NCPA - National Center for Policy Analysis

Alcohol Tax Could Backfire

January 28, 2011

Maryland's proposed new beverage tax would require wholesalers to pay the "dime per drink" tax on all of their liquor sales upfront and then pass along the cost to retailers and restaurants, which presumably would pass it along to consumers per drink.  But the upfront cost to wholesalers and retailers could be overwhelming, says Michelle Minton, director of insurance studies with the Competitive Enterprise Institute.

  • The proposal would raise the tax on beer from 9 cents to $1.16 per gallon.
  • It would raise the tax on wine from 40 cents to $2.92 per gallon, and raise the tax on distilled liquor from $1.50 to an astonishing $10.03 per gallon.
  • The tax would increase wholesalers' inventory costs by 700 percent to 1,300 percent.

Proponents of the tax argue that it would raise revenue for the smarting state budget, but they underestimate its impact on businesses.  In the end, the tax increase would hurt, rather than help, the state's economy, says Minton.

  • The taxes on alcohol are imposed directly on distributors, so the increase in the upfront cost of purchasing alcohol could bust their budgets.
  • Distributors may have to purchase less inventory, fire workers or raise prices -- or possibly all three.
  • Assuming that restaurants can cope with the increased costs, they are then left with two options: Absorb the cost and keep prices the same or increase prices in order to pass on the tax to their customers.
  • Most restaurants likely would increase their prices, not just on alcohol, but also on food -- this means that all potential patrons, even teetotalers, would end up paying for the tax increase.

One unintended consequence of the tax increase could be a reduction in purchasing and spending in Maryland.  With the District of Columbia a short ride away, Marylanders seeking better options to their state's liquor sales monopoly might begin to do the majority of their alcohol shopping in the District.  That would further hurt Maryland businesses struggling to recover from the economic downturn and stall the projected revenue bump the tax was intended to generate, says Milton.

Source: Michelle Minton, "Assault on Alcohol," Washington Times, January 20, 2011.

For text:


Browse more articles on Tax and Spending Issues