Alcohol and Income Tax

The history of our country is a history of alcohol and as it is currently April it is Tax season for the Adults of the US. This is a time for stress, the paying of our annual due and perforce a bit of drinking to blow off the stress of paperwork and payments.

What you might not be aware of is the role that alcohol played in the need for an income tax in the first place.

Prior to the passage of the 16th amendment in 1913 the government’s ability to levy taxes against individual income was severely limited. From the 1780’s onward the government paid most of its debts through a combination of tariff revenues, excise taxes and assorted other duties. Excise tax is tax on an item produced inside the country, this is as opposed to tariff which is tax against something imported from outside.

Up till the 1820’s the revenue from excise on alcohol and tobacco accounted for about 5% of the US total revenue. It wasn’t until the US incurred debts from the war of 1812 that more money was needed and alcohol was called upon to provide. Revenues in 1815 were almost 30% of the total US receipts.

After the war the income from excise and other taxes paid down the debt quickly and the extra taxes were removed almost entirely by 1825. Booze would not be called upon again to give service to our country until the 1860’s when debts from the civil war again forced a hunt for new incomes.

The amount of revenue being generated from this source was substantial. Accounting for 30-50% of a budget of $333 million dollars. This level of income persisted for decades, well into the 19-teens and it was this more than anything that prevented the federal government from accepting the calls of the Temperance League to ban alcohol entirely. Who could possibly accept that kind of change when it was funding 30% of government spending?

What tipped the scales was amendment 16. Permitting congress to levy taxes
without apportionment among the several States, and without regard to any census or enumeration.
Previously taxes needed to either be indirect like excise or tariffs or if they were direct had to be divided among the states by population. Putting the burden of the tax on the amount of income rather than by geography was a new spin on an old formula.

That first year of income tax in 1913 the total revenue was only about 5% of the US total, but by 1919 and the passage of the 18th amendment banning the production or sale of alcohol income tax was almost 75% of US receipts. Passage of the Volstead act and the ratification of the 18th would likely not have been possible if the US were still dependent on the revenue from liquor to power the machinery of government.

After the end of prohibition excise was sought out again as a source of funding when WWII forced the government again into major debts. Today excise tax in general accounts for about 3% of the total US revenue with about 10% of that being alcohol and the rest coming from airline fuel, gasoline taxes, tobacco and other sources. Despite this drop in overall importance the excise still brought in over $83 billion with alcohol’s share at $10 billion annually.

It would be nice to think that alcohol might rescue us again and that by paying a little more per bottle we could cut income taxes out entirely. Sadly Income tax these days brings in over a trillion dollars annually from individuals alone. So it looks like the 1040 isn’t going anywhere for a while.

In fact excise taxes have been getting lower and lower thanks to the efforts of lobbying groups from craft brewers, craft cider makers and craft distillers. Creating more graduated taxes or eliminating taxes below a certain level of production is encouraging new entrants into the budding markets for craft brews and spirits. Since the excise on liquor makes up almost half the price of a bottle these days it’s good to see this opening up to new producers without burdening them with the kind of taxes we put on bigger successful companies.

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