Maryland Lawmakers Look to Alcohol for New Revenue

Last week, Maryland Senator Antonio Hayes (D) announced that in the next legislative session he will sponsor a bill to increase Maryland’s alcohol excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. to raise revenue for health-care spending. Specifically, the bill would, if enacted, increase the ad valorem component of the state’s alcohol excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. from 9 percent to 10 percent. This tax is levied in lieu of the state’s general sales tax of 6 percent—not in addition to it.

According to supporters of the tax increase, a one percentage-point increase would raise $14 million in the first two years after implementation and $22 million annually in the following years. However, the increase would be delayed two years for bars and restaurants because they have been greatly impacted by the coronavirus pandemic. Revenue is to be appropriated for grants and tax incentives, which localities can apply for, to combat health inequities. Maryland previously had a similar program, called Health Enterprise Zones, which ended in 2016.

Excise taxes, which target specific transactions due to some unique characteristic (often negative externalities), are different than general sales taxes, which fall on most consumer transactions. Due to their narrow design, excise taxes should, largely, only be levied when appropriate to capture a negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. (or to create a “user pays” system). An externality, in economics terms, is the side effect or consequence of an activity that is not reflected in the cost of said activity. For alcohol consumption, examples are health-care costs related to alcoholism, or enforcement and other efforts to curtail impaired driving.

If the 10 percent excise tax proposal aims to internalize such negative externalities rather than simply raise revenue, the tax base is inappropriate. Negative externalities caused by alcohol do not have much connection to the price of the product; it is determined by the volume. Thus, alcoholic products with similar qualities and in similar quantities should have equal tax liability regardless of design or price. This is better achieved by taxing alcohol by volume.

In fact, Maryland already has such specific (volume-based) taxes. Alcohol sold in Maryland is, in addition to the ad valorem element, taxed by volume determined by alcohol by volume: $1.50 per gallon of distilled spirits, $0.40 per gallon of wine, and $0.09 per gallon of beer, cider, and mead. These state taxes are levied on top of the federal alcohol taxes. When combining the ad valorem and specific tax, Maryland has the nation’s 7th-highest taxes on beer, 10th-highest on wine, and 32nd-highest on distilled spirits.

While the proposal does exempt bars and restaurants for two years, Maryland already has relatively high taxes on wine and beer. Increasing these taxes could hurt already typically low-margin bars and restaurants when the exemption expires.

Senator Hayes’ proposal is part of a larger trend in Maryland and across the U.S. (and even globally) of increasing narrowly targeted taxes in search of new revenue (although it does allocate revenue to a more relevant spending program than a comparable proposal from New York). During the 2020 session, the Maryland legislature passed excise tax increases on tobacco products and vapor products. Governor Larry Hogan (R) vetoed the bill but the Democrat-controlled legislature is expected to take it up again in the next session. Furthermore, the legislature considered language that would have legalized and taxed sports betting. Across the U.S., states are considering marijuana legalization, data taxes, and taxes on financial transactions.

While there are legitimate reasons for increasing and levying excise taxes, legislatures should proceed with caution in the aftermath of the pandemic. Importantly, revenue from increased excise taxes should generally be allocated to spending related to the negative externalities as that revenue is too volatile and unreliable to rely on for long-term budget priorities.

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