LegiStorm

Summary:

The federal excise tax on alcoholic beverages is imposed at the manufacturer and importer level, based on the per unit production or importation of alcoholic beverages (e.g., distilled spirits, wine, and beer) for sale in the U.S. market. At current rates, the federal tax per ounce of pure alcoholic content for spirits, wine, and beer is 21 cents, 6 cents, and 9 cents, respectively. When converted to standard drink measures, liquor is generally subjected to a federal excise tax of approximately 13 cents per 1.5 ounce shot, wine is taxed at 4 cents per 5 ounce glass, and beer is taxed at 5 cents per 12 ounce can or bottle. Alcohol excise tax collections totaled $11.1 billion in FY2023, with collections from distilled spirits comprising 61% of that amount. This report provides a brief historical overview of alcohol excise tax policy and describes current law, and analyzes alcohol excise tax rates based on some of the standard criteria for tax evaluation: revenue, economic efficiency, and equity. Congressional interest in alcohol excise taxes varies with policy motivations and the industry’s wide geographic distribution. Since their inception in 1791, federal excise taxes on alcohol have been imposed or increased primarily to fund emergency spending during wartime or in response to concerns over the growth of budget deficits. Interest in alcohol taxes tends to be motivated by three types of approaches: (1) excise tax rates could be decreased to benefit firms in the industry; (2) excise tax rates could be increased for deficit reduction; or (3) excise tax rates could be increased to discourage the negative spillover effects of alcohol consumption (e.g., drunk driving fatalities, property damage, domestic violence). Federal alcohol excise tax rates have been subject to three increases since 1951, with the most recent occurring in 1991. Alcohol excise tax revenues have declined in inflation-adjusted value over time. Lowering excise taxes would reduce excise tax collections, reduce some of the regressivity in the federal tax code, and provide alcohol producers and importers with a temporary increase in their profits (due to lower tax rates). Two alcohol excise tax provisions have reduced revenues in recent years. The “double drawback” on wine allows a rebate of taxes for exports that have not been paid due to an interaction between the excise tax law and the drawback law. An estimate by U.S. Customs and Border Protection and the U.S. Department of the Treasury indicated that the double drawback caused a revenue loss of around 5% of total wine tax collections in FY2018. Recent expansions of lower tax rates aimed at craft beverages—justified to address concentration in the industry—have also reduced revenue. These changes are estimated to reduce taxes on distilled spirits, wine, and beer by 8.7%, 21.4%, and 4.4%, respectively, and to benefit large producers as well. Economic theory typically supports imposing excise taxes on alcohol consumption to better reflect the costs of an individual’s consumption of alcohol to society. While there is much debate surrounding the technical measurement of these linkages, most researchers argue that alcohol excise tax rates are set below the economically efficient level necessary to compensate for social costs. Recent research estimated an external cost of $1.34 per ounce of pure alcohol, compared with combined federal, state, and local taxes of around 25 cents per ounce. Analysis suggests that excise tax increases are usually passed forward to consumers through higher prices and are not borne by the owners of alcoholic beverage manufacturers or importers. Excise taxes are generally regressive, but alcohol taxes are initially progressive, rising from 0.051% of income in the first quintile to 0.063% in the middle quintile. They are regressive after that, falling to 0.046% in the top quintile. Consumers at the same income levels also pay different amounts of federal excise tax on the same amount of alcohol content, based on the type of alcoholic beverages they purchase.