SPECIAL REPORT: Other states take run at beer taxes (but come up short)

EDITOR’S NOTE: This is the latest in the Center’s ongoing series of special reports on forward-looking, statewide public policy issues.

By Melissa Preddy

In 1966, “That Girl” and “The Monkees” debuted on TV, gasoline cost 32 cents a gallon, the Dow Jones industrial average closed at 785 and Michigan’s beer excise tax was 2 cents a can.

Forty-three years later, reality shows have supplanted sitcoms, a gallon of gas is about $2.70, the Dow is clawing back above 10,000 and Michigan’s beer excise tax is 2 cents a can.

Contrast that to the rapid acceleration of the state’s cigarette tax, which at $2 a pack currently is the ninth-highest among the 50 states. Michigan boosted that tax from 50 cents to 75 cents in 1994, making it the then-steepest cigarette tax in the United States. It was hiked to $1.25 in 2002 and to $2 in 2004.

And while not a “sin tax” target like tobacco and booze, gasoline is another common household purchase that the state has chosen to tax rather steeply compared to other states: Currently, Michigan levies 30.9 cents per gallon, the 13th-highest rate in the nation.

Analysts and activists, frustrated by Michigan’s billion-dollar budget crisis and its toll on a wide range of public services, say a boost to the beer levy is a long-overdue and relatively painless way to restore millions of dollars a year to state coffers.

“Less than a nickel a beer would pay for a lot of the cuts to programs that would’ve helped kids,” said Jack Kresnak, head of the non-profit Michigan’s Children think tank in Lansing. Earlier this year, his Detroit Free Press editorial proposing the tax hike was met with tepid response by legislators across the state.

The alcohol industry has fended off any and all efforts to raise the beer tax for more than four decades. They contend that the wholesale trade in the beer, wine and spirits already is paying its fair share to the state — about $200 million a year in Michigan — if you count federal and state sales taxes and local property taxes along with the excise levy. Wholesalers account for about 5,100 jobs with an average wage and benefit package nearing $50,000, according to the state trade group.

The beer business alone, including the retail channels, contributes 37,000 jobs and pumps about $2 billion a year to Michigan’s economy, according to 2008 figures published by The Beer Institute, a national trade group. As is, they say, 40 percent of the cost of a bottle or canned brew is made up of taxes.

And “it is important to bear in mind that Michigan has the highest state beer tax in the Great Lakes region,” notes Mike Lashbrook, president of the Michigan Beer and Wine Wholesalers Association. “Around 41 percent of a glass of beer in Michigan is made up of taxes, including federal and state taxes, taxes on ingredients and labor, and licensing fees.
Beer and wine are also the only beverages in Michigan subject to a 6-percent sales tax. The fairest way to look at Michigan’s beer tax is to look at the entire tax picture and recognize that Michigan is at a considerable disadvantage in relation to other states. Our tax is 300 percent higher than in Wisconsin. It is also much higher than in Indiana and Ohio.”

Sharon Parks isn’t buying it.

“Raising the beer tax should be a no-brainer,” said Parks, chief executive of the non-profit Michigan League for Human Services. The League has championed tripling the tax from 2 cents to 6 cents per 12-ounce serving, which it figures would raise about $90 million a year for the state.

Right now, Michigan’s 20-cent-per-gallon beer excise tax is 28th highest among U.S. states, along with California, Texas and Connecticut. Among the lower 48 states, Alabama is highest at $1.05 a gallon, according to the Center for Science in the Public Interest (CPSI), while Wyoming’s excise tax is a mere 2 cents per gallon.

In Michigan, “it is an existing tax that hasn’t kept up with inflation,” said Parks. “There is no easier thing the Legislature could do. But the lawmakers are afraid that people will scream bloody murder.”

Michigan ranks eighth in the nation in beer shipments, with more than 6.5 million barrels distributed here in 2008, according to Beer Institute statistics. According to historical accounts from the state Liquor Control Commission, the $1.25 per barrel beer excise tax established in 1933 was hiked to $6.30 per 31-gallon barrel in 1966, and that rate remains in effect today.

At 20 cents a gallon, Michigan is above the national median of 18.5 cents a gallon, but below the average of 27.8 cents, which includes high-tax states like Alaska ($1.07), Alabama ($1.05) and Hawaii (93 cents), according to a July 2009 report from the CSPI.
According to the state’s legislative database, no bills to boost the beer tax have been introduced in at least the past decade.

Do the math and existing excise taxes equate to a little less than 2 cents of excise tax per 12-ounce serving. The Michigan League for Human Services says that adjusted for inflation, the tax accounts for 2 percent of the cost of an average brew, compared to 10 percent of the cost when the rate was set in 1966. This failure to keep up with price inflation has eroded the purchasing power of the excise tax by 84 percent, the League says.

It wants to triple the tax to 6 cents a serving and figures that extra quarter consumers would pay per six pack would raise about $90 million more a year statewide.

“People don’t realize we are literally talking about pennies here,” said Parks. “It’s not a lot when you are talking about a billion-dollar problem, but $90 million in $90 million.”

Sam Hesano, the owner of Discount Beverage in Canton, has been selling alcoholic beverages in Metro Detroit for 37 years. He dreads the effect of a tax hike on what he says already is a 10-percent profit margin – or less if patrons pay with credit cards.

“People aren’t going to stop drinking,” said Hesano, whose warehouse-style store specializes in a wide selection to draw patrons from miles away. “But they will trade down to cheaper brands. They can get Schlitz anywhere – and if the taxes go up, with my margins I can’t offer much more to get them in the door. It is going to kill niche retailers like me.”

Nationally, the industry still bemoans the 1990 federal excise tax hike, which along with taxing luxury goods like yachts and sports cars, doubled the levy on beer from $9 to $18 a barrel. The industry claims that change cost the country 31,000 jobs and sales of 4.3 million barrels of beer.

Since then, booze tax increases seldom have been successful, and despite the proliferation of bottled beverages, energy drinks to iced coffees to simple H20 are turning out to be the proverbial third rail when it comes to legislative action.

A 2004 proposal by Gov. Jennifer M. Granholm to raise the state excise tax on distilled spirits by 11 percent was defeated; her current proposed 1-cent-per-serving tax on bottled water is vigorously opposed by producers and the International Bottled Water Association.

This year, New Jersey raised alcohol taxes by 25 percent – excluding beer.

A hotly debated plan in Oregon to raise the beer tax by 1,900 percent – from less than a penny per serving to 15 cents – went down in flames earlier in 2009 after vehement opposition by brewers, distributors and even an anti-hike Facebook page.

In Wisconsin, state Rep. Terese Berceau has sponsored a bill to boost that state’s levy from $2 a barrel to $10 a barrel, or 2.4 cents per serving. Citing high rates of substance abuse and drunk driving, Berceau says her proposal aims at paying for more treatment and prevention by raising revenue from $9.7 million a year to nearly $50 million. Similar attempts in the past have failed, and Wisconsin pundits forecast little hope for this push.
In Minnesota, rumblings this year of a proposed hike have galvanized grass-roots anti-tax petitions and other protests.

The only state in 2009 to successfully enact a beer tax increase was New York, which in May raised its beer taxes from 11 cents to 14 cents a gallon. Along with a similar boost to wine taxes, the change is expected to garner an extra $14 million a year for the state. It’s too soon to tell if the higher taxes have affected consumption, officials said.

Why is beer so untouchable?

Industry boosters say the product already bears a large tax burden and that hikes would be regressive, unfairly hitting the blue-collar, lower-income demographic it claims as its market. Higher taxes also would cripple small businesses and entrepreneurs running burgeoning craft breweries and affiliated restaurants, lobbyists say.

“The track record for beer tax hikes passing is pretty low,” said Jeff Becker, a Michigan native and current head of the National Beer and Wine Wholesalers Association. “There is this perception out there among some (community activists) that there is a big pot of money out there and you can just take it. It sounds like an easy fix but we try to remind (proponents), you’re not taxing a beer company, you’re taxing a beer consumer. And that’s the wrong group to tax, especially in this economy. And legislators recognize this.”

Legislators also receive a lot of largesse from the alcoholic beverage industry, says Parks of the Michigan League.

“At some point, that has to become part of the discussion,” she said.

Others agree.

“Beer and wine wholesalers are probably the most well-funded lobby in the state,” said Doug Drake, group manager and senior policy consultant with the Lansing-based research firm Public Policy Associates.

But political consideration is not the only impediment to higher beer taxes, he said. For one thing, even the increase proposed by human services advocates would remain a drop in the bucket to the state’s budget woes.

“It’s a Joe Six-pack, third-rail kind of issue and relatively speaking a small piece of a solution to a really big problem, Drake said. “If I were a politician, I’d figure ‘If I’m going to get beat up, it might as well be for something big.’”

The bigger problem, Drake said, is that Michigan has a tax structure with built-in limitations. It doesn’t keep up with inflation and even lucrative taxes like those on cigarettes are designed to self-destruct as higher levies prompt more people to quit using the product.

Rather than an abrupt jump in beer and other excise taxes, Drake suggests abandoning the per-unit tax structure in favor of a value-based tax would make more sense.

“You could start it off in a revenue-neutral fashion,” he said, meaning the new tax would be the same out of pocket for consumers as the old method. “But if it’s connected to value, it naturally would grow over time. You build in growth.”

As with the service tax debate and other tax reform issues, that is the bigger question, Drake said.

“Do you build a tax system that will grow to keep pace with the economy, or don’t you?”

For 43 years, Michigan has said no to that question — at least as far as beer taxes are concerned.