This Cut's For You

By Wess Mitchell

Even as the first round in this year's tax debate draws to a close with the signing of the $1.35 trillion tax cut, lawmakers on Capitol Hill are already toasting the arrival of the next round of tax relief legislation - literally.

In 1991, Congress substantially raised taxes on alcohol and other "luxury goods" as part of an effort to reduce the federal deficit. Now, in the era of budget surpluses, America's beer producers are mounting a forceful campaign to ensure that they are next in line for tax relief.

Legislation currently being proposed by Representatives Phil English (R-Penn.) and Earl Pomeroy (D-N.D.) would significantly reduce the federal alcohol tax, cutting the rate on a case of beer by half. While such a reduction would cost the federal government about $17 billion in revenues, it would be fiscally prudent for three important reasons: It would create a more efficient tax, it would help stimulate the sagging beverage industry and - more importantly - it would reduce the overall tax burden on the poorest Americans.

First, the way the federal government taxes beer is inefficient. According to Standard and Poor's DRI, when additional state and federal sales tax revenues are included, brewers pay more than $25 billion per year in taxes. Significantly, federal taxes are levied on beer makers during production. Thus, they become part of the cost of production passed along to distributors, wholesalers and retailers. This inevitably means consumers pay higher prices. In fact - rather than hops, barley or labor - taxes are the single most expensive ingredient in beer, accounting for 44% of the total retail price of the average bottle. At purchase, a consumer is actually paying a tax on a product that was taxed during production - that is, he is paying a tax on a tax. These multiple layers of taxation make beer the most highly taxed consumer good - at three times the rate of practically any other item.

High beer taxes also create a drag on the economy by reducing sales and eliminating jobs. The beer industry generates about 2.5 million jobs and produces goods and services totaling nearly $55 billion annually. The industry was hit hard by the 1991 tax hike, which doubled the federal tax on a barrel of beer from $9 to $18, causing a drop in sales by over 4 million barrels and resulting in a loss of around 60,000 jobs. As a result of this downturn, the government's intake of corporate and personal income taxes was reduced, yielding a net of only 50 cents in revenue for every tax dollar paid on beer.

Finally, the beer tax is unfair because it disproportionately affects low-income Americans who consume beer - rather than other forms of alcohol - but who are least equipped to pay high prices. In fact, the Citizens for Tax Justice and the Institute on Taxation and Economic Policy have estimated that families with incomes in the lowest 20 percent pay five times more in beer taxes than families in the top 20 percent. By placing this heavier burden on lower- and middle-income taxpayers, the beer tax is in essence a regressive tax, penalizing the poor out of proportion to their ability to pay. The unfairness of the situation is striking; of all the consumer goods that Congress targeted as luxury items in 1991, including yachts, furs and private jets, only beer, which is the working man's delight, retains its high "luxury" status and corresponding tax rate.

Clearly, the fair move for Congress is to take the same approach to taxing beer as it ultimately has taken toward taxing the playthings of the wealthy and redress this imbalance. Doing so would lighten the tax burden shouldered by working Americans. It would also help to restore the tens of thousands of jobs lost by workers in the beer industry a decade ago, and alleviate the burdens of an overtaxed industry. Eliminating this inefficient and regressive tax would go a long way towards restoring sanity and fairness to an increasingly complex tax system.