracy of the brewery beer meter to determine the volume of beer brewed. In the photograph the large tank receives the liquid [after passing] thru the meter where it is weighed to get [the] true volume. Carl F. Stoneburner is reading ….
I think I’ve mentioned before that my wife is a political news junkie. She just sent me this link from one of the most popular political websites, Politico, entitled Craft beer bridges partisan divide in Senate. It’s nice to see beer getting some mainstream attention.
The Politico article is all about the introduction Wednesday of BEER, “Brewer’s Employment and Excise Relief Act,” which would cut taxes for microbreweries and on the production of smaller quantities of beer barrels, among other things. It was introduced in the Senate by Republican Mike Crapo (Idaho) and Democratic Senator John Kerry (Massachusetts).
Although Senator Kerry misstates that the “craft beer revolution started right here in Massachusetts,” I think we can forgive him for that one, having obviously been talking with Jim Koch for many months about this bill.
Here’s Crapo’s Press Release about the introduction of the BEER Act:
Small Brewery Tax Bill Would Create Jobs, Open Markets
Wednesday, March 9, 2011
Washington, D.C. — Senators Mike Crapo (R-Idaho) and John Kerry (D-Massachusetts) today introduced legislation to reduce the beer excise tax for America’s small brewers. The Brewer’s Employment and Excise Relief (BEER) Act will help create jobs at more than 1,600 small breweries nationwide, which collectively employ nearly 100,000 people. Idaho and Massachusetts are home to dozens of small breweries.
“Like any private business, craft brewing is all about supply and demand,” said Crapo. “In touring Idaho last year, I met with many craft brewers who are seeking to expand their business because they are seeing increased demand for their product. In addition, this legislation will expand the ready markets for our barley, wheat and hops producers in Idaho. I remain optimistic this bill will pass this year to create new jobs and new markets.”
“The craft beer revolution started right here in Massachusetts and they’ve been going toe to toe with multi-national beer companies ever since,” said Kerry. “This bill will help ensure that these small businesses keep people on the payroll and create jobs even during tight economic times.”
Because of differences in economies of scale, small brewers have higher costs for production, raw materials, packaging and market entry than larger, well-established multi-national competitors. The BEER Act also helps states that produce barley, hops and other ingredients used by these small brewers. In addition to Senators Crapo and Kerry, the legislation is co-sponsored by a bipartisan coalition of 16 additional Senators.
Currently, a small brewer that produces less than two million barrels of beer per year is eligible to pay $7.00 per barrel on the first 60,000 barrels produced each year. This legislation will reduce this rate to $3.50 per barrel, giving our nation’s smallest brewers approximately $19.9 million per year to expand and generate jobs. This change helps approximately 1,525 breweries nationwide.
Currently, once production exceeds 60,000 barrels, a small brewer must pay the same $18 per barrel excise tax rate that the largest brewer pays while producing more than 100 million barrels. This legislation will lower the tax rate to $16 per barrel on beer production above 60,000 barrels, up to two million barrels, providing small brewers with an additional $27.1 million per year that can be used to support significant long-term investments and create jobs by growing their businesses on a regional or national scale.
The small brewer tax rate was established in 1976 and has never been updated. This legislation would update the ceiling defining small breweries by increasing it from two million barrels to six million barrels. Raising the ceiling to six million barrels more accurately reflects the intent of the original differentiation between large and small brewers in the U.S.
Daniel Defoe observed in 1726 that nothing was more certain than death and taxes, and sadly, that still holds true nearly three centuries later. It seems more likely that we’ll lick that immortality problem before taxes ever become a thing of the past. And few taxes are more certain to be under attack than alcohol taxes, a favorite target of the anti-alcohol groups, whose incessant calls for their increase have only grown louder as the economy is in free fall. Because what you want to do in a sinking economy is make it harder for one of the few industries doing well to keep people employed, paying taxes and in business.
But that’s never stopped them before and it’s not stopping them now, as the latest shot over the bow from my friends at the Marin Institute was a press release today, Twelve States Stuck at Bottom of Beer Tax Barrel. It announces their new interactive map of Neglected and Outdated State Beer Taxes.
Here’s the entirety of the press release:
SAN FRANCISCO, Feb. 16, 2011 /PRNewswire-USNewswire/ — Marin Institute, the alcohol industry watchdog, launched its Neglected & Outdated Beer Taxes Map today. This new interactive tool helps those who want to raise beer tax rates to balance state budgets or erase deficits.
“Just point your cursor at a state and you can see the your current beer tax rate, the year of your last tax increase, and the loss of revenue from inflation,” said Bruce Lee Livingston, Marin Institute executive director and CEO. “We show the twelve states that have hit the bottom of the barrel in beer tax revenues and are the most overdue for an increase.”
The beer tax map quickly reveals states suffering the most from Big Beer’s influence. These are states that have beer taxes stuck at absurdly low rates set as long ago as the 1940s, and even the 1930s. “With almost every state struggling to find new dollars to fund critical programs, policymakers need to stop leaving beer tax revenue on the table,” said Sarah Mart, research and policy manager at Marin Institute.
The web site shows the twelve states with the “worst” beer tax rates in the nation, the “bottom of the beer barrel”: Georgia, Idaho, Kentucky, Louisiana, Michigan, Mississippi, Missouri, North Dakota, Pennsylvania, West Virginia, Wisconsin, and Wyoming. Six states (Kentucky, Louisiana, Mississippi, Pennsylvania, West Virginia, and Wyoming) have not raised their beer tax in 50 years or more.
The worst state is Wyoming, which has the distinction of the lowest tax rate – $0.02 per gallon – set in 1935, during FDR’s first term. Factoring for inflation, the value of Wyoming’s beer tax has decreased 94%. A simple 5 cents per drink increase in the state’s beer tax would yield $7.75 million in new revenue. Considering that Wyoming’s annual budget shortfalls are projected to hit $5 million by 2013, a modest beer tax increase would erase all budget shortfalls in the state, reduce drinking, and increase health and safety a little.
The map shows that in 47 states, the decrease in real value of the beer tax due to inflation ranges from 25 percent to more than 75 percent. “This is such a lose-lose scenario for the states,” added Mart. “States are losing revenue and cutting essential programs, especially those which mitigate alcohol-related harm, while the beer companies reap higher and higher profits. It’s time for states to stop their race to the bottom and raise beer taxes.”
And here’s their colorful map of beer taxes and when they were last raised, minus the interactivity. The interactive version you can see on their website.
But there are so many things wrong with their arguments that it’s hard to know where to begin. So I’ll start by being petty. Look at the first two words of the press release: “SAN FRANCISCO.” The Marin Institute is NOT in San Francisco, but in San Rafael, which is just north of the city in Marin County, hence their name. I’m sure that they used the more familiar San Francisco because nationwide, and especially worldwide, no one’s heard of San Rafael, but I can’t help but ponder that if they can’t even be accurate about where they’re located, what does that say about their commitment to the truth in more substantive issues?
First, let’s assume everything they say is correct (it’s not, but just for the sake of argument). The amounts realized according to their table of the states with the lowest taxes if their state excise taxes were increased by “10 cents a drink” ranges from $15.3 to $333 million, or an average of about $123 million per state. But state deficits are in the billions, with a “b.” The Center on Budget and Policy Priorities estimates around $350 billion. Even if you added up all twelve states, the additional taxes would be less than $1.5 billion, less than half a percent of the total (not a perfect number, but still indicative of the problem). The point is that raising the state excise taxes on alcohol comes no where close to doing anything meaningful about the budget shortfalls facing all but four or five of the states. All it does is punish and weaken one of the few functioning industries in a distressed economy.
Next, let’s talk about the idea that taxes should parallel inflation and be raised to match those levels. If that is indeed a public policy goal, shouldn’t it be applied across the board? If we accept that taxes should be raised every time inflation inches ever higher, then shouldn’t ALL taxes do likewise? Singling out the alcohol industry for such treatment is, again, just punishing one industry because one of their “watchdogs” doesn’t like them, despite all protestations to the contrary. I don’t want my taxes to go up anymore than I suspect you do, but if we need more money as a state, country and society, than I don’t see any other fair way to raise more money. Any scheme that falls disproportionally on any industry is de facto unfair to solve a problem that effects all of society. We should have done away with tax breaks for the rich, but that couldn’t even be talked about, much less implemented. Instead, let’s suggest the heavily regressive taxes on alcohol punish the poor even more than they already do.
The other unanswered question is how high to raise excise taxes and for how long? And while there’s no amount proposed at this time, since they’re merely providing the tools to sow discontent in individual states, I believe that’s because there’s really no amount too high for the anti-alcohol groups. Though unstated, it seems implicit in their rhetoric that no amount is enough and they’ll never be satisfied. I’ve never seen a discussion of what amount they might consider fair enough, or might balance the amount with their ability to stay in business (which is the only way companies could continue to actually pay their taxes). Is there an amount that might satisfy such organizations? If so, I’ve never seen it. Then, if fixing the economy is truly the aim of their proposals, should such taxes only be imposed as a temporary measure until the crisis is over? If you didn’t laugh when you read that, you don’t realize that taxes are almost never repealed, only imposed or increased. What I think this exposes is that this is simply a way to use current circumstances to harm the alcohol companies and make it harder for them to stay in business, falling especially hard on the small brewers.
What’s also conveniently left out of their argument, as always, is the current amount of taxes paid by alcohol producers. There’s more taxes paid on every bottle of beer than any other consumer good save tobacco. Those two products are the only remaining items that pay excise taxes, at both the federal and state level. And while I think most would agree that smoking offers no health benefits, beer (and alcohol more generally) in moderation most definitely does. If you drink one or two beers a day, the odds are you’ll live longer than either a teetotaler or a binge drinker.
How much does the brewing industry pay? As of 2008, business and personal taxes accounted for $35,283,148,850, consumption taxes account for another $11,172,946,867; or a total of $46,256,095,717 annually. The total economic impact of the beer industry alone pumps $198,152,918,964 into the national economy each year. And all those figures are not including wine and spirits which would push it significantly higher.
I think Defoe’s quote needs modifying to reflect modern society, adding that few things are more certain than anti-alcohol groups using a recession to further their own narrow agenda of making the alcohol industry pay for their perceived sins. I think I need one of Moonlight Brewing‘s tastiest beers, their black lager, Death & Taxes.
Surprising no one who’s been paying attention, the Brewers Association today announced the revision of the definition of what it means to be a craft brewery, at least as far as the trade organization is concerned. In order to advocate for any specific group, it’s useful to know who is eligible to be a member. In 1976, Congress arbitrarily chose 2 million barrels for a tax differential and ever since the part of the definition that denoted a “small” brewery has been one making less than 2 million barrels annually.
From the BA press release:
In the BA’s craft brewer definition, the term “small” now refers to any independent brewery that produces up to 6 million barrels of traditional beer. The previous definition capped production at 2 million barrels.
The association cited several reasons for the change, including the recognition that “small” is a descriptive term relative to the overall size of the industry.
“Thirty-four years have passed since the original small brewers tax differential defined small brewers as producing less than 2 million barrels,” said Nick Matt, chair of the Brewers Association board of directors and chairman and CEO of F.X. Matt Brewing Company. “A lot has changed since 1976. The largest brewer in the U.S. has grown from 45 million barrels to 300 million barrels of global beer production.”
Matt added, “The craft brewer definition and bylaws now more accurately reflect and align with our government affairs efforts.” On the legislative front in 2010, the Brewers Association supported H.R. 4278/S. 3339, which sought to update the cap on an excise tax differential for small brewers to 6 million barrels per year in production for their first 2 million barrels.
Retaining Market Share for Craft Brewers
The industry’s largest craft brewer, The Boston Beer Company, is poised to become the first craft brewer to surpass 2 million barrels of traditional beer within the next few years. Loss of The Boston Beer Company’s production in craft brewing industry statistics would inaccurately reflect on the craft brewing industry’s market share.
In addition to Boston Beer, the current growth trajectory of other sizable BA member breweries places them on a course approaching the 2 million barrel threshold in the coming years.
“With this change to the craft brewer definition and BA bylaws, statistics will continue to accurately reflect the 30-year growth of market share for craft brewed beer,” said Matt. “Brewers Association statistics on craft brewers will continue to keep pace with the growth of the industry.”
Craft brewed beer market share is now approximately five percent of the U.S. beer industry, and growing. The BA has a stated mission of helping America’s craft brewers achieve more than five percent market share by 2013.
Matt added, “Rather than removing members due to their success, the craft brewing industry should be celebrating our growth.”