Pro-Growth Reform Should Rollback or Remove Distortive Excise Taxes

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Posted by Alexander Hendrie on Thursday, December 1st, 2016, 9:00 AM PERMALINK

A major goal of tax reform is eliminating or minimizing the extent to which the code picks winners and losers, with the end goal of a code that treats all economic decisions neutrally. This means removing any distortions in the tax code so that capital can form in the most productive way possible, resulting in more jobs, increased wages, and higher growth than may otherwise occur.

One broad way of achieving this is ensuring that businesses are taxed as equitably as possible by eliminating business credits in exchange for lowering rates within an across the board tax cut.

A different, more targeted way to achieve this goal is through the repeal of certain taxes, such as excise taxes. When it comes to alcohol excise taxes, this problem is especially noteworthy as the code currently taxes beer, wine, and spirits at different, arbitrary rates:

  • Beer is subject to an $18 excise tax per barrel, with a reduced rate for the first 60,000 barrels produced by smaller brewers.
  • Wine is subject to excise taxes between $1.07 and $3.40 per gallon, with a phased out credit for small wineries.
  • Spirits are taxed at $13.50 per proof gallon, but with no reduced rate for smaller distillers.

This makes no sense, and is exactly the type of distortion that tax reform should aim to fix.

One possible path forward to undoing this inconsistent taxation is by passing the Craft Beverage Modernization and Tax Reform Act (S. 1562/H.R 2903), legislation sponsored by Senator Ron Wyden (D-Ore.) and Senator Roy Blunt (R-MO), and Congressman Erik Paulsen (R-MN) and Congressman Ron Kind (D-Wis.). The legislation is supported by a majority of both chambers -- 287 Congressmen and 52 Senators from both parties -- so there is clear consensus on the ideal path forward.

This legislation moves closer toward the goal of tax equity by ensuring the code treats beer, wine, and spirits in similar ways. In addition, it also equalizes the tax treatment of producers large and small.

By lowering rates, the Craft Beverage Modernization and Tax Reform Act achieves another key goal of tax reform – encouraging growth, jobs, and higher wages, through a more efficient system. It’s a basic principle that if you want more of something, you tax it less. Less income being diverted to federal and state governments means more resources left that can be invested by businesses in economically productive activity.

Excise taxes by their nature are counterproductive, because they have two competing goals. Lawmakers often justify these taxes as a way to clamp down on negative behavior, but the more successful they are at this goal, the less revenue they produce. In addition, they pick winners and losers by taxing a selective, narrow base, which distorts production and economic choices.

Tax reform that lowers rates and removes distortions is decades overdue. Removing credits, deductions, and discriminatory taxes – like alcohol excise taxes – must be a key component of pro-growth reform that increases wages, creates more jobs, and boosts economic growth.



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