Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon and Index Them for Inflation

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2023–
Decrease (-) in the Deficit                        
  Increase tax -6.6 -8.9 -9.2 -9.2 -9.4 -9.5 -9.6 -9.7 -9.8 -9.9 -43.3 -91.8
  Increase tax and index for inflation -6.6 -9.6 -10.5 -10.9 -11.4 -12.0 -12.5 -13.0 -13.5 -14.1 -49.0 -114.1

Data source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2023.

An offset to reflect reduced income and payroll taxes has been applied to the estimates in this table.

Alcoholic beverages are not taxed uniformly: Beer (including other malt beverages and most hard seltzers) and wine (including ciders) are taxed by volume, whereas distilled spirits are taxed by alcohol content. After accounting for alcohol by volume, the alcohol content of beer and wine is taxed at a lower rate than the alcohol content of distilled spirits. The highest tax rate on distilled spirits is $13.50 per proof gallon. (A proof gallon is a liquid gallon that is 50 percent alcohol by volume.) A tax rate of $13.50 per proof gallon translates to about 21 cents per ounce of pure alcohol. The general tax on beer is equivalent to about 9 cents per ounce of pure alcohol, and the general tax on wine is about 6 cents per ounce of pure alcohol.

Several factors affect how specific alcoholic beverages are taxed. Tax rates are generally lower for quantities of alcoholic beverages below certain thresholds for producers of all sizes. Wines with higher volumes of alcohol and sparkling wines face a higher tax per gallon. Additionally, specific provisions of tax law can lower the effective tax rate on small quantities of beer for certain small producers. Finally, small volumes of beer and wine that are produced for personal or family use are exempt from taxation.

This option consists of two alternatives. The first alternative would standardize the base on which the federal excise tax is levied by using the proof gallon as the measure for all alcoholic beverages. The tax rate would be raised to $16 per proof gallon, or 25 cents per ounce of pure alcohol. The first alternative would also eliminate the provisions of law that allow for reduced tax rates below certain thresholds and that lower effective tax rates for small producers, thus making the tax rate equal for all producers and quantities of alcohol. The second alternative would also raise the tax rate to $16 per proof gallon and eliminate the provisions that lower effective tax rates, but it would adjust, or index, the tax for the effects of inflation each year. Under both alternatives, exporters of alcoholic beverages would no longer be able to claim drawbacks (or refunds) of excise taxes on beverages for which they have not paid such taxes. (That ability was created by a recent court ruling.)