CRS RECAPS OBRA TAX PROVISIONS.

                          December 18, 1990

This report exams the recently passed increases in excise tax rates on alcohol products as contained in the Revenue Reconciliation Act of 1990 (Public Law 101-508). These rates were increased because of large continuing Federal budget deficits and the need for additional Federal revenues. These new tax rates are effective January 1, 1991.

Tax rates were increased $1.00 per proof gallon on distilled spirits. The tax rate for beer was doubled to $18.00 per barrel. Also, the excise tax rates on wines were increased, the new rates ranging from $1.07 to $3.80 per wine gallon.

The Joint Committee on Taxation has estimated that these changes will increase revenues by $8.768 billion for the period FY91- 95. Broken down by year the expected increased revenues are $1.300 billion in FY91, $1.850 billion in FY92, $1.862 in FY93, $1.874 billion in FY94, and $1.882 billion in FY95. Revenues collected from all alcohol excise taxes go into the general receipts of the United States Treasury.

TAX RATES

The tax rate on distilled spirits was unchanged from 1951 to 1985. In October 1985 the rate was raised from $10.50 to $12.50 per proof gallon. Under the Revenue Reconciliation Act of 1990 the rate was increased by $1.00 per proof gallon to $13.50.

The tax rate on beer had not been raised since November 1, 1951. At that time, the rate was raised from $8.00 to $9.00 per barrel. The Revenue Reconciliation Act of 1990 doubled the existing rate, thus the new rate is $18 per barrel. The new act retained the small producer exception of prior law. Thus, a lower rate applies to small brewers who produce fewer than 2,000,000 barrels of beer per year. The rate for small brewers, which has been in effect since February 1977, is $7.00 per barrel for the first 60,000 barrels. A barrel contains thirty-one gallons.

The tax rate on wines are levied at a variety of rates. Prior law rates ranged between 17 cents for still wine to $3.40 per wine gallon on sparkling wines. Under the new law these rates range from $1.07 to $3.40 per wine gallon. These changes are detailed in table 1. The tax rates on champagne and sparkling wines were not increased. Like beer, the tax rate on wine has not been changed since 1951. A small domestic wineries credit equal to 90 cents per wine gallon is provided for the first 100,000 gallons of wine production with a phase-out of the credit for wineries whose production falls between 150,000 to 250,000 gallons.

All of these tax rates changes are effective beginning January 1, 1991.

            TABLE 1. COMPARISON OF ALCOHOL EXCISE TAX RATES

In addition to the excise taxes on alcohol products there are also occupational taxes. A producer/manufacturer of taxable alcohol products with gross receipts of less than half a million dollars in the preceding taxable year must pay a tax of $500 a year. For those whose gross receipts exceed that amount, the tax is $1,000 a year per premise. Additionally, alcoholic beverage wholesalers pay a wholesale dealer occupational tax of $500 per year per place of business while alcoholic beverage retailers pay at a rate of $250 per year per place of business.

REVENUES

The revenue yield from total Federal alcohol excise taxes in fiscal year 1989 was $5,810,457,000. Of this total, distilled spirits accounted for $3,862,326,000. Deer excise tax receipts for the same fiscal year brought in $1,678,070,000. The most lightly taxed, wine, had revenues of $270,061,000. Special occupational taxes generated $128,901,000 in revenues.

The Joint Committee on Taxation has estimated that the higher excise tax rates on alcohol products under provisions of the Revenue Reconciliation Act of 1990 will lead to an increase in revenues of $8.768 billion for the period FY91-95. Broken down by year the expected additional revenues are $1.300 billion in FY91, $1.850 billion in FY92, $1.862 in FY93, $1.874 billion in FY94, and $1.882 billion in FY95.

Revenues collected from all alcohol excise taxes go into the general receipts of the United States Treasury. As such, these revenues are not specifically dedicated for any trust fund. The rationale for increasing these taxes was for budget reduction purposes. There have been several other suggested proposals made in recent years to dedicate the excise taxes on alcohol products for various purposes. For example, it has been suggested that the revenues collected from alcohol and tobacco excise taxes be used to help finance the Medicare/Medicaid Trust Fund. In the case of the Medicare/Medicaid Trust Fund proposal, the rationale given has been that the abuse of alcohol and tobacco products early in life may lead to health related problems such as cirrhosis of the liver, emphysema, heart disease, or cancer which in turn drains receipts from those trust funds for health expenditures. Suggestions have also been made that alcohol receipts be used for alcohol rehabilitation treatment and to compensate victims of drunk drivers.

POLICY ARGUMENTS

Arguments that were made for increasing the alcohol excise taxes were that they can raise substantial and stable amounts of revenues while the cost of tax administration in relation to revenue is small. It was also noted that it is impossible for wealthy taxpayers to avoid this tax through "loopholes" or other income tax reduction or saving devices. Likewise, the tax falls on all persons who use these products, and many people believe that even lower income individuals should contribute to the support of the Federal Government. Not only should ability-to-pay be a factor of taxation but also the ability to spend and consume. The fact that a person with limited resources spends funds for a nonessential is considered sufficient reason for imposition of a tax and an ability to support the national government in the same proportion as the amount purchased and consumed. These excise taxes have long been justified as a "user tax." Society's cost from alcohol is generally borne from alcohol induced auto accidents and increased police services because of its indiscriminate use. There are those that would like to see further increases in tax rates and thus revenues to help pay for these services and the attendant costs to society.

Several arguments have been advanced against increasing the excise taxes on alcohol products. An increase in rates is expected to decrease consumption. Decreased consumption will affect State tax revenues unless the States were to further raise their own excise tax rates (which could lead to still lower rates of consumption). A decrease in consumption can also be expected to cause a loss of employment in the alcohol industry along with related industries such as trucking and packaging. Finally, an argument can be made against the increase based on equity. Equity is generally considered to mean taxation based on ability-to-pay. These types of excises are considered to be regressive because individuals with lower incomes would spend a larger portion of their income than a higher income person for the same consumption amount.