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Friday, June 05, 2009

Beer Taxes and Industry Vibrancy

A couple days ago, Jay Brooks posted an interesting graphic from the Tax Foundation showing the exise rates per gallon in each state. Brooks' comment:
It’s worth noting that all the southern states have high excise taxes on beer, where the idea of drinking being sinful is, I think, more prevalent.
That's a good point. But something else is worth noting, too. Look at the map. Now look at the high-tax states. Utah, the South, Oklahoma--these are not generally regarded as brewing hot-spots (click to enlarge).

I don't want to identify the direction of causality here, but it is striking to look at the difference among the categories of taxation and see how many breweries they have per-capita. Within these categories, there's one brewery for every:
Low tax states: 164,728 people
Med tax states: 198,331 people
High tax states: 366,526 people
National average: 204,906 people
So medium-tax states are have about as many breweries per-capita as the national average. But low-tax states have 2.2 times more breweries per-capita than high-tax states.

If Oregon were to pass the current beer tax as written, we'd go from 8 cents a gallon to $1.67 a gallon--60 cents higher than Alaska, the current high. Maybe there's no causality here--maybe Southerners just don't do microbrews. But maybe there is a relationship. This is what gives me the willies--I'm just not willing to take such a massive gamble that there isn't a relationship.


  1. Jeff,

    Let me beat DW to the punch:

    No s^*t sherlock.

    Anyone who thinks there isn't causality isn't very well steeped in economics.

    All businesses locate and relocate to take advantages of favorable tax situations. WHy would we assume that brewers are worse businessmen than the average?

  2. I wasn't going to comment...

    I put the same graphic on Dr Wort's page a couple of days ago and asked what people thought. No response! So, I figured.... OK.... Move on... They're not interested.

    To me the graphic is pretty obvious, Oregon is under-taxed and they're finally getting around to fixing that little problem. Death and Taxes my friends.... You can bitch, but it doesn't do much good! Kind of like Dr Wort....but he really doesn't really give a sh*t! :-O

  3. Not so fast with the stats. Presumably most craft beer businesses locate, initially, where there is a strong market for their products. I doubt that Oregon breweries were founded on the basis of brewers scouring the state tax tables to determine the ideal siting of a brewery. I am also unaware of the relocation of breweries here from higher-tax states, but I'm no expert on that.
    However, I understand Jeff's fear that the currently proposed excise taxes would be a problem if not a disaster.
    I think the per capita analysis is interesting, but to tie it to taxes is only part of the picture. The other parts include access to raw materials, brewing talent, and, importantly, draft beer sales as a percentage of all beer sales. If I am to believe a source who has been in the business since its founding, Portland has always had a much higher percentage of draft beer to packaged beer sales. (I am using Portland since we have the lion's share of the brewing in Oregon, Deschutes notwisthstanding. Perhaps the same stats can be said of Oregon. I just don't know)
    This post is a fair warning about the dangers of a precipitous rise in taxes. I may be alone in this argument, but Oregon breweries and their supporters need to be realistic about supporting a reasonable rise in excise taxes. The "no tax increase ever" strategy will ultimately fail and we may be left with something much worse than expected.

  4. Patrick,

    Careful, stats lie. Correlations do not equal causation. You'd have to run the numbers to see what the effect is--and you'd have to control for things like historical brewing states, consumption, and factors that aren't obvious by a casual glance.

    An interesting test case is Alaska, which raised their rates in the past few years and are now the country's highest. It's also a high-brewery state, when considered per-capita. So we'll see what happens to it.

  5. And, to add to the debate, Alaska may be a high per capita state, but there are darn few people in Alaska. So, even though they excel in that category, are they as significant as Washington and California? Those states have higher excise taxes than Oregon and perhaps lower number of breweries per capita, too. Also, it would be useful to know beer production volumes rather than breweries per capita. And, are these craft breweries only or all breweries including the big guys?
    Regardless, thanks for bringing some statistical analysis to the debate about taxes. What we typically read is the number of people who will end up on the unemployment rolls if the tax is implemented or, more likely, the trumpeting of the 1900% increase from current rates.

  6. Interesting, our fellow "Beer City USA" is in North Carolina, one of the higher taxed states.

    I say we start our own bill to double the current tax on beer in Oregon, put in a clause that it is locked in for 25 years, "funds needed to fulfill the gap in education funding", maybe the dolts that are supporting the current bill will bite.

  7. Profitablity drives business formation. Taxes are a cost that effect profitablity. Who'd start a business if they weren't confident they'd have a good shot to make money?

    "Oregon is under-taxed"

    Maybe everywhere else is over-taxed, who's to say? That's like saying entity x needs to pay their "fair share." What does that even mean and who determines what's fair?

    The truly interesting question to me is what happens to brewery openings AFTER a tax increase? Has there been no change in Alaska pre/post tax?

  8. Mark, I wouldn't dismiss Alaska. In some cases, the per-capita figure is misleading. Wyoming looks like a vibrantly-breweried state if you apply that measure, but try to name me a single Wyoming brewery. Alaska, by contrast, has two breweries of national reputation (Alaskan, Midnight Sun), both of which make serious beers. My sense is that there is a burgeoning beer scene there.

    I have mentioned this before, but my tax proposal is simple and fair: raise the tax to something similar to CA and WA--say $8 bucks a barrel--and exempt the first 100,000 barrels from this hike. Or even 50,000 barrels. That way you bring the tax up to a modern level but you protect the local industry.

    Why isn't this plan acceptable? Apparently because it wouldn't really raise much money. Every time a beer tax comes down the pike, legislators see it as a cash cow and try to go to $50 a barrel. Raising it to just $8 would only bring in something like $50 million more--which legislators apparently think isn't worth the effort.

    So it fails because the legislature's proposal would put Oregon's tax in the stratosphere--WAY beyond any other state.

  9. I did a little research to answer my own question and who knows if the interweb is right on these things, but here's what I've found. Again, take this with a grain of salt.

    Alaska raised its tax in 2002. 8 (possibly 9) breweries opened pre 2002 with the bulk in the late '90s. Since 2002 5 breweries have closed (3 in the year 2002) and 3 have opened.

    At best this suggests a net loss of breweries since the tax in a time period when craft brewing has exploded in the rest of the nation.

    But again, trust the internet and me at your peril...

  10. Jeff,

    Here is what I hear you saying in my head:

    "Tax the big guys, not the little guys. I drink beer from the little guys, so tax those other guys not the ones I drink."

    OLCC Barrels Sold 2008

    So let's see, according to you they should maybe tax Deschutes, but for sure tax BMC.

    Great a more progressive tax structure the puts the burden on the working man's beer. Oh yeah, they are successful corporations and should be punished. Sorry, I'll move along.

    "Tax others, not me."

  11. Political Economy suggests that states with strong industry lobbies (i.e. lots of brewers) will be more apt to raise tax rates.

    So, to echo Jeff, causality is a tough nut to crack.

  12. Ralph, when you quote someone, you best quote what they actually say, rather than a projection of your own mind.

    You suggested this was my view: "Tax the big guys, not the little guys. I drink beer from the little guys, so tax those other guys not the ones I drink."


    To me there are two issues here: 1) fairness and 2) protecting local business.

    Large breweries have huge institutional advantages. In addition to efficiencies of scale, you have distribution and retailing muscle. If Oregon raises a tax to the levels they suggest, it will give the national breweries a competitive advantage. A-B won't go out of business if the tax goes up; Ninkasi might.

    Where state taxation goes, I further think it's asinine to damage local industries. You damage your own tax base by securing jobs in St. Louis (or what, Brussels now?) rather than Oregon, damaging your tax base, and you ensure people spend money on a product made elsewhere. Reasonable people may disagree about protectionism, but this isn't analagous; it's a question of keeping the playing field flat versus favoring very large national breweries.

    Maybe 100k barrels isn't the right amount--maybe it should be 50. I'll let people who understand brewing argue that. Though keep in mind that this law may be in effect 30 years before it changes. Looking at 2008's numbers doesn't tell you a whole hell of a lot.

    But there's another point here. Creating an exemption gives breweries an incentive to sell beer in Oregon. Deschutes isn't the biggest brewery in the state. They just sell a far greater percentage of the beer they brew here than does Widmer, for example. If you don't create an exemption, you create a disincentive for breweries to sell their beer here. If the beer tax is 5x higher than it is across the border, wouldn't it make sense to neglect local retailers here and try to find distribution elsewhere? Remember, we want people to sell their beer here. Low taxes ensure that.

    Care to respond to my actual position?

  13. @ Jeff

    I really don't want to get involved in a discussion that won't get anybody anywhere....

    Why don't we concentrate on something we can change or influence.... like Beer events... ;-}

    Beer tax is in the hand of the politicians....

  14. Whoa! Slow down there Jeff. Please go back and read my post, I didn't quote you, I paraphrased. I said "Here is what I hear you saying in my head". I apologize for paraphrasing outside the MLA/APA style guidelines, I'll try harder to use APA style guidelines in the future.

    So let's cut to the thrust of your argument shall we? "Fairness"

    You speak of fairness then go on to suggest an progressive tax that makes a smaller population pay the majority of the tax. That is fair to you? You want fairness but then you want to protect a segment of the population. That is like saying I want to protect freedom by creating laws.

    I have to say Jeff, I'm left with the impression that you see as fairness, to use a hockey term, is having the ice tilted to your ideals. You aren't suggesting a flat playing field, and it is disingenuous to suggest you are promoting a flat playing field. You are promoting a playing field that favors smaller producers over the larger producers. A playing field in which one of the teams must play with a different set of rules.

    A progressive tax structure is not a flat playing field.

  15. Ralph, we're not going to come to a meeting of the minds, but to be clear, this is not "progressive" taxation. It's an exemption--these things are very common. We're not talking about "the population," either. These are excise taxes on business.

    Joe, interesting data. Seems pretty solid, too.

  16. Wow, you ask to debate the merits (respond) and then walk away. Jeff, I'm disappointed in you. I do so enjoy debating the finer points.

    Some Clarifications:

    The statement of "...segment of the population" was referring to the entire population of all companies that sell and/or produce beer in the state. I had thought the context of our discussion was setup pretty well and that I didn't have to differentiate between all of "the population(s)" that exist.

    I apologize for the usage of "progressive" in reference to the proposal you have made.

    (Of course, there is already a tax in place that is being increased, so I am a little unclear whether you are proposing the smaller manufactures are going to continue to pay the existing tax rate or be completely exempt from the excise. So in reality your proposal is a progressive tax, but I'll go with you for the sake of argument as it is irrelevant to the issue of fairness.)

    Yes, tax exemptions do exist, no question about it. I never suggested that tax exemptions do not exists, but we aren't talking about any "tax exemption" other than the one you have proposed.

    I thought we were going to discuss the "fairness" of your proposed tax exemption. Or, the other side of the argument you seem to be avoiding, the handicapping of larger beer producers.

    As for being an excise tax, again, irrelevant. Let's just refer to it as a "tax".

    We don't have to come to a meeting of the minds Jeff. Everyday the world fights over the powers of fairness and inevitability. What is fair is different to everyone. Your suggestion that fairness, in reference to the proposed increase of the excise tax, is to handicap larger businesses to benefit smaller businesses struck a cord to me.

    You are welcome to think this is fair, but please don't try to elevate it to as "keeping the playing field flat". Because what you are proposing is the opposite.

  17. Ralph,

    I think you're misunderstanding the concept of "exemption," or else I have misunderstood what Jeff means by it. The application of a lower tax rate for the first 50,000 or 100,000 barrels (or whatever) would apply equally to all beers sold in the state. Thus, everyone gets the same tax rate on the first XX,000 gallons, and anything in excess of that is assessed at the higher rate. This isn't fair?

    And if you really want to argue about a "level playing field" when it comes to beer, you might also want to tackle the issue of the three-tier distribution system, which the "big guys" manipulate relentlessly to stifle fair competition. (For more on the latest shenanigans in this area, check out Madison Beer Review's post for a summary and link to the original article in Modern Brewery Age

    Also, in speaking of "fairness" perhaps we may consider how many state legislators seem to think that funding for alcohol and drug related education, counseling, and recovery programs needs to come from a tax increase on beer, rather than other forms of alcohol as well. Admittedly, a quick perusal online yielded stats from a decidedly pro alochol tax website ( that put the wine tax at $0.67/gallon, significantly higher than beer (no info on distilled liquor). Should the beer tax be raised? Probably. But if the ostensible reason has to do with offsetting all the supposed social ills caused by alcohol (and it seems the real "treatment" the state is worried about is for meth, not alcohol), shouldn't their simply be a tax on ALCOHOL? I've bought beer in some states/cities with such codes, and I paid a couple cents more for my high ABV double ipa than I did for the pale ale, based on a calculation of alcohol per gallon (listed on the receipt as a figured calculated in "proof gallons").

  18. Ralph, I think Anon does a nice job of summarizing my position. I believe we've both made our positions quite clear, which is why I think we're not going to come to a meeting of the minds on this one. I hear your argument, but I think you're wrong on both the facts and the policy. But hey, you think I'm wrong on facts and policy, too. So there's our impasse.

    Based on the news I see coming out of Salem, it looks like it's an academic point, anyway. I haven't heard a peep about the beer tax.

  19. Anon,

    I do not think it is fair to create a tax system that is aimed at assessing a higher tax rate for out of state producers. I believe that our federal system of governance has held this same belief of fairness in regards to the Commerce Clause of the United States constitution. At 100,000 barrels, no in-state producers of beer will be effected. On its face that is discriminatory. Lowering it to 50,000 sacrifices a lamb. (Deschutes) So no, I do not believe the tax is fair.

    Tax exemption, progressive tax, whatever. Let us say it simply: "the tax increase will not be applied equally, it will only be assessed after beer production has reached a per-determined level". Hell, let's just do it like that, then we can pass on the problem of being discriminatory to our legislators on a yearly basis. Either way we look at this tax, it doesn't matter. Simply put, it does not apply to all, but a few beer producers.

    Fair is subjective. You seem to side with Jeff in that this type of taxation is fair. Good. We are welcome to our opinions on the matter.

    Now, let's get back to the point of "level playing fields".

    ( Doing a quick search on the phrase using these fine intertubes... )

    Wikipedia: Level Playing Field

    ( Sorry, if you dislike wikipedia, please discover your own link if you'd like. )

    To suggest that applying this proposed tax to less than all is creating a level playing field is ridiculous.

    Thus politics emerge. One side will always attempt to tilt the field towards their side. This seesaw of politics is a perpetual motion machine that could cure all our energy needs if we could tap into it.

    ( When was the last time I was on a seesaw? It was yellow I think. )

    I don't care about the religion to which you belong. But let's be honest about our intentions shall we?

    To apply a tax to only a small portion rather than all is discriminatory however noble your reasons. I'm not suggesting at all that I don't have my prejudices, I do. But I'll lay them out on the table and be honest about how I feel. I'll never suggest to you to accept my prejudices as normal. Never will I attempt to suggest my discrimination has the moral high ground and it is where all games should be played. ( Level playing field ) That is arrogance.

    Now to your other points.

    I believe that as long as distributors are following the law of the land, they should be allowed to do whatever is within their power to win the market share. That is business.

    If we are to have this excise tax, yes I believe that all alcohol should be treated equally. Or if they want to be just taxing the "malt" part of the beverage, it should be determined by the final gravity of the finished product. ( Mmm, I see the come back of Bud Dry now. )

  20. Jeff,

    What facts have I gotten wrong? If you are going to accuse my of misrepresenting fact you should at least tell me where I am wrong. Or were you referring to the facts of your opinion?

    I never said you were wrong on any facts Jeff. There was never any facts in dispute.

    Policy?!? Where is this policy?

    You aren't very good at this whole defending your position thing Jeff. All I'm asking you to do is answer the following question that I've tried to pose but you seem to be avoiding:

    How does a "malt beverage" tax that is not applied to all "malt beverage" produce create a level playing field?

    I honestly don't understand that position.

  21. The cost of beer jumped by a price tag far greater than the proposed beer tax. Don't put it on the back of moderate drinkers like me whose only 'sin' is to enjoy a beer.