TAX NEWS - 2010

California Tax: Alcohol tax increases die on the vine in California's Capitol

California's excise taxes on wine, beer and liquor remain a 1991 vintage, the last year the state hiked the price that producers pay on each gallon of alcohol.

With California facing an ongoing fiscal crisis, lawmakers and Gov. Arnold Schwarzenegger have proposed using higher alcohol taxes to help balance the budget in recent years. More than four out of five voters supported a Schwarzenegger plan to charge an extra nickel a drink, one poll found.

But such taxes have gone nowhere in the Legislature.

Senate Democrats last month proposed an increase tied to the inflation rate since 1991 – adding less than half a cent to a glass of wine. That plan appears to be near death.

The annual rejection of new alcohol taxes and fees is a reflection of the industry's political power, say tax-hike proponents. Major beverage manufacturers and wine growers spend millions to lobby the Capitol each year and sprinkle campaign contributions to members of both parties.

"We're not going to get any action out of Sacramento this year," said Michael Scippa, director of public affairs for the Marin Institute, a foundation-backed critic of the alcohol industry. "It's a direct reflection of the power of the alcohol lobby and the millions they pour in each year. Almost nobody wants to go up against them."

Alcohol-related businesses contend that tax hikes would hurt sales and threaten jobs at a time of high unemployment. While Republicans have taken a hard line against all taxes, even some Democrats who represent major wine regions oppose new taxes on alcohol.

"This is a regressive tax increase at a time when the economy is struggling," said David Kline, vice president of communications and research with the business-backed California Taxpayers Association. "Every one of us has seen a favorite restaurant close down, and brewpubs would be hit particularly hard."

Relative to other states, California imposes low excise taxes on alcohol. It charges 20 cents per gallon of wine – less than a penny per 5-ounce glass, the second-lowest rate in the nation, according to the Tax Foundation. Taxes on liquor and beer remain below the national average.

The nonpartisan Legislative Analyst's Office recommended that lawmakers adjust the rates for inflation. Deputy Legislative Analyst Michael Cohen said his office felt it was reasonable policy because the "social costs of drinking are far in excess of revenues collected by alcohol."

Producers and importers generally pay the tax on wine and beer, while wholesalers pay tax on distilled spirits. It is presumed the industry passes on most tax costs to consumers.

The state has a history of resisting alcohol tax increases. Before 1991, California had not raised its taxes on wine and beer since the 1950s, nor on distilled spirits since 1967, according to the Board of Equalization.

The federal government also charges an excise tax on alcohol, which it has not raised since 1991.

"It's not like we're one of the highest-taxed states that way, but if you look at our overall taxing structure, we're one the highest-taxed states," said Sen. Bob Huff, R-Diamond Bar, a member of the joint budget committee. "So even on something discretionary like alcohol, I'm opposed."

The Public Policy Institute of California found last year that 85 percent of voters supported a nickel-a-drink increase for budget purposes, while the Field Poll determined 74 percent backed a general alcohol tax increase.

"Sin taxes are seen as optional because you don't have to imbibe if you don't want to," said Mark DiCamillo, director of the Field Poll. "Even among those who do, it's seen as a kind of luxury tax you can control."

Schwarzenegger withdrew his alcohol tax idea when he and lawmakers cut a deal last February to raise broad-based taxes on income, sales and vehicles to help bridge a $42 billion deficit. Their plan relied on voter approval of five special-election ballot measures.

Some of the biggest contributors toward the ballot measure campaign were those who had been spared from tax hikes. Alcohol firms gave $671,000 to the Budget Reform Now committee formed by Schwarzenegger and lawmakers, according to the Marin Institute.

Outside the budget process, Assemblyman Jim Beall, D-San Jose, has written bills to impose 10-cent or 5-cent a drink fee on alcohol that would raise hundreds of millions of dollars each year for alcohol abuse treatment, trauma care and criminal justice, among other services.

Beall's proposals have died in committee. Some industry groups challenged Beall's legal basis for pursing the new levy as a majority-vote fee rather than a tax. Others said his bills would cost jobs. The Wine Institute, which represents 1,100 wineries, said last year's Assembly Bill 1019 "scapegoats wine, wineries and their employees."

As alcohol taxes and fees were debated last year, companies spent heavily on lobbying. Records show the Wine Institute paid $591,908 and Anheuser-Busch spent $252,192 in 2009 lobbying costs.

"There is no public policy benefit to tax one (of) California's signature industries and its millions of consumers to prevent the consumption of wine," Mike Falasco, Wine Institute director of California state relations, said in a letter to the committee. "There are no negative social costs associated with normal, moderate wine consumption."

The Senate Democrats' budget proposal does not tie alcohol revenues to any particular spending but would raise $210 million to help bridge a $19.1 billion deficit. Democratic aides say the proposal has stalled, in large part because it will be difficult to obtain enough votes, and the $210 million is not worth the political battles required.

Democrats are pursuing other proposals that would generate more revenue, such as a tax on oil production and delaying corporate tax breaks.