In the budget proposal, Gov. Jim Justice proposes expanding revenues for the state’s coffers by raising both beer taxes and the markup on distilled spirits. The same markup is included in the Republican framework.
These combined measures are scheduled to yield an estimated $5.6 million in new revenues, but they would also harm state-based businesses and undermine political accountability.
Like the rest of the nation, craft distilleries and breweries are popping up across the Mountain State, contributing jobs, opportunity and economic growth. For a state with one of the highest unemployment rates in the country, this has been a very positive trend.
Unfortunately, West Virginia, like many other states, continues to force alcohol producers to navigate a bevy of government-imposed roadblocks in the form of burdensome regulations and high taxes on alcohol. The governor’s proposal to raise the beer barrel tax from $5.50 to $8 and increase the wholesale liquor markup from 28 percent to 32 percent doubles down on this misguided approach.
According to the Tax Foundation, West Virginia’s beer taxes are relatively low compared to other states; currently, they are only the 32nd highest in the country. Of the states bordering West Virginia, only Pennsylvania boasts lower beer taxes.
But if the barrel tax is raised to $8 as proposed, West Virginia would slip down the rankings and find itself surrounded by numerous states with equal or lower beer taxes (including nearby Ohio and Virginia, in addition to Pennsylvania).
These relative rates are important, given significant evidence that higher beer taxes can reduce the number of breweries in a state. What that means is that West Virginia could lose out to its neighbors when it comes to creating an attractive environment for brewers.
The proposed increase in the state liquor markup is even more problematic. In addition to hurting West Virginia distillers and raising liquor prices for consumers, the higher markup would undermine core principles of democratic governance.
Under current law, the state Alcohol Beverage Control Administration commissioner has unilateral control over wholesale liquor prices. If the ABC commissioner goes along with the governor’s proposal, West Virginia residents will, in effect, face higher taxes in the form of the increased markup, even though the Legislature never voted on the increase.
West Virginia’s 28 percent markup functions as a backdoor tax to raise revenue for the state, as the average markup for alcohol in the private market is only 20 percent. Under the governor’s proposal, the revenue gained from increasing the markup to 32 percent would be funneled to the state’s Division of Tourism. Republican legislative leaders have also endorsed raising the beer tax and liquor markup in their alternative budget proposal; the only difference is their plan would use the additional revenue to close the budget shortfall rather than for tourism.
The power of taxation long has been considered a core legislative power in democratically elected governments. West Virginia’s ABC setup erodes political accountability by granting unelected bureaucrats the authority to raise taxes on state residents.
To be sure, other “control states” also vest unilateral markup power in the hands of their alcohol regulators, but this doesn’t mean West Virginians should put up with this state of affairs.
Ideally, state lawmakers would push to privatize liquor sales fully and allow market forces to dictate booze prices. There is at least some precedent for this approach, as the state government withdrew from the liquor-retail business in 1990, although it still maintained its role at the wholesaling stage.
Absent privatization, the state Legislature could at least reassert its authority over taxation by requiring legislative approval for increased liquor markups, as recently introduced legislation seeks to do.
Budgetary politics are often tricky and the desire for more revenue can be enticing to politicians. But balancing the state budget on the backs of craft-spirits producers only serves to weaken one of West Virginia’s most promising growth industries.
State lawmakers should resist this effort, while also re-establishing their control over the power of taxation.
C. Jarrett Dieterle is a fellow at the R Street Institute, a Washington think tank that promotes free markets and limited, effective government.