Alcohol Tax Debated in States Across the Nation

Oct. 26, 2010— -- It's not the lagging economy that's caused his small business to lose $250,000 in revenue and its staff to shrink from 14 to nine employees, says James Alexander.

It's the state sales tax, claims the owner of Winchester Wine and Spirits in Winchester, Mass.

In August 2009, the Massachusetts legislature voted to subject alcohol sold in retail stores to the state sales tax. Previously, wine, beer and liquor (already subject to an excise tax) purchased in stores were exempt.

So Alexander will be sure to vote "yes" on Question 1 on Nov. 2. He's already posted statements on his Facebook page in support of it. The initiative asks Massachusetts voters if they would like to exempt alcohol from the sales tax.

"I can understand why you need sales taxes, I really can," Alexander told ABCNews.com.

But, he added, "It was painful knowing this tax has laid good people off."

Last year, a Friday night would have brought about 1,000 people through the doors of the shop, he said. On one Friday earlier this month, only 575 customers came in.

Instead, customers drive to New Hampshire, where alcohol isn't subject to a sales tax.

States Re-Examining Tax on Alcohol

A well-publicized initiative in California, which failed to get enough signatures to put it on November's ballot, sought to increase excise taxes on alcohol dramatically -- from 11 cents to $6.08 on a six-pack of beer and from four cents to $5.11 on a bottle of wine. Supporters hope it will appear on the 2012 ballot.

Virginia is considering adding a fee onto alcohol sold in bars and restaurants as it looks at privatizing state-run liquor stores.

Officials in Oklahoma recently have proposed a tax increase to the state legislature that would help offset the fiscal budget.

And in Maryland, there's the "dime a drink" proposed tax. The move would increase the tax on alcohol proportionally to how many servings the container holds. A six-pack of beer would be subject to a 60-cent increase.

"Beer is Cheaper Than Milk"

Vincent DeMarco, president of the Maryland Citizen's Health Initiative, a non-profit organization that seeks to improve public health, said the state's general assembly will vote on the initiative early next year. For now, he said, the proposed tax is fueling debate among residents.

The tax, he told ABCNews.com, is designed to combat drinking in excess. The money collected would be used in part to fund alcohol-abuse treatment programs.

"It's a win-win situation," he said. "Alcohol-related problems decrease, and government revenue for special programs increases."

The initiative worked with Johns Hopkins University associate professor David Jernigan, who studied how behavior is related to alcohol taxes. Jernigan's research shows that with a heightened alcohol tax, people drink less, and, subsequently, alcohol-related deaths and accidents decrease.

"We all suffer when there is alcohol abuse," DeMarco said.

Jernigan said the tax is "long overdue" because Maryland has one of the lowest tax rates on alcohol in the country. Taxes haven't been raised on wine and beer since 1972, and spirits haven't been subject to an increase since 1955, he said.

"It may hurt the alcohol business, but, frankly, that's the point," he said. "In our state, beer is cheaper than milk. It's cheaper than orange juice. Sometimes, it's cheaper than water. That is a terrible message to send people."

Jernigan said the tax will not threaten Maryland's economy.

"Money just doesn't disappear from the economy," Jernigan said. "The money that people don't spend on alcohol, they'll spend on other things. They won't just stop spending."

Examine the Proposals Carefully, Say Economists

The Tax Foundation, a non-profit organization committed to educating taxpayers about government finance and "sound" tax policy, recommends citizens consider any proposed increase carefully.

Mark Robyn, a staff economist for the group, said there are two main reasons a government would implement a higher alcohol tax.

It could be used as an excise tax, meant to curb consumption, or it could simply be a way to raise revenue for government projects.

In the case that a tax is raised to cut drinking, he said, taxpayers and lawmakers need to decide what level of taxation would yield the desired reduction.

"Unfortunately, it's pretty difficult to gauge at what price consumption drops," Robyn said. "I don't know of any way you could really estimate it."

"A Slippery Slope"

He added that excise taxes carry the risk of not working.

"People who abuse alcohol," he said, "are the people less likely to respond to an increase. People who just enjoy a drink now and then for the fun of it will probably cut back if it's more expensive. People who are dependent on alcohol will probably continue to drink, no matter the price."

Robyn also warned taxpayers that a government should have an established plan for money collected through an increase. "The state needs revenue" is not specific enough of a reason.

"Right now, it seems a lot of tax policy is, 'If it will affect me, the tax is bad, and if it won't affect me, the tax is good,'" he said, "and we need to get back to the basics of sound economic theory."

For Robyn, that means weighing the public good an alcohol tax increase would create with the possible economic effects.

Curtis Dubay, a senior tax policy analyst for the Heritage Foundation, said specific excise taxes, like the one proposed in Maryland, and general sales taxes on alcohol, like the case in Massachusetts, are two different issues.

Taxpayers should be wary of excise taxes, he said, while including alcohol in a state's sales tax is "perfectly legitimate economic policy."

"A state sales tax should tax every good and service, and excluding something like alcohol could lead to a slippery slope of other exemptions," he said.

No Easy Answer

Meanwhile, in Massachusetts, the debate moves along.

The No On 1 campaign's position is that the alcohol industry "doesn't deserve a special tax break."

"Alcohol is not a basic necessity," No On 1 spokesman Jim McManus said. "It shouldn't be lumped into the same group with food, clothing and prescription medications. It's not needed to survive."

The revenue now collected from the tax goes into a dedicated public health services fund, which provides treatment to substance abusers and prevention education to the public, he said.

McManus said that the first year the tax was implemented, alcohol sales fell less than 0.1 percent. Citing the Massachusetts Department of Revenue, he said that in the last three months, sales have increased four percent.

McManus said that while individual businesses, such as Winchester Wine and Spirits, may have seen their sales decrease, the alcohol industry as a whole has not been harmed by the tax.

According to McManus, polls say the public supports keeping the sales tax on alcohol intact.

"People don't mind paying a little more in taxes if they know it's going to better society," he said.

ABCNews.com contributor Meg Wagner is a member of the ABC News on Campus bureau in Gainesville, Fla.