State Floats the Idea of an Oregon Beer Tax Hike

Last week, Willamette Week’s Nigel Jaquiss broke the news that Oregon is considering a beer tax hike. We went through this in two different sessions a decade ago, when the proposals were shot-through with shoddy thinking, a misunderstanding of the beer industry, and heaps of bad faith. The battle blew up the Democratic agenda, tarnished some legislators, and ultimately failed. It looks like ten years is just about enough time to forget the lessons of that stupid proposal. Here’s Jaquiss:

According to the [Oregon Health Plan] budget, the agency is proposing raising Oregon's taxes on cigarettes and alcohol to reduce consumption and to boost state revenues. It's a logical move: Oregon's so-called "sin taxes" lag far behind other states, fueling consumption that OHA says causes a variety of harms, including higher health care costs….

"Oregon has not increased the taxes on beer for over 40 years and wine for over 32 years," the budget document explains. "In real terms, beer and wine taxes fall every year because they do not keep up with inflation. The price of alcohol in Oregon is too low. Cheap alcohol fuels excessive drinking and related harms."

OHA also seeks to raise the retail price of beer, wine and cider 10 percent, according to its budget proposal. Increasing the costs of cigarettes, beer, wine and cider, the OHA says, would lead to better health outcomes and save … $287 million in lost productivity and health costs for drinkers.

There’s a lot to unpack in this thinking, but it strongly recalls all the mistakes made in the ‘07 and ‘09 budget cycles. Here’s why this looks like bad news.

Sin Tax or Pigouvian Tax?

Dueling rationales beset past beer-hike proposals, and that appears to be the case here. In the 2009 bill (the text of which, sadly, I can’t locate online), a big part of the reasoning was listed at the outset, in the preamble. In a series of “whereas” statements, the sponsors attributed to beer every social ill visited on Oregonians including, in a case of damaging agitprop, child abuse. It was cast not just as a tax bill, but a moral problem to be solved. The US, with its Puritan roots, has a loooooong history of trying to regulate behavior it finds immoral. You see echoes of that in Jaquiss’s report.

There’s a separate issue that is far more defensible. In econ-speak, there’s a concept called a “negative externality” that describes a downstream consequence to certain activity. These can cost the government a lot of money, and so it’s reasonable to levy a tax to pay for them. This is called a Pigouvian tax, and it is particularly relevant to health and the environment. If your industry pollutes the rivers, for example, the state has a right to charge you the cost they incur to clean them up. While these two concepts have substantial overlap, they have very different goals. In one, the government is trying to affect behavior; in the other, it’s trying to recoup costs of behavior. One’s moral, one’s economic.

There’s a very good argument that makers and sellers of alcohol should pick up the tab for whatever costs the state incurs as a consequence of drinking. But because this is an economic argument, it follows that the debate should be entirely focused on assessing the state’s cost and how it should be apportioned among beer, wine, cider, and spirits. Why do they stuff the debate with a treacly filling of moral puffery? For two reasons: 1) they’re adding the “sin tax” on top of the Pigouvian tax to raise further revenues, because 2) a modest, sensible hike on the beer tax isn’t worth the bother.

Oregon currently taxes beer at about eight cents a gallon ($2.60 per barrel). If the state raised that to Tennessee’s rate, the nation’s highest, Oregon would bring in $112 million dollars. That amounts to .06% of the $19.9 billion state budget. And Tennessee’s beer tax is gigantic—if Oregon hiked it to the median (twenty cents a gallon), it would raise a miniscule $10.4 million more than it brings in now.

It’s an Excise Tax

In the two sessions a decade ago, Oregon legislators spun out some hogwash about how the tax would amount to only ten cents a pint. In fact, beer is taxed at the producer level, not the retailer level. That is to say, breweries pay the tax. They have no control over how much a retailer will charge. Worse, legislators didn’t take into account the manner in which beer is sold—once to wholesalers and once to retailers. The way a tax would actually work is this: if the increase raised the price of a keg $12.40 (ten cents a pint), that would get passed onto the wholesaler. The wholesaler would add their standard markup, inflating the cost. The retailer would then add their standard markup, inflating it further. The initial excise tax, nearly $25 a barrel, would have raised beer prices a lot more than ten cents a pint.

It’s hard to guess from Jaquiss’s report how much the legislature would try to raise the tax (he characterizes it as a retail hike of 10%), but it’s almost certainly not going to be assessed at the retail level. That looks like a sales tax, and sales taxes are wildly unpopular in Oregon. It would also require adding a different, separate tax to the current per-barrel excise tax breweries pay, or scrapping that tax altogether and starting with a single sales tax. None of that is going to happen, so it means they’ll actually propose an excise hike and try to sell it as a retail tax.

Bad Politics

The Oregon beer industry is a good deal bigger than it was a decade ago. It accounts for 10,000 jobs (31,000 if you include related industries) and contributes $4.5 billion to the state’s economy. To raise what amounts to a rounding error in the state budget, legislators would assess a tax that would substantially harm hundreds of businesses in Oregon and affect thousands of workers. Beer is popular, and this would be a high-profile, unpopular proposal. You recall what happened when the city tried to bully Old Town Brewing? Multiply that by 300 breweries.

And keep in mind that these are local businesses who already pay all the state and local taxes every other business does. This is an additional tax. As it stands, a third of the cost of that pint you’re drinking is already a result of taxes. We now have added costs of tariffs and inflation is ticking up again, so the legislature would be proposing substantially raising beer prices and damaging a vibrant local industry as a consequence.

When I was writing about this a decade ago for BlueOregon, I started getting calls from Democratic lawmakers asking why I was hammering them so hard. They didn’t really see that it was a big deal. Later, one legislator, Ben Cannon, wrote a column detailing all the ways the legislature had botched this effort. I would strongly recommend current legislators read that article if they plan to do this again. Based on this short report, they are about to make all the mistakes Ben outlined.

I would happily support a modest increase in the beer tax, say to the US median. One of the few accurate things legislators note about the beer tax is that Oregon hasn’t raised it in decades. That would be reasonable, and I hope even the Brewers Guild would support it. My guess is that’s not really on the agenda, though—the effort wouldn’t be worth the meager benefit.

I’ll keep my eye on this one. Prepare to cause a ruckus.

Jeff Alworth3 Comments