Heads Up – Tax Man is Looking

States look to alcohol to solve budget problems – California has ‘near miss’

When Gov. Arnold Schwarzenegger proposed raising California’s tax on alcohol by a nickel a drink earlier this week, part of an ongoing effort to close the state’s $40 billion budget gap, California became the 27th state this year to consider raising taxes on beer, wine, and liquor to prop up its sagging budget. Schwarzenegger claimed the tax increase would generate nearly $900 million in new revenue over the next year and a half.

The measure was tabled yesterday during the latest round of budget negotiations, but experts say it is only a matter of time before it re-appears in the ongoing effort to fill the deep budget hole.

Meanwhile, other states are certain to pick up where California left off, turning to alcohol to solve its revenue problems.

Some states are raising revenue from liquor sales in a way that’s good for the coffers as well as for consumers. This summer, Colorado lawmakers lifted a long standing ban on Sunday liquor sales, boosting the state’s excise tax returns by 7 percent. Lawmakers in a half-dozen other states, including Indiana, West Virginia, and Georgia, are considering similar changes.

Most lawmakers don’t have the luxury of finding another day of the week when retailers can sell alcohol, of course. Thus, liquor taxes have found their way into budget talks. Earlier this year, Eliot Spitzer, the now departed governor of New York, proposed raising taxes on malt liquor and small cigars to help close the state’s then $4.4 billion shortfall; he said the increase would add $738 million to the state’s coffers. California lawmakers, for their part, promised earlier this week to use the revenue from their proposed 5-cent tax increase for drug and alcohol abuse treatment and prevention programs.

But raising alcohol taxes doesn’t necessarily sit well with consumers. In Maine, after passing a law that raised revenue for a state health insurance program by doubling taxes on beer and wine, state legislators were surprised to find themselves facing a taxpayer revolt. Even though the tax increased prices by only 16 cents for a six-pack of beer and 7 cents for a bottle of wine, it was widely denounced across the state. A group of angry beer and wine sellers—and their loyal customers—rallied to put an initiative on the ballot to repeal the measure. The initiative passed with 64 percent of the vote.

So far this year, all 27 of the proposals to raise state taxes on alcohol have been defeated or withdrawn.