Craft distilling may be undergoing a renaissance, but in the shadow of George Washington’s Mount Vernon (home to one of the nation’s first distilleries), you can barely get a full flight of whiskey. Were Washington, our nation’s original craft distiller, operating his still today, he would face a dizzying array of state-imposed regulations and taxes.
In a state with such a deep history in spirit making — whiskey has been here since 1620 — it’s time for Virginia to stop treating its distillers like second-class citizens.
Commonwealth distilleries are hit with an excessively high rate of taxation. According to analysis by the Tax Foundation, Virginia has the third-highest effective tax rate on distilled spirits in the country. Because Virginia is a “control state” (meaning the state government controls all liquor sales via its ABC stores), the state’s effective tax rate on booze not only includes excise taxes, but also a state-imposed markup on the retail price.
Virginia ABC marks up distilled spirits by an incredible 69 percent, before applying a 20 percent excise tax, not to mention the additional general state sales tax of around 5 percent. As a Washington Post calculation demonstrated, the results are eye-catching: A bottle that a distillery might want to sell for just under $12 will end up costing consumers closer to $25.
This hidden tax doesn’t just apply when a bottle of booze is sold in state ABC stores. Virginia distilleries also act as agents for ABC, meaning that, even when a distillery sells a bottle of spirits on its own premises, it has to send all of the proceeds to ABC. The distillery then has to wait a month or more for ABC to return its share of the revenue. Once the ABC markup and taxes are accounted for, the distilleries only get about 46 percent of the purchase price.
These hefty taxes disproportionately hurt Virginia’s local, small-batch distillers more than they hurt megabrand whiskeys like Jack Daniel’s. Because craft spirits are often more expensive to make to begin with, Virginia’s liquor tax can push these products out of many Virginia consumers’ price range. As Economics 101 teaches, too-high prices can soften demand and limit the growth of up-and-coming industries.
The commonwealth doesn’t punish all alcohol makers with high taxes, however. Not only are beer and wine subject to lower state excise taxes than liquor, but beer and wine sales are also not controlled through the state ABC system, meaning they are not subject to the state’s automatic 69 percent retail markup. Beer merely faces the 24th-highest tax rate in the country, with an effective rate of only 26 cents per gallon. And while wine faces a relatively high rate compared to other states (seventh overall), the effective tax on Virginia wine is still only $1.51 per gallon, compared to $19.86 per gallon for liquor, according to the Tax Foundation.
Unfortunately, it’s not just high taxes that hurt Virginia distilleries. Overbearing regulations also suppress this corner of the drinks market. As one example, up until this year distilleries, weren’t allowed to serve more than two ounces of spirits per customer during on-site tastings. This particularly stings, as tastings are one of the primary ways distillers can grow their businesses and expose would-be customers to new brands. That goes double for small craft distilleries which, because of the labor-intensive nature of their products, often have to charge higher prices than their name brand competitors.
While the state Legislature recently upped the limit to three ounces (doled out in half-ounce pours), in reality, the entire law should be scrapped. Virginia wineries and breweries face no explicit limits on the amount of beer and wine they can sell to on-site visitors, despite the fact that a glass of either is just as alcoholic as a shot of hard liquor. Further, the on-site tasting law serves no public purpose since Virginia already has numerous laws that make it illegal to sell alcohol to intoxicated persons, rendering additional limits duplicative and unnecessary. There’s no evidence that distilleries are overserving customers.
Given this legal backdrop, it comes as no surprise that beer and wine interests are among those pushing hardest to keep local distillers legislatively handcuffed. The state beer and wine lobbies, which made $1.7 million in political donations from 2014 to 2015, dwarf the nascent distillery lobby (which has only recently gotten off the ground). Beer and wine producers dress up their concerns in the language of prudence, but in reality, they are most interested in handicapping a distilled spirits industry that could siphon off their business. Even the state restaurant lobby is against allowing distilleries to serve larger tasting sizes on-site—at least until Virginia also agrees to repeal the restaurant guild’s own regulatory nightmare, the infamous food-beverage ratio.
The Virginia ABC system has been referred to as the “golden goose of the commonwealth.” Indeed, it has raked in $152 million for the state’s general fund in recent years. This does not, however, rationalize a structure in which one small sliver of state businesses are disproportionately relied upon to fund the general government. If the state is facing budget shortfalls, it can always cut spending or push to broaden the tax base, rather than relying on hidden liquor taxes and markups to stay afloat.
Protectionist and budgetary impulses may be understandable, but state lawmakers should rise above them and strike a much-needed blow for free enterprise in Virginia’s alcoholic beverages market. Virginian distillers deserve the right to compete on even terms with the wine and beer industries. George Washington would approve.
Guest blogger C. Jarrett Dieterle is an attorney and policy writer in the Washington, D.C. area.
(This piece first appeared on the R Street Institute Blog.)