Politicians never fail to live up to their reputation of exercising a lack of foresight when proposing policy. In the wonderful Corn Husker state, Nebraska Governor Jim Pillen, has proposed a 287% increase on the liquor excise tax for spirits. The excise tax would increase from $3.75 a gallon to $14.50 a gallon.

It would result in Nebraska going from the 38th highest excise tax to the 2nd highest excise tax in the country among licensed states. The governor proposed the tax increases as a revenue enhancer and as a way to fund a shift away from property taxes funding education to a greater reliance on a mixture of sales and excise taxes.

Unforeseen consequences

The excise tax rate reflects the rate of tax when the product is taken out of bond, often times the distributor/wholesaler pays the tax and sometimes it is the manufacturer of the product itself. The tax increase is so substantial that the wholesaler cannot eat the whole cost and must pass a substantial amount of it onto the retailer, who because they are incurring such a huge pass thru cost, must pass much of this cost onto the customer. What results is excessively higher cost liquor products.

In 2009 Illinois increased the excise tax on spirits by 90% to $8.55 a gallon. What resulted was a tax rate nearly 4 times higher than neighboring Indiana and well over 4 times higher than neighboring Missouri.

In isolation the numbers mean nothing, but they mean something when you look at the real-world effects.

Illinois overnight made it difficult for many retailers to stay in business. Especially those retailers on the border with Indiana and Missouri. The small liquor store owners in border communities’ profits were being squeezed as a customer could basically walked across the state line and obtain the same product at a substantially cheaper price.

Nebraska is surrounded by four states where the excise tax would be 6 to 7 times less than Nebraska’s excise tax rate.

With excessively higher prices due to the excise tax, border community stores will lose business to neighboring states, putting their businesses in jeopardy of surviving.

For the border communities, if the excise tax goes through, the lose of revenue for their stores is guaranteed, and there is a high likelihood the stores will cease as profit becomes impossible.

Further, what I have seen in Illinois is numerous Illinois border community retailers are buying at retail in Indiana as it is cheaper than buying wholesale in Illinois.

Finally, we must look at this from the producer tier. Craft distilleries are in crisis, even without the tax issue, the lack of legitimate distribution options and being shut off from DTC markets is hurting the industry. [1] But combine this with what would be a major cost via an excise tax and you have businesses whose survival is in danger.[2]

In the end, the Governor’s drastic tax increase proposal could kill off many retailers and could singlehandedly destroy Nebraska’s craft distiller industry. I know foresight is not a politician’s best friend but I hope reason is.

[1] https://www.foodandwine.com/craft-distilleries-in-crisis-8686337

[2] https://www.ketv.com/article/omaha-area-distilleries-say-proposed-spirit-tax-hike-could-put-them-out-of-business-force-move/61693461