Alcohol taxes are selective sales taxes on the purchase of alcohol. Most states levy the tax as an amount per unit sold (i.e., per gallon of beer, wine, or liquor). The producer or seller of the product pays the tax, but the tax is then included in the final purchase price and thus passed on to consumers. States and localities can also levy a retail excise tax on the purchase price of alcohol. Additionally, some states and localities collect revenue from government-owned liquor stores.
Alcohol taxes are sometimes called a corrective or "sin tax" because, unlike a general sales tax, the tax is levied in part to discourage the consumption of alcohol because the choice to use it has costs both to the consumer and the general public (such as increased health care costs). State and local governments tax cigarettes, and have begun taxing marijuana and soda, in a similar way.
- How much revenue do state and local governments raise from taxes on alcohol?
- How much do alcohol tax rates differ across states?
- Further reading
In 2017, state and local governments collected $7.3 billion in alcohol taxes, or less than 1 percent of general revenue. Nearly all of the revenue (90 percent) came from state taxes.
Additionally, state and local governments collected $9.6 billion from government-owned liquor stores, generating revenue through various taxes, fees, price mark-ups, and net profits. This revenue, like other "business-like" activities, is not included in state and local general revenue. States collected most of this revenue (84 percent) but some states without state-run liquor stores allowed localities to operate government-run stores. In total, 22 states collected revenue (state or local) from a government-run liquor store in 2017.
Alcohol taxes are generally remitted at the wholesale level, so the cost of the tax is already incorporated into the retail price paid by the consumer. The excise taxes are per gallon rather than a percentage of the final price, and the tax is based on the amount of alcohol in the beverage: liquor is taxed at a higher rate than wine and wine is taxed a higher rate than beer.
However, the tax rates vary considerably across states. In 2020, the per gallon tax rates on beer range from $0.02 in Wyoming to $1.29 in Tennessee, the per gallon tax rates on wine range from $0.20 in California and Texas to $2.50 in Alaska, and the per gallon tax rate on liquor range from $1.50 in the District of Columbia and Maryland to $14.27 in Washington. Three states (Pennsylvania, Utah, and Wyoming) do not tax wine or liquor and another 14 states do not tax liquor. These states instead raise revenue from these products via government-run liquor stores.
In addition to the per-gallon excise tax, some states and localities also levy a special sales tax on the final purchase price of alcohol. For example, the District of Columbia has per gallon taxes on beer ($0.09), wine ($0.30), and liquor ($1.50) built into the retail price of alcohol, but the city additionally levies a 10.25 percent alcohol sales tax on the final purchase price.
Are States Betting on Sin? The Murky Future of State Taxation
Lucy Dadayan (2019)
Critical Value Podcast: #46 Sin Taxes Are Sweeping the States!
Richard Auxier and Lucy Dadayan (2020)
Do Alcohol Excise Taxes Reduce Motor Vehicle Fatalities? Evidence from Two Illinois Tax Increases
Robert McClelland and John Iselin (2017)
Should We Tax Internalities Like Externalities?
Donald Marron (2015)
How Should Governments Use Revenue from Corrective Taxes?
Adele C. Morris and Donald Marron (2016)