What's worse, the alcohol tax or education cuts?

Our view: The liquor industry is debating the true cost of an increase in its excise tax, but lawmakers need to put that question in context

March 13, 2011

When the opponents of an increase in Maryland's alcohol tax got an opportunity to make their case before the Senate Budget and Taxation Committee last week, their message was clear: Anything that increases the price of beer, wine and liquor will cause consumers to buy less of it, and that will cost the state jobs. But what was curious about their argument was that they admitted that if the tax increase were enacted, they would effectively exacerbate the impact by increasing the final retail price by much more than the extra tax they pay.

Here's why: The proposed tax increase, advertised by advocates as a dime a drink, works out to about $2.41 for a case of beer, about 50 cents for a bottle of wine (though, curiously, the industry reports this as $1.01 in its advocacy materials, as if people typically bought magnums), and $3.94 for a 1.75-liter bottle of spirits. But unlike the sales tax, which is levied at the consumer level, the alcohol tax is an excise tax, levied on the wholesaler level. Liquor industry officials testified that the current practice is for the wholesaler to incorporate the tax, plus a percentage markup, in its price to the retailer, and the retailer does the same thing in its price to the consumer. If the tax is increased by the equivalent of a dime a drink, the officials said, that increase would also get marked up twice on its way to the consumer, though they were vague about exactly how much.

A bigger tax, then, means a bigger profit for each bottle they sell. It's hard to tell which makes less sense, that an industry avowedly concerned with price competition from other states would voluntarily make the problem worse or that it would find this argument persuasive.

But logic has always had a tenuous connection with any discussion of alcohol in Annapolis, where the powerful liquor lobby, through millions in campaign contributions and lobbying fees, has worked for decades to limit competition and fend off tax increases — so successfully that the tax on beer and wine hasn't gone up since 1972 and the tax on spirits not since 1955. Yet the general counsel for the Licensed Beverage Distributors of Maryland argued in the Senate hearing that the industry is unusually put upon: "For some reason," he said, "we're a favorite target." Indeed, the General Assembly seems to go back to that well every half-century or so.

The liquor industry's histrionics and questionable pricing tactics aside, there's no doubt that increasing a tax on alcohol — or anything else — will have an economic impact. The effect probably won't be so dire as the 8,000 lost jobs distributors and retailers claim, but the economic law that what you tax you get less of holds true, whether that tax was last raised in 1955 or 2010.

But as legislators decide whether to support a tax increase on alcohol — either the dime-a-drink proposal or some lesser amount — they need to bear in mind that their inaction would have economic consequences, too. As it stands, the governor's budget cuts millions from state education funding, which is likely to result in layoffs of teachers. That costs jobs right now, just as surely as the liquor industry says a tax increase will, and if it results in a lower quality of education, the impact could be even greater in the future. Cuts to services for the developmentally disabled, the favored cause of the coalition pushing the dime-a-drink plan, have economic impacts too, both in reducing employment for those who serve that community and in taking family members of the disabled out of the work force so they can provide care.

The other thing legislators need to bear in mind is that the governor's budget this year is only a first step in solving Maryland's budget imbalance. The actions he proposes eliminate only a third of the long-term shortfall, and if he and the General Assembly want to take care of the rest — as they have indicated they do — the options for doing so with budget cuts alone will get progressively worse. The alcohol tax, estimated to generate about $213 million at the dime-a-drink level, would eliminate only a portion of the problem, but it could stave off some of the most damaging budget cuts.

The alcohol lobby can debate what the exact cost of a tax increase would be in terms of the price of a beer at the bar or of jobs in a fragile economy. But as Maryland apportions the pain caused by the recession, lawmakers need to ask whether they want to continue a half-century tradition of shielding this industry at the expense of health care, education, public safety or any of the other important causes that suffer in the governor's budget proposal. No one likes tax increases, but if the liquor lobby thinks it makes sense to cut more deeply from our most important priorities, the ones that provide a chance for a better future, in order to spare an industry that causes a great deal of societal harm, they must be overindulging in their own products.

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