Ideas for Sin Taxes' to Fund Health Reform Finding Little Hill Support

By Heather M. Rothman and Brett Ferguson
Publication date: 06/08/2009

A Senate Finance Committee suggestion to tax products viewed by some as bad for Americans, such as alcoholic and sugary beverages, to raise revenues for a $1 trillion health care reform is facing stiff resistance from lawmakers on both sides of the Capitol.

The notion of using “sin taxes” to raise revenues while discouraging undesirable activity proved successful in February when Congress succeeded in increasing excise taxes on tobacco products for the first time since 1997 to help pay for an expansion of the Children's Health Insurance Program. Sen. Charles Grassley (R-Iowa), ranking member of the Senate Finance Committee, refers to the idea as “nuisance taxes.” Private budget analysts have told the committee that tens of billions of dollars more could be raised through higher taxes on alcohol and a new tax on sugar-sweetened drinks.

Advocates of the increases say the federal excise tax on alcohol has not kept up with the rate of inflation and needs to be raised, while they argue sugary drinks are a primary cause of obesity and more dangerous than fatty foods because they represent “empty calories.”

The Center on Budget and Policy Priorities estimates that raising taxes on alcoholic beverages could raise between $27 billion and $100 billion over 10 years, and that a new tax on sugary beverages could raise as much another $100 billion over years.

The suggested change in the alcoholic beverage taxes would include imposing a uniform tax across different types of beverages, eliminating the current system of treating wine and beer differently from liquor.

But House members in recent interviews said the economic recession and a history of revenues decreasing after a hike in such excise taxes should be enough to see the proposal set aside.

“What needs to be looked at right now is what increasing that tax would mean not just in terms of dollars raised, because it's a zero-sum game at this point, so any dollars picked up on the tax side would be lost on the jobs side,” said Ways and Means Committee member Mike Thompson (D-Calif.), who represents Napa Valley. “The wine industry has been hit hard in this recession and the idea that you could just somehow pull more money out—all that would do is lose jobs.”

Ways and Means Committee Chairman Charles Rangel (D-N.Y.) said June 5 increasing the taxes on alcoholic beverages is “on the table”—his standard line when discussing all revenue-raising options—but also said “the table is slanted; a lot of stuff slides off the table.”

Current Tax Rates

Currently, on a per-ounce basis, distilled spirits are taxed at roughly 21 cents per ounce of alcohol, wines at 8 cents per ounce of alcohol (assuming an average alcohol content of 11 percent), and beer at 10 cents per ounce of alcohol (assuming an average alcohol content of 4.5 percent).

Under one proposal, the excise tax could be raised to a rate of $16 per proof gallon on all alcoholic beverages, which would have the effect of raising taxes on beer by 13 cents a bottle and on wine by 14 cents per bottle. Distilled spirits are currently taxed at a rate of $13.50 per proof gallon.

“I understand the thought, but this is already one of the most heavily taxed products in the country. About 60 percent of the retail value is taxes,” said Ways and Means member John Yarmuth (D-Ky.), who said June 2 he was contacted by constituent Brown Forman, a major producer of wine and spirits, to voice an objection to tax increases.

The idea of raising taxes on alcoholic beverages is likely to be opposed by at least 191 members of the House, who have signed on to co-sponsor legislation (H.R. 836) to cut the tax on a barrel of beer from $18 per barrel to $9 per barrel. The tax was last raised in 1991. The Senate version of the Brewers Excise and Economic Relief Act (S. 1058) has the support of six members—two Democrats and two Republicans—while the House version has won the support of 75 Democrats and 116 Republicans.

“I have one of the most Irish districts in the United States of America and there are folks in my district that would consider a massive increase on the beer tax as a hate crime,” said Rep. Stephen Lynch (D-Mass.), the Boston lawmaker whose district includes brewers Samuel Adams and Harpoon. Lynch said Harpoon has contacted him on the matter.

Law of Diminishing Returns

Lawmakers said one problem with raising excise taxes on items like alcohol or cigarettes is that over time, people stop purchasing as much of those products, and the revenue that comes in is less than originally expected.

Yarmuth has seen the effects firsthand in Kentucky, which passed a tax increase on alcohol in February. Revenue from consumption and wholesale taxes during March and April was already 55 percent below last year's revenue at that time, and tax revenue in April from wine consumption had dropped by more than $75,000 from a year earlier, ATR said.

Economic Impact

Another concern for Lynch is the effect of a tax increase on his constituency, which includes the poor and working-class neighborhoods of South Boston.

Yarmuth agreed, calling the proposal regressive and noting that half of all alcoholic beverage sales in the country are to people making less than $50,000. He said 25,000 Kentuckians are directly employed by the industry, adding that if additional industries are included, such as the people who grow the corn, make the bottles, and make the labels, the number jumps to 40,000 jobs statewide.

Those comments echoed the views of liquor, hospitality, and retail industry officials, who have already begun making the case to their members of Congress that the suggested tax increases would eat into their livelihoods.

“I don't see this as a sin tax issue, but a hospitality tax issue. If you're going to throw hundreds of thousands of people out of work, you should at least know you're going to get some revenue out of it,” said Frank Coleman, a spokesman for the Distilled Spirits Council of the United States.

In a June 4 interview on CNBC, Senate Finance Committee Chairman Max Baucus (D-Mont.) acknowledged that the idea to raise taxes on alcohol and sugary drinks has not been well-received.

A Future Policy Trend?

Nonetheless, critics say the mere suggestion to tax sugary drinks raises a number of questions about future policy trends if Congress continues to struggle to find ways to pay for new policy initiatives.

“There are a number of political drivers here. President Obama is desperate for revenues to finance health care reform. People have done a pretty good job demonizing some of these things and that makes it easier to pass them,” said Chris Edwards, tax policy director at the Cato Institute. The increase in tobacco taxes “shows if you work hard enough to demonize something, you can turn it into a cash cow,” he said.

While it appears that the alcohol and sugary-drink ideas are unlikely to go forward in 2010, Coleman said: “All bets are off down the road. That's why we do what we do.”

The complete text of this article can be found in the BNA Daily Tax Report, June 8, 2009. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2009, The Bureau of National Affairs, Inc.