States Weigh Tax Hikes on Wine

The recession and budget deficits make higher excise taxes on alcohol a tempting idea to legislators
 
Would Two-Buck Chuck seem like such a bargain at $2.16? Perhaps, but increasing prices amidst one of the worst recessions in the past hundred years could be considered questionable at best. And yet many state governments are considering forcing wine lovers to shell out a little bit more of their hard-earned cash in 2009, in the form of higher excise taxes.

In 2008, legislatures in 27 states considered raising taxes on wine, beer and spirits in an attempt to close budget deficits. California Gov. Arnold Schwarzenegger pitched an 8 percent increase in California's tax on alcohol as one way to help close the state's deficit, an idea that did not prove popular with California's wine industry.

The idea went down to defeat. In the end, none of the proposed tax increases in 27 states passed, but this year such proposals may have better chances. State governments have already closed $40 billion in 2009 budget gaps, according to the National Conference of State Legislatures (NCSL), but will likely have to find ways to deal with another $97 billion in deficits during the next two years. Unlike the federal government, state legislatures are required by law to pass balanced budgets. They have already cut spending, tapped rainy-day funds and passed some tax increases.

Tax hikes on alcohol sales have long been a favored budget-balancing tool in hard times. So-called "sin taxes"—taxes on tobacco and alcohol—are usually more popular with voters than raising income taxes or property taxes. "Politicians always want to tax a minority of voters, if possible," said Patrick Fleenor, chief economist at the Tax Foundation, a nonpartisan think tank.

Current state excise taxes on wine range from 11 cents per gallon in Louisiana to $2.50 per gallon in Alaska. The national median rate is 69 cents per gallon. The federal government also charges an excise tax. Retailers are reporting that consumers have been "trading down" in the past six months, buying lower priced wines. Bottles selling for less than $10 have seen a big increase in sales. Any increase in tax obviously adds to the price.

Not surprisingly, anti-alcohol groups are supporting the proposed increases. Most were calling for increases during boom economic times, arguing that higher excise taxes are an effective way of curbing alcoholism.

Members of the wine and spirits industries, on the other hand, are not fans of the idea. "This isn't a sin tax," said David Wojnar, vice president of the Distilled Spirits Council of the United States. "It's an assault on the hardworking men and women of the hospitality industry. A majority of Americans consume alcohol responsibly."

Fleenor has a different objection. "Broad government programs financed by a minority of voters: It fails a basic fairness argument."

The fact that no alcohol excise tax increases went into law last year may be a sign that voters no longer consider drinking a "sin." "There has not been a push in recent years for more taxes on alcohol," said Bert Waisanen, a fiscal analyst at NCSL, who noted that states instead turn consistently to taxes on tobacco products. The only tax increase on alcohol that was approved by a legislature last year was in Maine. The measure was placed on the ballot in November and rejected by voters. Still, $97 billion may make such increases too tempting.

A few states, however, are considering how excise taxes can increase revenues without tax increases. Colorado recently ended its ban on Sunday alcohol sales, and the resulting increase in purchases raised excise tax revenues by 7 percent. Lawmakers in other states are considering similar moves. New York Gov. David Paterson has proposed increasing New York's excise tax, but has also proposed allowing wine sales in grocery stores, a move that should result in more sales and plenty of revenue from licensing fees. That may render the excise tax increase unnecessary. Plenty of winemakers are hoping so.