Research & Commentary: Nebraska Should Avoid Relying on Alcohol Taxes
Proposal would increase the tax on beer by 345 percent, the tax on wine not from farm wineries by 1,032 percent, and the tax on distilled spirits by 227 percent in an effort to provide property tax relief.
In an effort to provide property tax relief, Nebraska lawmakers introduced legislation that would significantly increase the tax on alcohol. LB 497 would increase beer taxes from 31cents per gallon to $1.38 per gallon, wine taxes from 31 cents per gallon to $3.51 per gallon, and liquor taxes from $3.75 per gallon to $12.28 per gallon.
According to the bill, “Wines produced and released from bond in farm wineries” would be taxed at a slightly lower rate — an increase from 6 cents per gallon to $2.62. Essentially, beer taxes would increase by 345 percent, wine not from farm wineries would face a 1,032 percent increase, and the tax on distilled spirits would increase by 227 percent.
Alcohol taxes are a sin tax and lawmakers should not rely on them to fund government programs. Sin taxes are highly regressive, unreliable, and are often used by governments to fund unsustainable spending surges. Further, the significant tax increases will put an economic burden on small business owners across Nebraska.
All states tax alcohol in some form or fashion. The Urban Institute found that per gallon taxes on beer range from 2 cents in Wyoming to $1.29 in Tennessee, 20 cents in California to $2.50 in Alaska for wine, and $1.50 in Maryland and Washington DC to $14.27 in Washington state for distilled spirits. Although lawmakers are more likely to increase sin taxes on cigarettes than libations, alcohol taxes typically generate more revenue. In fact, alcohol tax revenue increased nationwide by 12 percent from 2008 to 2016.
Alcohol taxes are highly regressive. Although a higher percentage of upper income persons tend to drink than lower income persons, they tend to purchase more expensive alcohol. As an excise tax, alcohol products are “levied by the ounce” and not reflective of the price, leading the tax to be “highest on cheaper products.” The Tax Foundation found that on average, people in the top income quintile spend 0.09 percent of their income on state and federal alcohol taxes, while individuals in the bottom-quintile spend 0.16 percent of their income on alcohol taxes. This translates to lower income individuals spending “a 78% larger share of their income on alcohol taxes than people in the top quintile.”
Moreover, alcohol taxes are unreliable revenue sources because alcohol consumption rates are cyclical. The Pew Charitable Trusts found that “average per capital alcohol consumption in 2015 was 2.3 gallons, down from the 1981 peak of 2.8 gallons (and up from the 1998 trough of 2.1 gallons).” The authors noted “that usage ebbs and flows with society trends and consumer whims,” which impacts potential revenue streams from alcohol taxes.
Further, the proposed tax increase would undoubtedly negatively impact Nebraska’s 49 craft breweries, which “produce 53,000 barrels of beer a year,” and generate an “annual economic impact of $465 million.” In fact, one Nebraska brewery estimated its business tax burden would increase from $50,000 in excise taxes to $232,000. Another brewery estimated its tax bill would climb to “a quarter million dollars.”
Breweries are a strong source of economic growth — about 1,000 new breweries are expected to open in 2019, according to the Brewers Association. And it should be noted that beer is already highly taxed. Indeed, the Beer Institute finds taxes are the “single most expensive ingredient in beer.” Astonishingly, taxes account for nearly 40 percent of the retail price of beer.
Rather than relying on regressive sin taxes, lawmakers should focus on tax reforms that lower rates. Targeted tax increases hurt everyone and do not provide a solution to the real issue: too much government spending. Nebraska lawmakers ought to balance the state budget without increasing unnecessary, regressive taxes.
The following documents provide more information about sin taxes.
The Wages of Sin Taxes: The True Cost of Taxing Alcohol, Tobacco, and Other ‘Vices’
In this report by Christopher Snowdon of the Adam Smith Institute, the author outlines the case against sin taxes on cigarettes and alcohol. The report argues that taxes on commodities believed to be harmful to a person’s health or society are ineffective in reducing consumption and are not necessary for recouping lost revenue. Sin taxes are highly regressive and often force the poor to pay for the government’s mishandling of public finances.
Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigovian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive and preventive lobbying.
Ten Principles of State Fiscal Policy
This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low,” to “Protect state employees from politics.”
The Dirty Dozen: 12 States That Bet Big on Sin
Nikhil Hutheesing of Bloomberg News examines the dozen states with the greatest percentage of total tax revenue derived from “sin.” Sin taxes in this article include tax revenue from tobacco, alcohol, and pari-mutuel betting, using data from the State Government Tax Collections survey produced by the U.S. Census Bureau.
Sin Taxes: When the State Becomes the Sinner
Andrew J. Haile uses the Master Settlement Agreement between the states and major tobacco companies to illustrate the moral hazard created when states become dependent on sin tax revenues. Haile also draws out lessons from states’ experiences with taxing tobacco products to identify problems to consider as state legislatures weigh whether to enact new sin taxes.
The Political Economy of Excise Taxation: Some Ethical and Legal Issues
Excise taxes are used not only to raise revenue but also to alter or punish behavior. In many cases, excise taxes can be called “sin” taxes, because they punish people for politically incorrect behavior, such as smoking or consuming alcoholic beverages. In this article, Robert W. McGee examines the nonrevenue uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.
Republican Governors Unwisely Seeking “Sin” Tax Hikes
Lee Schalk of the National Taxpayers Union says Republican governors such as Sam Brownback of Kansas and John Kasich of Ohio should stop trying to raise sin taxes. “Unfortunately, states taking aim at tobacco to fill budget gaps or pay for tax cuts is extremely problematic,” Schalk wrote. “History has shown that revenue projections from cigarette tax increases come up short. According to National Taxpayers Union’s latest cigarette tax study, roughly 7 out of every 10 state-level tobacco tax hikes enacted between 2001 and 2011 resulted in lower-than-anticipated revenues.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, our Consumer Freedom Lounge, and PolicyBot, Heartland’s free online research database.
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