PoliGraph: Is seven cents a drink seven cents a drink?

A tax increase on beer, wine and liquor is turning out to be one of the more controversial parts of the House Omnibus tax bill.

House Republicans generally oppose the idea, as do Democrats in the Senate who have opted to leave it out of their version of tax legislation. They say the tax could end up costing consumers more than expected.

Some of the state’s most well known brewers are leading an effort to have the tax increase taken off the table, arguing that the proposed $.07 per glass tax increase could be twice that.

In reality, what the state’s beer, wine and liquor enthusiasts end up paying for their favorite cocktail will depend on how much manufacturers, distributors and retailers mark-up the price of alcohol.

The Evidence

The House wants to increase the state’s excise tax on all alcoholic beverages. For instance, the current excise tax on a barrel of beer – about 331 12 oz drinks – is $4.60. The House proposal would increase that about $27 a barrel. The tax would be paid by the alcohol maker, and the state’s leading brewers say they would consider the additional tax part of the cost of making beer.

That means beer drinkers will end up paying $.07 more for every 12 oz glass or bottle they drink, say state lawmakers who support the legislation. Consumers shouldn’t pay more than that if alcohol producers and sellers don’t charge more than the amount of the excise tax, they say.

But Mark Stutrud, who owns Summit Brewing, says that House lawmakers who voted in favor of the increase don’t understand the business of making and selling alcohol.

Before a bottle of beer ends up in your refrigerator or at your table, it’s been handed off three times. First, the manufacturer makes the beer. Then he sells it to a distributor, who, in turn, sells it to a liquor store or restaurant.

Brewers like Summit will have to charge their distributors more for a barrel of beer to cover the cost of the tax increase, Stutrud explained. His distributors will then mark-up the cost of that barrel of beer by about 30 percent before selling it to a retailer to help cover other costs like employee salaries and delivery.

There’s an additional mark-up at the retail level, too, said Ryan Huseby who is the general manager of the Happy Gnome in St. Paul.

“When we price things out, we look at what we pay for things, we have a certain percentage that we are budgeted for that our products have to cost a certain percentage of sales,” Huseby explained.

That’s how consumers could end up paying more than just an extra $.07, Huseby said.

How much more depends on the retailer. Huseby said that the Happy Gnome charges even dollar amounts for the beer on their menu. So if the excise tax is put into law, certain products could go up in price, while others would stay the same.

Will the new tax mean people will stop drinking? Probably not, said Joel Michael, who works in the Minnesota House Research department. Academic research shows that the demand for alcohol doesn’t change dramatically with changes in price.

And Huseby agrees it’s unlikely his restaurant will be empty if the tax increase is approved, though he suspects consumers may buy less or opt for cheaper brands to stay within their dining budget.

The Verdict

Both the Legislature and the state’s alcohol industry make convincing arguments for and against the liquor tax increase.

On one hand, producers, distributors and retailers aren’t required to mark-up their product above the amount it costs to cover the additional tax; they could choose to charge just enough to cover the cost of the tax.

On the other, the state’s alcohol industry says it’s unrealistic to think it will stray from the current business model.

But until the tax increase is adopted and it’s clear exactly how producers, distributors and retailers react, claims about how much more the tax increase will cost consumers remain inconclusive.

SOURCES

House Research, Alcoholic Beverage Taxes, June 2012

Minnesota Department of Revenue, Alcoholic Beverage Excise Tax Rate Increase $.07 Per Drink, April 18, 2013 (courtesy of WCCO)

Society for the Study of Addiction, Effects of beverage alcohol price and tax levels on

drinking: a meta-analysis of 1003 estimates from 112 studies, accessed April 29, 2013

Joel Michael, House Research

Andrew Schmitt, Director, Minnesota Beer Activists

Mark Stutrud, CEO, Summit Brewing

Michael D. Madigan, Beer, Wine and Spirits Distributors of Minnesota

Ryan Huseby, General Manager, The Happy Gnome

  • CR Moewes

    I think it is a shame that all the coverage of this is boiled down to this micro level. Phrasing it as a seven cent increase makes it seem to small.

    How come none of the coverage ever talks about the fact that it is a 600% increase. Your article mentions that it goes from $4.60 to $27 but that’s it.

    Can you imagine any other place where increasing the tax rate 600% would go anywhere?

    And this is an excise tax, which is not paid by the consumer but is included in the price of manufacturing the good. Most people upstream don’t even know that it is in there. This isn’t an increase in the state liquor sales tax. This sort of excise tax is included in the price of the manufacture of the product sold and then the various middlemen mark up their profit on top of that.

    The distributors aren’t going to change their mark up to minimize the increase in their cost. To them their beer just costs more to purchase from the manufacturers.

    So they are going to pass the increase along to the retailers. And they are going to pass it along to the consumers.

    And while we’re at it, we’ve now increased the cost of the beer to the consumer so the state can collect extra on the sales tax side of things too. Now there’s some double taxation for you.

    If the state want to increase the taxes on beer and liquor they should have the fortitude to increase the sale tax on the consumer side so that they can’t hide behind excuse that it shouldn’t effect consumers more then seven cents a glass.