Love bourbon? So does the tax man

I recently completed a three-day tour of the Kentucky Bourbon Trail. It was quite educational as well as introducing me to a few new labels to try now that I am back home.

Not everything I learned was blissfully enlightening however. At one of the distillery tours, the guide said the wholesale price for its product was 60 percent federal and state taxes, 30 percent ingredients and processing, and just 10 percent for overhead and margin.

Sixty percent of the product price is taxes?

Several economic principles seem to be in play here. First, governments always find it politic to tax so-called sin items. If a significant portion of the voting public considers certain activities or consumption to be immoral or unhealthy, then politicians know that they can hit those with fairly high tax charges.

Second, this free pass on public reaction is only possible because the taxed products have inelastic demand curves. In other words, no matter what the product costs people will purchase it. Everyday essentials like gasoline and groceries can fall into this category as well.

These products are taxed not so much because they raise significant revenue but because they are politically safe. This year’s federal alcohol excise tax receipts will total about $10 billion, not a lot by federal budget standards but “a billion here, a billion there and pretty soon you’re talking real money,” as former Sen. Everett Dirksen liked to say.

This hasn’t always been true. In the first years of our republic, the federal government could not legally tax incomes. It had to raise revenue through import tariffs (which are back in the news again) and excise taxes, which are taxes on certain products like alcohol.

The first Secretary of the Treasury Alexander Hamilton convinced Congress to tax alcohol, which really amounted to a tax on western farmers who reduced their grain crops to liquid form for shipping to market. The Whiskey Rebellion ensued, one of the supreme ironies of our national history; we rebelled against Great Britain over taxation and immediately had to quell an internal armed rebellion over the same thing.

The current federal tax is $13.50 per proof gallon (with exceptions for small distillers) and nearly every state adds its own excise tax, running from $35.22 per gallon in Washington to only $2.68 here in Indiana, thankfully near the bottom of the list. Then add every other form of taxation at each stop in the distribution channel — business property and income taxes, payroll taxes, sales taxes, liquor license fees, ad nauseum — and you soon see why a bourbon distillery claims 60 percent of its selling price is paid over to one or another governmental agency.

Here’s how that works out in the real world. A recent survey of the retail cost of a bottle of popular American whiskey by state ran from $33 in West Virginia to $16 in New Mexico, with Indiana in the middle at $24 — same product, a wide range of retail prices driven primarily by tax differentials.

It could be worse. In the United Kingdom where they make Scotch whisky (note there is no “e” in the Queen’s English), 79 percent of the retail price is tax. Seventy-nine percent. Maggie Thatcher must be rolling over in her grave.

I wasn’t a math major but it is clear to me that the first $10 or so I pay for a bottle of whiskey goes directly into Uncle Sam’s pocket, with a declining percentage as the price goes up. This tells me I need to take a principled libertarian stand and buy only expensive bourbon to deny the government the satisfaction of pocketing most of the purchase price.

My bourbon demand curve is very inelastic.

Mark Franke, an adjunct scholar of the Indiana Policy Review, is formerly an associate vice chancellor at Indiana University-Purdue University Fort Wayne. Send comments to [email protected]