Raising Liquor Taxes in Illinois will become an absolute folly

 

Governor J.B. Pritzker proposed increasing liquor taxes as a way to pay for his capital plan. His proposed plan would increase the tax on beer from 23.1 cents to 27.7 cents per gallon, would increase the tax on wine from $1.39 to $2.05 per gallon, and would increase the tax on spirits from $8.55 to $12.60 per gallon.

Illinois has some of the highest taxes on liquor in the country, and the liquor tax proposal would make it the highest tax state in the Midwest and Great Plains for wine and spirits.

If the proposed tax increases go through it will lead to dire consequences for Illinois, including: 1. Increased illegal activity in the liquor industry; and 2. The shuttering of Illinois business.

 

Increased illegal activity in the liquor industry

Illinois has a serious problem with illegal liquor coming over the border from other states. Recently, Illinois announced that it was charging five liquor store owners with tax evasion and interstate bootlegging of liquor.[1] The Illinois Liquor Control Commission revoked a retailer’s license because it was bootlegging liquor from Indiana.[2]

Illinois retailers are bootlegging liquor based on the extreme differential liquor tax rates between Illinois and its border states.  If you look at the three categories of liquor beer/wine/spirits, Illinois’ numbers presently read $.231/$1.39/$8.55, Indiana’s are $.115/$.47/$2.68, Missouri’s are $.06/$.42/$2, and Wisconsin’s are $.06/$.25/$3.25.

These numbers show that liquor from Illinois is much more expensive than the neighboring states by wide margins. Bootlegging liquor from Indiana increased, because it is cheaper for an Illinois retailer to buy at retail in Indiana as opposed to buying from a wholesaler in Illinois.

The retailers probably make a cost/benefit analysis and determine that the price differential is so high between Illinois and Indiana that bootlegging is worth the risk. They also probably factored into this analysis that their chances of getting caught were slim.

The Illinois Liquor Control Commission back in early 2018 had roughly 20 agents for the whole state. Indiana which is a lot smaller geographically than Illinois, we estimated had at least double to triple the number of agents.

So based on the high amount of tax and the low number of enforcement agents, bootlegging in Illinois is rampant and hard to crack down on.

With so much commerce occurring in the shadows, Illinois is losing tax revenue.

But this capital bill ignores this problem and in fact doubles down on it. The rates, which are excessively higher than the neighboring states and motivate illegal activity, increase by over 47% on wine and spirits.

It does not take Einstein to see that bootlegging will become even more rampant and that people who didn’t partake in bootlegging previously, may become motivated to bootleg liquor based on the excessively increased rates.

Problematically, this proposed capital plan does not seem to increase enforcement officers for the Illinois Liquor Control Commission. Although the capital plan will result in increasing illegal activity, it will not provide the state with adequate resources to fight these activities.

 

The shuttering of Illinois business

Most businesses do not bootleg liquor because it is fun and they want to live out a Dukes of Hazzard fantasy. They do so because they want to enhance profit margins or even survive as a business.

But there are also honest Illinois businesses that reject the higher profit because they don’t want to break the law. And for some their integrity is so strong that they would rather go out of business rather than break the law.

The 47% increase in tax will essentially put these places out of business. Presently, it is very hard to compete with border stores, especially in Indiana, on price. The proposed tax increase would make Illinois products excessively more expensive. A consumer is not going to shop at an Illinois store when a store within a short distance may offer product at half the price.

As a long time, veteran of the wholesale industry told me, “right now these businesses are hanging on for their dear lives’”.

What this tax proposal fails to recognize is that if a store closes a family loses a business. This may result in kids not being able to go to college, or the honest hardworking immigrant losing his or her way to the American dream.

What I fear most from this tax proposal is it will push honest and hardworking business owners over to the side of bootlegging. Where is the turning point where we turn honest hardworking business owners into those engaging in activities that constitute a felony?

This tax plan creates a “Faustian bargain” for these retailers, either obey the law and go out of business, or disobey the law so you can survive. When the family bread is on the table, this becomes a really hard choice!

 

Conclusion

Illinois’ current taxing system for liquor makes life very difficult for the industry and enhances illegal activity.

In my humble opinion, doubling down on a serious problem to make it worse is nonsensical.

Hopefully, a closer look at the results of this proposal will lead to a different outcome. If not, we are entering very dangerous territory for the Illinois liquor industry.

 

 

[1] http://www.illinoisattorneygeneral.gov/pressroom/2019_04/20190418b.html

[2] https://www.nwitimes.com/business/jobs-and-employment/illinois-liquor-licenses-revoked-suspended-after-bootlegging-from-indiana/article_0d56dfb0-3889-5546-88c2-bbba09778596.html

 

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