As we head into 2021, state finances are in more trouble than usual. Efforts to address the COVID-19 pandemic while economic activity took a nosedive have pushed budgets into the red.
Estimated state tax revenue shortfalls that exceed 10% are widespread. Some states — including California — are in even deeper holes with projected tax losses expected to double that decline. And without the ability to print whatever money you need, lawmakers will be on the prowl for ideas to fill the fiscal gap.
Raising alcohol taxes are bound to be a favorite among the proposals embraced by short-term thinkers.
The policy is already getting some play. Oregon Gov. Kate Brown included a tax increase on distilled spirits in a budget proposal released earlier this month, which follows an October decision to extend yet another surcharge on the product. If adopted, the moves will cost businesses and consumers more than $60 million annually. Alcohol producers, restaurants and consumers — which have already been beaten down by the coronavirus — will be footing the bill.
An avalanche of new alcohol taxes could suffocate an already crippled hospitality industry as the additional costs trickle down to consumers in the form of more expensive drinks and suppress demand. As of November, 9.8 million Americans who had a job in February don’t have one now. People struggling to make ends meet are seldom willing to pay extra for a glass of wine, beer or a cocktail.
The coronavirus pandemic has pistol whipped U.S. restaurants and taverns — which usually account for 46% of all alcohol sales. Earlier in the year, local and state governments banned food and drink establishments from offering dine-in service and another wave of restrictions are creeping across the country as virus cases surge. Washington, D.C., became the latest area to shutdown indoor dining last week.
Recent reports indicate more than 110,000 restaurants — or 17% of establishments nationwide — are either closed permanently or long-term. When parsing the data for full-service restaurants, the proportion of closures is even more chilling. Food and drink businesses laid-off more than 17,000 employees last month alone. Despite an uptick in alcohol sales from delivery options, maintaining previous revenue levels is impossible.
Higher excise tax rates will only make matters worse.
The ripple effect will be widespread. Millions of jobs nationwide that are touched by beer, wine or spirits companies will suffer. In addition to those who staff the breweries, distilleries and wineries directly, everyone ranging from employees in glass bottle or aluminum can manufacturing facilities to restaurant servers and bartenders will be negatively impacted.
Alcohol is already one of the most taxed products in the country. Last year, the federal government collected $10 billion in alcohol excise taxes nationwide and it grows even more when applying billions of dollars in state and local excise taxes every year. Consider that 40% of the retail price of a beer is typically driven by taxes, and excise taxes on spirits can be as high as $33 per gallon.
Federal lawmakers understand the idea of not kicking hospitality businesses while they’re down. Congress has agreed to indefinitely extend provisions of 2017 legislation that lowered federal duties on beer, wine and spirits. If shortsighted politicians in Washington understand raising taxes on an already overtaxed product during an economic downturn is a lousy policy, state lawmakers should be able to wrap their heads around the concept.
The Whiskey Rebellion of 1791 was sparked by taxes levied on distilled spirits. While increasing state alcohol tax rates is unlikely to incite an armed conflict, it could be the straw that breaks the camel’s back and sends the hospitality industry and partner companies and their employees into an even deeper economic tailspin. It’s a sobering thought state policymakers should keep in mind.