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Minnesota's 300% Alcohol Tax Hike Will Hurt Consumers And Businesses

Politicians love to sell alcohol tax hikes as pennies on the drink that won’t really hurt anyone’s pocketbook, while helping to pay for the burden that drinkers put on the rest of society, as they did in Minnesota this week, when lawmakers there introduced a proposal to increase the state excise tax on alcohol by at least 300 percent.

These arguments are deceptive. The cost estimates used by politicians to increase taxes are usually misleading and grossly inflated. Worse, these seemingly small increases in the cost of alcohol will have significantly harmful effects on Minnesota businesses and consumers, and potentially reduce state tax revenue as businesses close and consumers cross the border to buy cheaper alcohol in neighboring states.

According to a 2011 Minnesota Institute of Public Health (MIPH) study commissioned by the Minnesota Department of Health, alcohol use costs the state $5.07 billion a year. That number is far greater than the $296 million in revenue collected each year from alcohol taxes, but a closer look at the study shows that the majority of the “costs” aren’t paid by the state at all. Most of those costs, such as the $3.71 billion in productivity loss, lost wages, absenteeism, and premature death, are borne by individual and arguably their families and employers, not taxpayers. As is often the case, government researchers are conflating private costs with public, or social, costs.

Furthermore, the MIPH study fails to take into account the economic and social benefits of alcohol use. Even setting aside the number of jobs the business of alcohol provides to Minnesota, there are numerous proven health benefits to moderate consumption, such as significantly reducing the incidence of heart disease. Additionally, while it may be distasteful to consider, those heavy drinkers who die prematurely do not draw money out of the state’s public health care programs like MinnesotaCare or Medical Assistance. Finally, the study includes many costs that are only tangentially connected with alcohol consumption, such as fire damage or administrative costs related to alcohol abuse education.

The tax increase, while sold as a per-drink tax, is not assessed upon drinkers, but taken in one lump sum from wholesalers. The tax on spirits would jump from $5.03 per gallon to $17.82 per gallon. The tax on wine would increase from $0.95 per gallon to $8.24 per gallon, and the beer tax would increase from $2.40 per 31-gallon barrel to $13.97 per 31-gallon barrel. Wholesalers will have to pay thousands in excise taxes to the state and to recoup that loss will certainly increase the price of the alcohol they sell to bars, restaurants, and stores.

To make up for their increased expenses bars and restaurants will certainly hike prices on their consumers, but there’s no guarantee it will be on their drinking patrons. Establishments could just as easily raise their food prices in order to keep their drink prices competitive. In that case you’d have non-drinking Minnesotans paying the alcohol tax.

Whether establishments raise the price of alcohol, food, or both, the people who will really end up paying the tax are servers. At the end of a meal or round of drinks, few patrons whip out a calculator and add exactly 20 percent to the final bill. Rather, most customers put a few extra dollars on top of the bill’s total. If the cost of a drink goes up by 10 or 25 cents patrons will continue to put a few extra dollars down, but the waiters, waitresses, and bartenders will end up getting a few cents less in tips. That’s assuming that those servers still have jobs.

If the price of alcohol increases enough, consumers may choose to go out to eat or drink less or they may seek to purchase alcohol from neighboring states. For example, in Pennsylvania, where the average cost of a drink is significantly higher than in its bordering states, studies show that the state loses billions of dollars in sales and tax revenue.

While alcohol abuse can certainly be a problem for individuals and their families, the myth that their life choices are a burden on the state is just that, a myth. Alcohol use, on the other hand, has been proven to be healthy for a state’s citizens as well as its economy. Lawmakers who seek to increase their revenue through sin taxes, under the auspices that drinkers have to “pay their way,” simply lack the courage to either raise taxes in an upfront manner or cut spending. In the end, raising taxes on alcohol will hurt more than it will help not only the state coffers, but consumers and businesses as well.