Tuesday, May 25, 2021

A Tale of Two Troublemakers: Alcohol and Firearms


Although the Federal Excise Tax (FET) on distilled spirits was lowered recently for small producers, it remains $13.50 per proof gallon* for most beverage spirits sold in the United States, a rate that was set in 1985. Raising taxes on beverage alcohol products even higher has been part of some health care plans presented to Congress. Sixteen dollars per proof gallon has been widely proposed. Increasingly, health care costs related to alcohol consumption are cited as justification for higher beverage alcohol taxes at all levels of government, and beverage alcohol (beer, wine and spirits) is taxed at all levels of government.

It may surprise you to learn that a federal excise tax of 10-11 percent on the import and production of guns and ammunition has been in effect, at the same rate, since 1919. The National Firearms Act of 1934 (NFA) imposed a $200 tax on manufacturers for the transfer of a very narrow set of weapons and that too has not changed since its enactment.**

The argument in favor of these punitive taxes is simple and superficially attractive. The use of tobacco and alcohol, the usual suspects, is unhealthy and increases healthcare costs. Gasoline is taxed the same way for similar reasons, related to the cost of motor vehicle infrastructure and, increasingly, to reduce climate change harms. Higher taxes on products deemed inherently unhealthy or harmful are justified to help pay for the healthcare and other expenses caused by those products and borne directly by government programs such as Medicare and Medicaid, and infrastructure grants. In this way, tobacco, alcohol, and gasoline users pay for the consequences of that use, whether through healthcare, pollution abatement, or highway maintenance. 

The money raised by the firearms FET funds wildlife conservation and hunter education programs. 

If you buy a bottle of whiskey for $25, a nice bottle of Wild Turkey 101 perhaps, you have just made an FET payment of about $7.50, plus another few bucks for state and local taxes, all of which are much higher for Wild Turkey bourbon than they are for, well, actual turkey.

Rarely considered for similar higher taxation due to harms caused are firearms, ammunition and related products.  

Before you unholster your best 2nd Amendment rant, consider this a thought exercise in how policy toward these two different product categories is approached. Considering how often alcohol and gun violence go together, the exercise would seem to have some validity.

In addition to funding care for the harm they cause, higher taxes on disfavored products cause prices to go up, thus discouraging consumption and reducing the harm and associated healthcare costs. According to RAND, "a wide body of research has found that taxation can serve as an effective policy lever for reducing consumption and consumption-related harms." Studies show price increases prompted by higher taxes may or may not affect consumption depending on many factors, but even when they don't, money is raised to fund mitigation. Either way, it seems like a logical bit of social engineering so far. 

If it makes sense to engineer society in this way with regard to alcohol, tobacco, and gasoline, why not include other harmful products?

There are many possible candidates in the category of foods and beverages, especially products that are high in saturated fat, sugar, or salt that have minimal nutritional value, such as ice cream, candy, potato chips, and soft drinks. The harm they cause is comparable to that caused by alcohol and tobacco.

The same logic suggests fattening foods, guns, and ammunition should be taxed the same way alcohol and tobacco are, but just as alcohol, tobacco, and gasoline are taxed at all levels of government, food production is often subsidized, and taxes on firearms and ammunition are rare. 

They are also disfavored. In 2016, a U.S. territory passed a $1,000 tax on all pistol sales but it was struck down by a federal court as imposing "an undue burden on individuals' ability to exercise their constitutional rights."

One advantage of an excise tax increase is that it would be levied on manufacturers and thereby become part of the price each time the weapon changes hands, even extra-legally. Since handgun sales impact both law enforcement and healthcare costs, the argument for recovering some of that cost through taxation is very strong, even if the higher prices don't directly impact gun violence by reducing consumption. The Second Amendment is not impacted unless the tax is so high it unreasonably limits the ability of people to lawfully bear arms. No one has construed the Second Amendment as saying the right to bear arms has to be free or cheap.

Using the Federal Excise Tax on Distilled Spirits as an example, a proportional excise tax on firearms and ammunition would raise the price by about 30 percent. Since no one is harmed by mere ownership of a gun, perhaps it makes more sense to only tax ammunition this way. That would be more parallel to alcohol, tobacco, and gasoline taxes.

At present, regulations for ammunition sales are less stringent than those for firearms. No license is required for sellers and no background checks are required for buyers. In a survey at Cook County Jail (Chicago), inmates arrested for gun offenses said ammunition was easier to get than guns, yet reducing gun violence by tightening up and taxing ammunition sales has never been tried. 

If high taxes are okay on Bulleit Bourbon but not on actual bullets, why not?

If nothing else, this thought exercise should persuade you that all taxation is essentially arbitrary and like everything else in our society, it is a function of power and privilege merely obtained and held and not, in any sense, earned or justified.


* A 'proof gallon' is one gallon of beverage alcohol that is half alcohol and half water, i.e., 100° proof, or 50 percent alcohol-by-volume (50% ABV).


Anonymous said...

The bottle of 101 Turkey you referenced has about $2.70 in FET, not $7.50 as you state.
As a distiller I can attest that $2.70+/- is not an exhorbanant amount to pay to be in the industry that we all so choose.

Chuck Cowdery said...

For purposes of this sort of illustration, it can be calculated in different ways. Because the FET is built into the manufacturer's cost, it gets marked up at each successive stage in the distribution chain, and amounts to about 1/3 of the retail price of a standard (i.e., not premium) distilled spirits product. If I calculate it without the markup it comes to about $3.37. All of which is beside the point. However you add it up, alcohol consumers pay considerably more for the harms their consumption ostensibly causes than do ammunition consumers.

Stacy Thomas said...

Not really a valid comparison since, as mentioned in the court opinion you refer to, the proposed increased taxes on guns and ammunition would be a further impediment to the exercise of an enumerated right guaranteed by the Second Amendment to the US Constitution in the Bill of Rights.

Also, the amounts collected by the G from the percentage tax referred to has been effectively increased many times due to the inflated prices of the items taxed.

Chuck Cowdery said...

All you can really take from the Northern Marianas Islands case is that $1,000 is too much.

Anonymous said...

I really have no idea what you are talking about when you say that a distillery "marks up" their taxes. That's pretty absurd on the face of it. Does a drug store "mark up" the sales tax they charge for your shampoo? I think you might be a little too close to big liquor who are constantly crying "woe is me" so they can ugrade from G5's to G6s.

The consumer pays $2.70 for the tax. Every deviation from that is on the distiller and nobody else. Period.

Tom Murin said...

The type of taxes you are referring to as "Pigouvian" taxes. As a 2nd Amendment supporter, I'm not a fan of your example, but you're correct intellectually.

Mark Shilling said...

I'm not really following how you got to 7.50 on the tax. The FET on a 750 of WT 101 would be 54 cents. Even if that tax was paid at each step from producer to consumer it would only come to 2.16 - but it's not. Even if it were fully passed on, only the first .54 goes to the government.

What am I missing here?

Anonymous said...

I ran the thought exercise and reached the conclusion that all FET should be eliminated.

Chuck Cowdery said...

FET is $13.50 per proof gallon. 750 ml is 20% of a gallon. 20% of 13.50 is 2.70. But since that is the manufacturer's cost, that 2.70 gets marked up by the distributor and retailer. Does that get us to $7.50? Maybe. The $7.50 comes, as I said, from a rule-of-thumb that says the FET represents about 1/3 of the retail price of an 'ordinary' (i.e., not premium) distilled spirit product. I used Wild Turkey 101 as the example because it is sold at proof, while most distilled spirits products are lower. All that said, the actual number is beside the point. Does anyone deny that alcohol is heavily taxed and the justification for that is the harm alcohol allegedly causes? Yet we don't tax other 'harmful' products the same way. Why is that? If you want to argue about something, argue about that, not my math.

Anonymous said...

$2.70 is not, and I again repeat, not, too much tax on an intoxicant that carries with it some public health issues. Get off this completely absurd soapbox that claims that somehow distillers mark up this tax. If they do, or better yet pretend that they do, then so what? Who cares what quick books column some penny pinching back room accountant puts their FET expense in? Christ, this has got to be the dumbest blog you have done, and I normally love your stuff.

Move along, because this one is a non starter.

CJ said...

@Chuck Cowdery Regarding the math, a 1.75L bottle is nearly half a gallon.

Whether the consumer or producer pays the tax is not a valid question. If it weren't for the tax, they could charge less and have the same profit margin, while selling more, assuming there's some elasticity in the demand for spirits.

Regarding the merits of taxing things according to the harm or use of resources they cause, taxing harmful things seems better than taxing work, which is generally a good thing. As you say, though, tax laws end up being arbitrary

Chuck Cowdery said...

If we had a consistent policy of taxing harms and rewarding good, we would have a very different tax policy.

Stacy Thomas said...

"If we had a consistent policy of taxing harms and rewarding good, we would have a very different tax policy."

One problem with this would be -- who decides what's good and what's harmful?

Chuck Cowdery said...

Who decided tobacco and alcohol are harmful, for tax purposes, and firearms are not?

John S. said...

You would have my vote if you were running for public office.

Anonymous said...

Re your query: who decided that tobacco and alcohol are harmful and firearms are not.

Ok, his is my last post on this absurd thread:
Alcohol in excess and tobacco even moderately, are always harmful but guns are only harmful sometimes. But there is a BIG difference. Alcohol and tobacco harm are self inflicted harms, I.e. if you choose to use, especially in excess, you are harming yourself. You must then pay a tax to cover the burden to society (increased health care, increased police and EMT's, etc) .. All to cover the choices you have made.

With a gun, if you shoot yourself accidentally, see (A) but more so if you shoot someone else, you don't get taxed, you get incarcerated or maybe even put to death.

Are you starting to see the difference? One is a tax you pay to cover the societal expenses that you create by smoking and drinking. However if you shoot someone, taxes are the least of your worries.

Let's move along please.

Sam Komlenic said...

Um, hey, Anonymous above, what are you referring to when you mention (A) in that reply of 6/8 at 7:27, since you do not delineate same in your note, nor a (B), which would be the only reason to refer to an (A) to begin with?

Oh, never mind, that was your last post on this absurd thread.

And some of us actually post with our real names. Are you starting to see the difference?

Iakov Alenchik said...

Topics like this make me wanna say, "If you're gonna tax, just slap a flat tax on all and be done with it."

Crown Point Marc said...

You're arguing apples and oranges. The right to defense of one's self and loved one's is a God given right, protected by the U.S. Constitution (2nd Amendment). There is no protected right to imbibe alcohol, gamble or view pornography; the usual suspects associated with sin taxes.

Chuck Cowdery said...

Nowhere in the Constitution does it say the exercise of a protected right cannot be taxed.

Crown Point Marc said...

True, but it shouldn't be taxed exorbitantly so it becomes a burden on the people to properly defend themselves. Taxing alcohol, gambling etc. at a much higher rate doesn't put people's lives at risk.