The tax system can be a confusing labyrinth of rules and regulations. This is no different when it comes to alcohol tax requirements and the ways producers and consumers pay for beer, wine and spirits. It doesn’t help that taxes can be levied on alcohol by federal, state and local governments. This significantly raises the price of alcohol, especially in the case of distilled spirits. That is why we are going to take a closer look at how Federal Excise Tax (FET) reform is affecting the industry.
Federal Alcohol Tax
Excise taxes generate significant revenue on the federal level. In 2019, excise taxes on alcohol amounted to $10 billion. When it comes to assigning tax amounts, things can get complicated, especially since beer, wine and spirits are all taxed at different amounts. In general spirits are taxed $13.50 per proof gallon, which is defined as a gallon of liquid that is 50% alcohol. In 2020, the amount was slightly lower at $13.34.
When it comes to wine, the tax amount depends on the alcohol content. For example, wines with 16% alcohol or less are taxed $1.07 per gallon while sparkling wines are taxed at $3.40 per gallon. Again, these rates were slightly lower throughout 2020.
Beer is taxed by the barrel, which is the equivalent of 31 gallons. Typically, the alcohol tax is $18 per barrel, but that price was reduced to $3.50 on the first 60,000 barrels made by breweries that produce less than two million barrels in total.
As you can see, beer and wine is taxed at a significantly lower rate. These rates were slightly lower in 2020 in order to provide some relief to businesses being hit hard by pandemic related financial challenges.
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The Logic Behind Alcohol Tax Amounts
In order to understand the logic behind heavily taxing alcohol, it is important to note that items like alcohol, cigarettes, gasoline and gambling are considered unnecessary. These items are governed by what is often referred to as the “sin tax.” Theoretically, by raising taxes and increasing the cost of these items, they will be used less often.
An excise tax is considered an indirect type of taxation that is applied to the manufacturer or producer of products. Ultimately, the manufacturer ends up having to raise the price of a product in order to cover the cost of taxes. This means that consumers end up paying more even though they aren’t being “directly” taxed.
While alcohol taxes have been an integral part of the United States fiscal policy, excluding the period of Prohibition, there is no consensus on how alcohol should be taxed. Different arguments are based on looking at the issue from certain perspectives, including:
- Public health
- Revenue generation
- Economic efficiency
- Equity
- Employment
While studies show that alcohol is price responsive, meaning that raising the price does reduce consumption, it isn’t completely clear just how price responsive it is. This helps support the idea that taxation can affect public health and economic factors, but it doesn’t necessarily provide any definitive answers about the best approach to alcohol tax.
As a result of differing philosophies about alcohol tax practices, tax rates vary widely among states. Washington has by far the highest rate at $32.52 per gallon for spirits. The next closest is Oregon, but their rate is still over $10 cheaper at $21.98 per gallon. The 10 states with the highest alcohol tax include:
1. Washington ($32.52)
2. Oregon ($21.98)
3. Virginia ($19.93)
4. Alabama ($19.15)
5. Utah ($15.96)
6. North Carolina ($14.63)
7. Iowa ($13.07)
8. Alaska ($12.80)
9. Maine ($12.00)
10. Michigan ($11.99)
Alcohol Tax Reform
Since 2011, craft spirit producers have been waging a grassroots effort to reform FET regulations. The American Craft Spirits Association (ACSA) has been especially active in speaking with members of Congress and making sure that the story of spirits producers is being heard. These efforts continued virtually even during COVID-19.
On December 27th, 2020, the industry made major headway with the passage of the Craft Beverage Modernization and Tax Reform Act (CBMTRA). The bill provides tax relief to over 2,200 craft spirit producers who have not been enjoying the same permanently low rates as beer and wine producers. Without the legislation, distillers would have been faced with a 400% tax increase that would have increased the tax rate from $2.70 per gallon to $13.50. The CBMTRA is a much welcomed source of relief, especially as distillers work to stay above water in the wake of the COVID-19 pandemic.
While the pandemic has been difficult for the alcohol industry, some changes to excise tax alcohol laws will provide some much-needed good news for craft spirits distillers. State and local governments will still be able to add taxes to alcohol, but low federal rates will be locked in for distillers. Hopefully, this will help them recover from the pandemic and continue to grow their businesses.
FAQs
Which tax is applicable to alcohol?
The federal government, as well as state and local governments, can apply excise taxes to all types of alcohol. These taxes are especially high when it comes to spirits.
What is the federal tax on alcohol?
The federal tax on spirits is $13.50 per proof gallon, which is defined as one gallon of liquid that is 50% alcohol). For wine, the rates vary based on alcohol content and can range from $1.07 per gallon on products with 16% or less alcohol to $3.40 for sparkling wines. The typical rate for beer is $18.00 per barrel, which is the equivalent of 31 gallons.
Why is alcohol taxed so heavily?
Alcohol, cigarettes, gasoline and gambling are covered by what is commonly called the “sin tax”. Because these items aren’t considered necessary, they are subject to higher tax rates. In addition, there is some evidence that raising prices on these items means that they are used less.
Which state has the highest alcohol tax?
Washington has by far the highest alcohol tax at $32.52 per gallon of spirits.
What’s an example of an excise tax?
An excise tax is an indirect way of taxing items such as alcohol, cigarettes and gambling. The manufacturer is taxed, but this cost is often passed on to the consumer in the form of higher priced products and activities.
What is the Craft Beverage Modernization and Tax Reform Act?
The CBMTRA is a stimulus package that is designed to lower the tax rate for craft distillers. This reform has been the result of years of lobbying by various industry organizations and will keep that tax rate at $2.70 and prevent it from going back up to $13.50.
