Priceonomics

Beer and taxes have never gotten along. 

In 1831, King Ludwig I of Bavaria decreed a minimal ad valorem tax on beer equivalent to two US cents. Here’s what ensued, according to Frederick Engels:

“The working men assembled in large masses, paraded through the streets, and assailed the public houses -- smashing the windows, breaking the furniture, and destroying everything in their reach -- in order to take revenge for the enhanced price of their favourite drink.”

For four days, Munich was chaos. Order was only restored after the king reduced the price of beer by 10%.

In the United States, taxes and beer have had a more long-term marriage. Early spirits taxes were levied in order to pay off war debts following the Revolutionary War, the War of 1812, and the Civil War. In the antebellum period (just before the Civil War), taxes were levied on beer, and, outside of a brief hiatus during Prohibition, have since been a mainstay. Many critics of these taxes have cited them as a factor behind the United States’ declining preference for beer seen here.

Source: Gallup

So, what exactly are these taxes for, and are they really hampering the domestic (and global) beer market?

Beer Taxes: Hidden in the Price

Today, beer taxes in the United States amount to more than 40% of the price

Every time you buy a beer, you unwittingly pay excise taxes, also known as “hidden taxes,” or indirect taxes. These are taxes imposed on the supplier which are then factored into the item’s retail price. Many luxury goods and “sins” (ie. tobacco, alcohol, lottery tickets) have been subjected to excise taxes.

Beer is no exception: both state and federal excise taxes are imposed on brewers. 

On July 1, 1862, Congress authorized the first federal excise tax on beer: $1 per barrel (31 gallons). This tax increased slowly over the years (consistent with inflation) and, by 1990, was set at $9 per barrel. Then, in 1991, the federal government doubled the tax per barrel to $18 -- the largest beer tax increase in American history. As a result, beer sales decreased 5%, and an estimated 60,000 Americans lost their jobs. 

Brewers also deal with state excise taxes, which are independently set. Broken down into per gallon measures, these taxes widely vary. As of 2014, the national average is $0.20 per gallon. But in certain states (Tennessee, Alabama, Georgia), taxes are over $1 per gallon.

Source: Tax Foundation

Jeffrey Last, a beer enthusiast on Capitol Hill, says that in the 2007 fiscal year, “the federal beer excise tax generated $3.8 billion with $3.3 billion coming from domestic brewers, and $500 million from imports.” This doesn’t include state excise taxes, which he estimates reel in “at least $1 billion” more. He adds that federal taxes aren’t earmarked for any particular programs or initiatives, in contrast to state taxes. For example, Arkansas’ excise taxes go toward education and child care funds.

Proponents of this beer tax argue that it does more than provide extra federal and state funding. Last says that some see these “sin taxes” as a viable way to mitigate unhealthy habits. These advocates cite graphics like the one below, which they believe demonstrates how the 1991 beer tax increase reduced drunk driving fatalities by 10% in the following years.

Source: Negligent Driving 

But opponents of the taxes have data of their own. The graphic below shows that, following 1991, teen drinking prevalence actually continued to increase. The tax seemed to have little impact on underage drinking trends. 

California: Percentage of Teens Who Consume Beer (1985-1994)

Source: Beer Institute (DC)

Opponents also argue that these excise taxes propagate social disparities, and should be deemed unconstitutional. As the effective tax rate is total excise taxes paid divided by comprehensive income, beer taxes are higher for lower income people.

Source: Congressional Budget Office

Beer/Tax Relationship in Other Countries

In the U.K., a 10 pence per pint tax increase over a three year period (2006-2009) contributed to a 2,500% increase in pub closures (figure A). Data compiled by The British Beer and Pub Association (BBPA) also indicates a converse relationship between tax increases and beer sales -- most dramatically from 2010-2013 (Figure B).

Figure A: Relationship Between Taxes, Foreclosed Pubs in UK

Source: BBPA

Figure B: Relationship Between Taxes, Beer Sales, Pubs in the UK

Source: BBPA

Germany has seen a similar trend. The country’s Biersteuergesetz (“beer tax law”) was modified in 1995 to impose higher tax rates on beer. Here’s what happened:

Source: Quartz

In Thailand, excise taxes on beer are “a way of milking the cash cow,” according to one overseas investor; laws were passed last year that increased the taxes on beer to 60% of the product’s value. In a public statement, Thailand’s finance minister, Kittiratt Na-Ranong, told his country that ''the tax restructuring for alcohol beverages is not aimed at boosting state revenue, but is aimed at reducing the number of alcohol drinkers.” This is similar in mindset to the United States’ motivations.

Thailand’s beer market, which is worth about $2.9 billion (US dollars), is being completely shaken up by the new law, which stipulates two separate taxes: one on product value, and another on alcohol content. Singha (5.0% alcohol), which has historically been a more expensive premium brand, will become cheaper than Chang (6.4% alcohol), and Chang is now losing market share to Singha.

Conclusion 

Source: Amarand Agasi, Flickr

In fairness, none of these trends should be solely attributed to increased taxes. External factors have also contributed to decreased beer sales. Germany, for instance, cites old people or, specifically, “your grandfather,” as the villains of beer’s downward trajectory.

In the United States, it seems the youngins are partly to blame: in the early nineties, “71 percent of the 18-29 cohort preferred beer, while just 41 percent of today's youth cohort say beer is their favorite.”

It’s also important to consider fluctuations in the economy (ie. the financial crisis of 2007-8). Amy Mittelman, author of Brewing Battles: History of American Beer, says it’s a myth that alcohol is immune to social and economic crises. She also concedes, though, that there is a strong correlation between taxes and beer consumption: “Throughout the 1990s, beer sales were flat because of tax increases.”

In any case, we offer a proposal: let’s band together, as the Bavarians once did, and storm the cobble-stoned streets. Perhaps we can even overturn a horse carriage or two! Collectively, we can rescue beer from the cold, unrelenting hands of Uncle Sam.

Eh, screw it. Let’s just have a few (highly marked up) cold ones and forget our troubles.

This post was written by Zachary Crockett. Follow him on Twitter here, or Google Plus here.



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