March 21, 2023

Gerard Scimeca
Chairman, CASE

Since the advent of alcohol excise taxes, state and federal governments have understood that beer and liquor are fundamentally different products. As a result, they have always been taxed at different rates, with a higher tax levied on liquor due to how it is produced, distributed, and consumed.

During the 2022 Legislative Session, the Maryland House and Senate both considered legislation that would have upended this precedent by cutting taxes on canned cocktails to make them equivalent with those levied on beer. Canned cocktails, also known as ready-to-drink (RTD) cocktails, are liquor-based drinks that are packaged in aluminum cans and typically have a higher alcohol-by-volume (ABV) that is closer to that of wine than beer.

Backed by big liquor companies, proponents of the legislation argued that canned cocktails should be taxed like beer even though they are a liquor product. They claimed that reducing taxes would result in lower prices for consumers, an appealing prospect during a period of high inflation.

While canned cocktail tax cuts failed during the 2022 legislative session, lawmakers were rightfully intrigued enough by the idea. As a result, the Maryland Alcohol and Tobacco Commission (ATC) was commissioned by the state to conduct a study on the impacts such measures would have if the legislature wanted to revisit the issue in 2023.

Based on the ATC’s report, which was published last month, it is clear the Legislature was correct to reject canned cocktail tax cuts.

To better understand the impact such cuts would have on Maryland, the ATC looked at two states–Michigan and Nebraska—that passed canned cocktail tax cuts in recent years. The report found that both states saw significant reductions in excise tax revenue, but consumers did not enjoy lower prices as a result.

During fiscal year 2022, the first full year the liquor tax break was in effect, Michigan lost out on over $2 million in tax revenue compared to what would have happened if rates had remained unchanged.

Despite the reduced tax rates, the ATC report concluded that canned cocktail prices “remained relatively similar” to those across the US as a whole. This indicates that rather than lowering prices for consumers, liquor companies simply pocketed the extra revenue.

Lower taxes on consumer purchases is almost always a good thing, but to be fair and effective cuts have to be neutrally applied, provide a known consumer benefit, and applicable to a uniform type of product, for instance, packaged alcohol in general. A tax cut targeted within an industry to one specific type of product is more problematic, especially if that product’s supply demand is inelastic and largely ambivalent to price, as is the case with canned spirits.

In these cases, there is no consumer benefit, just a windfall for the businesses using the tax cut to pad their profit margins. A similar story happened in Nebraska. The ATC concluded that “Nebraska failed to realize $1,984,463 in revenues over the course of [2021 and 2022]” and attributed this fact “to the change in tax rates associated with ‘low proof spirit’ RTDs.”

Shockingly, canned cocktail prices in Nebraska actually increased compared to the US average after the tax cut went into effect. In January of 2021, the average unit price of canned cocktails in Nebraska was $5.53, compared to $5.70 nationwide. By August 2022, the nationwide average had risen to $9.52, but in Nebraska, unit prices had soared to $9.62.

The ATC conclusion is unambiguous: “the reduction of the tax rate for ‘low proof spirits’ has not led to an increase of sales of these products to fully offset the revenue loss, nor…did the retail cost of these products change in any beneficial way for the consumer.”

These findings should put to bed any plans to cut taxes on canned cocktails in Maryland, or any other state across the country. A special-interest handout to liquor companies is entirely unwarranted, especially when it unfairly shifts the tax burden to other products and their customers and doesn’t do anything to help lower prices for consumers.