You Aren't Going to Beat The Tax Person
Tax on alcohol has been with us since the Revolutionary War and later it was a device used to help pay for the Civil War. Honest Abe gave us the first tax on beer in 1862 at $1 per gallon. Even Cleopatra VII imposed beer taxes on Egyptians to pay for her wars. In America’s early history 80% of the Federal budget was funded by tax on beer, wine, and whiskey. The Whiskey Rebellion of 1794 was a direct result of an alcohol tax that increased from $0.09 per gallon to $0.25 per gallon.
The Temperance movement got its start in the 1780’s and had an active presence until Prohibition which lasted from 1920 through 1933. The tenants of temperance were that alcohol destroyed the family, promoted abuse, destroyed the mind, led to alcoholism, and destroyed initiative. Basically, Alcohol was of the Devil to capture and destroy man’s soul. In the mid 1900’s, the message turned to using taxes as a means to throttle the availability of alcohol. The theory was that cheap alcohol was the genesis of abuse by the young and was the primary cause of highway tragedies.
There is research that shows that increasing excise taxes on alcohol at federal, state, and local levels will reduce consumption. Research also does indicate that problem drinkers will acquire alcohol no matter the cost. So, will higher excise taxes reduce consumption of problem consumers?
Over the past couple of decades there have been numerous studies which indicate some health benefits to moderate alcohol consumption. What seemed to start all the studies of health benefits, or health hazards, of alcohol was a study released in the 1980’s known as the French Paradox. More recently many universities in the U.S. started doing research about the antioxidant component of red wine. U.C. Davis in California has done research on benefits of red wine. But today, if your adverse to consuming red wine, you don’t necessarily need to consume it to get the benefits of resveratrol, it’s available as a dietary supplement.
Beer is blessed with many studies about the benefits of moderate consumption. Having written a lot about the pros and cons of alcohol consumption, my observations are there have been many studies in the past and will continue to be more debate into the future. I do recall studies having been reported as fact that were debunked in subsequent research. For example, coffee consumption was to be avoided, now it is promoted as being full of healthy antioxidants. Kris Gunnars writing in “Healthline” reports, “Coffee is loaded with antioxidants and offers many benefits.
Aside from research pro or con concerning alcohol, there will never be a lack of researched positions for or against alcohol. Prohibition was one of those instances that proved it is impossible to pass laws regulating alcohol consumption, it has been part of cultures for 10,000 years. Prohibition was a law that was well intentioned with great supporting research promoting good for society; it failed for many health, social, cultural, and logical reasons.
The December 2020 extension of the 2017 changes in the Federal Excise Tax law has some benefits for the craft beer producers. Generally, the Craft Beverage Modernization and Tax Reform Act (CBMTRA) will have minimal impact on the federal budget. Currently the government receives approximately $1 billion per month in excise tax according to Alcohol Problems and Solutions. In the case of beer, federal taxes are levied on the barrels (31 US gallons) distributed/removed.
Focusing on beer and not wine and spirits. The excise tax on beer going forward is staying at $3.50 per barrel for production up to 60,000 barrels removed in a calendar year, or let’s call it distributed. Over 60,000 barrels up to 2,000,000 the Federal excise tax is $16.00 per barrel. To add perspective to the new CBMTRA bill, Bud Light band accounted for 30 million barrels sold in 2018.
The TTB (Tax and Trade Bureau) assumes alcohol equivalent content across beer, wine, and spirits to be:
A 12 oz. can or bottle of regular beer (=) A 5 oz. glass of dinner wine (=) A 1.5 oz. shot of 80 proof spirits. Beer is a bargain from a low tax standpoint. Consumers of spirits will pay 2.5 time more in excise tax than a beer consumer.
But federal excise tax is not the end of the tax saga, states and some cities and counties also get their bite of the tax apple. These state and local entities add their excise tax and then add their sales taxes. Each state has their own tax laws in addition the feds. Of the roughly 8,700 craft brewers, 99% produce less than 60,000 barrels in a calendar year, which means only about 50 craft breweries produce more. Basically, the reduced fed excise tax starting in 2018, which is now permanent, did help the small producer. In the aggregate the new tax bill saves all craft brewers approximately $80 million per year. (A shout out goes to The Brewers Association for their decades work on the CBMTRA.)
A federal excise tax cut is seldom noticed by way of a price reduction. Beer pricing seems to be inelastic-price decrease or increase do not seem to impact purchase trends. It will be interesting to see if cash strapped states and cities take advantage of a permanently reduced federal tax on beer to increase their beer taxes, as well as taxes on wine and spirits.
Today, the tax bite on a 12 oz. beer is more than 40% of the price of the retail at a grocery store, according to Alcohol Problems and Solutions. The state with the highest tax on all alcohol beverages is Tennessee. Colorado tips the scales on the bottom end of the tax scale.
Here is a sample summary of taxes the consumer pays for beer: (Source: Sale-Tax.com July 2020)
- Federal Excise Tax $3.50/barrel $0.12/gal.
- Excise Tax $1.29/gal.
- Wholesale Tax Per Case $5.36/case
- State Sales Tax (9.250% Paid at sale.
- Federal Excise Tax $0.12/gal.
- Illinois Beer Tax $0.23/gal.
- Chicago Beer Tax $0.29/gal.
- Cook County Tax $0.06/gal.
- State Sales Tax (10.25%) Paid at sale.
Some interesting facts:
- There are alcohol beverage distribution monopolies in Utah and Vermont and a few other states. They are monopolies because the state is the only seller of beverages.
- Alcohol excise tax is a very regressive tax-more of a burden on lower income people.
- For the same amount of alcohol in beer/wine/spirits, the tax on spirits represents half the cost of the beverage and exceeds the tax on beer by approximately 2 times.
- Nearly all states require alcoholic beverages to be distributed by state and federal licensed distributors via the “Three Tier Distribution” system. California and some other states do allow for self-distribution but those do include some restrictive rules.
- Moderate beer consumption does offer some research results that claim to provide specific health benefits. But, be prepared for counter claims.
Taxes on beer, wine, or spirits is confusing. Each state is different on how they impose taxes-excise or sales. Some states go further by increasing excise taxes relative to ABV (alcohol by volume)-higher alcohol content get additional taxes added. Other states such as Illinois allow cities and counties to impose their own sales tax on beer.
With the repeal of the 21st Amendment states were given control over how beer, wine and spirits were distributed within their state. The Three Tier Distribution system was part of that agreement that allowed states to generate tax revenues. Technically, the Three Tier Distribution system allows for monopolies through Beer Franchise Law protection. Generally, Beer Franchise laws are to protect distributors from the heavy-handed actions of brewers. Most of these laws do not consider the small craft brewer needs in today’s market.