Tax Analysts Blog

Taxing Beer

Posted on Aug 12, 2015

Here in the dog days of August, it seems fitting to write about beer. I know some of you don't drink it, but in the immortal words of country music star Billy Currington, beer is good. In Shawshank Redemption, Andy Dufresne says, "I think a man working outdoors feels more like a man if he can have a bottle of suds."

I've been a beer guy since I was 15 (drinking ages were guidelines where I grew up). Beer is what working men drank when they came home from a long day in the factory. It's what we drink at the ballgame or backyard barbecue. Currington sums it up in "Pretty Good at Drinkin' Beer":

      So hand me one more

      That's what I'm here for

      I'm built for having a ball

      I love the nightlife

      I love my Bud Light

      I like 'em cold and tall

You may be wondering what this has to do with state taxes. Everything. It turns out I'm not the only person who thinks beer is good. The Beer Institute released a study finding that beer consumption resulted in over $48.5 billion in tax revenue in the United States. That amount includes $37.5 billion in business taxes, $5.4 billion in excise taxes, and $5.2 billion in state sales taxes. The study found that local governments received about $385 million in taxes from beer sales.

Beer folks aren't necessarily happy with the tax burden. They point out that taxes are the most expensive ingredient in making and selling beer. We have been taxing beer since the beginning of the republic. The income and business taxes levied on the industry are really no different than the taxes imposed on other businesses. But beer is subject to excise tax in every state.

We impose excise tax on beer for several reasons. Some folks tax beer because they disapprove of drinking alcohol. Others tax beer purely because they want money to do good things (there have been proposals to increase alcohol taxes to pay for education). Those are both illegitimate reasons for taxing beer. The only rational reason for imposing a special tax on beer is to account for the externalities associated with drinking. Beer excise taxes are valid when paying for the societal costs not borne by the marketplace.

And there are externalities associated with drinking, including public health costs (an increased risk of cancer and heart disease), economic losses (from chronic drinking), and obvious public safety costs. To the extent the public is paying these costs, an excise tax is appropriate. But the excise taxes on beer have never been as crazy high as those on cigarettes. Used as intended, alcohol is not as dangerous as smoking. And the beer industry lacks the villainous reputation of tobacco companies. There has been a reticence to tax alcohol since the end of Prohibition.

Traditionally, states have used alcohol excises to export the tax burden. Thus, tourist states have always had higher-than-average tax rates. Some states, particularly in the Bible Belt, have used alcohol taxes to discourage drinking. States in the Deep South tend to have higher taxes as a result. States in the Northeast and Midwest have always had lower taxes on alcohol.

Tennessee, Alaska, Hawaii, South Carolina, and North Carolina have the highest excise taxes on beer. All five states want to tax imbibing tourists. The Carolinas still have prohibitionist tendencies with alcohol. Tennessee heavily taxes beer because it likes whiskey better. The lowest excise tax rates are in Wyoming, Wisconsin, Pennsylvania, Missouri, and Oregon. To put it in context, Tennessee taxes beer at $1.29 a gallon. Wyoming's tax is $0.02 a gallon. Buy your beer in Cheyenne. By the way, the Federation of Tax Administrators keeps an up-to-date chart on the rates.

But states impose other levies on beer. Alabama, Georgia, and Louisiana all have very high mandatory local taxes on beer ($0.53 a gallon in Alabama). Arkansas, Maine, Texas, and Vermont have special additional taxes on beer bought at a restaurant or bar. Kentucky, Rhode Island, and Tennessee have special wholesale taxes on beer. None of these additional taxes are grounded in sound policy. They are money grabs or, in Tennessee and Kentucky, ways to favor whiskey and bourbon.

And nearly every state imposes its sales tax on top of the excise tax. To their credit, Kansas, Maryland, Minnesota, and North Dakota are the only states (other than the states with no sales tax) that impose no sales tax on beer. The problem with imposing sales taxes on products subject to excise tax should be obvious. The tax is often, if not usually, imposed on the sales price that includes the excise. Thus, the states are taxing not only the value of the item sold, but the "value" of the excise. That double consumption tax distorts markets. More importantly, it also makes beer taxes very regressive. None of that represents good tax policy.

But enough about taxes. My all-time favorite song on the subject is "In Heaven There Is No Beer," which Wikipedia says is about the existential pleasures of beer drinking. Its title points out the reason for drinking beer while you are still alive.

Read Comments (2)

emsig beobachterAug 11, 2015

Beer is a sign from God that he loves us and wants us to be happy -- Ben
Franklin

teriAug 11, 2015

Maryland taxes beer. It's a higher alcohol sales tax.

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