US state budgets are facing their worst fiscal crisis since World War II, and many are looking to the alcohol beverage industry for a fix. Anne Brockhoff looks at the repercussions for the drinks industry and some emerging signs of hope for the trade.

Shrinking tax revenues and rising health care costs have created a combined state budget shortfall of more than US$30 billion in 2003, and that figure is expected to reach US$82 billion in 2004, according to the National Governors Association. To refill their coffers, lawmakers in more than 30 states have proposed raising taxes on spirits, wine and beer.

Arkansas extended to 2005 a 3% beer tax increase initially passed in 2000. Idaho approved a 2% surcharge on spirits. And Utah (a control state) instituted a 3% increase in the mark-up on spirits and 16% increase on beer. Efforts in 13 other states were defeated. Initiatives in 18 more are still pending.

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"We're holding our own very well, but, as for the outlook for the rest of the year? It's hard to speculate how things will turn out"
We're holding our own very well, but, as for the outlook for the rest of the year? It's hard to speculate how things will turn out," says Jeff Becker, president of the Beer Institute, which represents US brewers and their suppliers. "The problems for the states aren't going to go away next year or the following year."

Taxes already account for more than half the cost of spirits in many states. That means a product priced at US$11.50 (about the cost of a 750ml bottle of Bacardi rum or Smirnoff vodka) includes US$2.15 in federal excise tax. State and local taxes account for US$2.19; corporate, payroll and other indirect taxes for US$1.78, according to the Distilled Spirits Council of the United States (DISCUS).

But while some legislators claim that higher taxes will equal higher revenue, raising taxes can actually be counterproductive, says the trade group Wine & Spirits Wholesalers of America.

"Recent excise tax increases have actually caused revenues to decline for states, as well as the federal government," WSWA's position paper on the topic says. "


"Because restaurants, hotels and taverns depend upon alcohol sales to remain profitable, higher taxes mean lost jobs and a declining tax base"
Because restaurants, hotels and taverns depend upon alcohol sales to remain profitable, higher taxes mean lost jobs and a declining tax base."

A Massachusetts proposal to double excise taxes on spirits, wine and beer could result in a US$150m decrease in state-wide economic activity and the loss of 2,300 hospitality and other jobs. Maryland could lose US$64m and 800 jobs if additional taxes are imposed, DISCUS says.

Such hikes hurt the drinks industry as well. If tax increases had gone through in each of the 34 states where they were proposed this year, the US$13 billion distilled spirits industry would have lost about US$500m in revenue, says David Ozgo, vice president of economic and strategic analysis for DISCUS.

In California, a proposed US$0.05 per-drink surcharge (now in legislative committee) could devastate the state's wine industry, according to the California Association of Winegrape Growers.

"The tax would mean that the value of over half of the winegrapes harvested in California would be dwarfed by the amount of the tax," Barry Bedwell of Joseph W. Ciatti & Co. and a CAWG director-at-large said in a statement. "It doesn't take an economist to figure out that a grower would have no option but to quickly pull vines and issue pink slips."

In the face of such arguments - and voters' general opposition to any form of tax increase - some states have opted for a different approach: legalising Sunday sales.

New York and Delaware in May became the latest to allow retailers to sell alcohol on Sunday, bringing the total to 26 states. Washington, Maryland, Rhode Island and Connecticut are also considering allowing sales on what is usually the biggest shopping day of the week. In Kansas, cities like Overland Park, Lenexa and Edwardsville have passed ordinances overriding a state ban on Sunday sales.

The result can be quite lucrative, in part because the added convenience of shopping on Sunday can help boost per-capita consumption (but not abuse or illegal use) about 22% to just over 2 gallons a year, DISCUS says. And increased sales mean more tax revenue.

In New York, allowing retailers to open any six days of the week is expected to generate US$26.7m from both new sales and those recaptured from neighbouring states that allow for Sunday buying, DISCUS says. Sunday sales in Delaware are projected to yield up to US$2m in new tax revenue for that state, according to University of Delaware economist William R. Latham.

It's also good news for suppliers. If the remaining states legalised Sunday sales, distillers could see as much as US$500 million in additional annual revenue, Ozgo says.

"If suppliers sell more product, they make more profit," says DISCUS spokesman Frank Coleman. "That's pretty basic."