States Eye Higher Taxes on Beer, Wine, and Liquor

SAN FRANCISCO—When Gov. Arnold Schwarzenegger proposed raising California's tax on alcohol by a nickel a drink earlier this week, part of an ongoing effort to close the state's $40 billion budget gap, California became the 27th state this year to consider raising taxes on beer, wine, and liquor to prop up its sagging budget. Schwarzenegger claimed the tax increase would generate nearly $900 million in new revenue over the next year and a half.

The measure was tabled yesterday during the latest round of budget negotiations, but experts say it is only a matter of time before another state picks up where California left off, turning to booze to solve its revenue problems.

Some states, to be fair, are raising revenue from liquor sales in a way that's good for them as well as for consumers. This summer, Colorado lawmakers lifted a decades-long ban on Sunday liquor sales, boosting the state's excise tax returns by 7 percent. Lawmakers in a half-dozen other states, including Indiana, West Virginia, and Georgia, are considering similar changes. According to a recent study, the 12 states that have abandoned their Prohibition-era Sunday sales restrictions in recent years have generated more than $200 million in annual state revenue.

Most lawmakers don't have the luxury of finding another day of the week when retailers can sell alcohol, of course. Thus, liquor taxes have found their way into budget talks. Earlier this year, Eliot Spitzer, the now departed governor of New York, proposed raising taxes on malt liquor and small cigars to help close the state's then $4.4 billion shortfall; he said the increase would add $738 million to the state's coffers. California lawmakers, for their part, promised earlier this week to use the revenue from their proposed 5-cent tax increase for drug and alcohol abuse treatment and prevention programs.

These tax increases may be for a good cause—lawmakers have to find some way to continue funding education and Medicaid, after all—but experts are cautioning states against using the recession to go after their constituents' liquor. Alcohol may be a luxury item, they say, but most voters don't support tax hikes on liquor the way they do on, say, tobacco.

"When revenue is needed for either balancing a budget or funding a particular spending priority, cigarette taxes have been a popular way to do it," says Bert Waisanen, a fiscal analyst at the National Conference of State Legislatures. "A lot of people are aware of the health risk, and they've formed their opinion. But alcohol, for some reason, is different."

Maine lawmakers learned this lesson the hard way earlier this year.

After passing a law that raised revenue for a state health insurance program by doubling taxes on beer and wine, state legislators were surprised to find themselves facing a taxpayer revolt. Even though the tax increased prices by only 16 cents for a six-pack of beer and 7 cents for a bottle of wine, it was widely denounced across the state. A group of angry beer and wine sellers—and their loyal customers—rallied to put an initiative on the ballot to repeal the measure. With the help of the deep-pocketed liquor industry, the initiative passed with 64 percent of the vote.

So far this year, all 27 of the proposals to raise state taxes on alcohol have been defeated or withdrawn.

"There has been a propensity to look at alcohol taxes historically as a way to raise revenue—this is part of the playbook that exists from Prohibition," says David Wojnar, vice president of government affairs at the Distilled Spirits Council of the United States, an industry lobbying group. "But a down economy is never a good time to add costs to any consumer good. It hurts small mom-and-pops, it hurts the bartenders, the waiters, the waitresses—the people who are driving the economy."

There is a case to be made, of course, that taxes on liquor, just like taxes on cigarettes, do have their time and their place. While raising revenue for the state, taxes on alcohol can also reduce consumption of a product known to cause health problems and contribute to other problems, such as traffic accidents.

There is a reason why roughly 50 percent of the purchase price of a bottle of liquor is due to taxes and fees.

Still, raising those taxes further—according to outside estimates, Schwarzenegger's proposal would have raised the price of beer and wine by more than 8 percent—is no way to boost a state's economy, by some accounts. Wojnar's group claims that the California tax would have reduced sales revenue in the hospitality industry by $1 billion and caused the loss of 20,000 jobs.

A small army of lobbyists descended on the state capital when the California tax hike was proposed, and it's no accident, political observers note, that the state has decided to look elsewhere for new revenue. "There's a broad-based coalition in opposition to this," says Wojnar. "While legislators turn to it quickly as a way to raise revenue, once we're able to educate them on the issue, they turn away from it. They realize it's a bad idea. A tax is a tax is a tax."

For budget-cutting lawmakers in California and elsewhere, there is no easy solution to their problems, it seems. It's almost enough to make a guy need a drink.

• Read about President-elect Obama's promises to help states.
• Read about which states have the biggest budget problems.