“No on Question 1” by John Edward

We have long invited readers to submit articles for us to post on this site. Today, John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and is an adjunct professor of economics at Bentley University, shares his reasons for voting NO on Question 1 in the upcoming state election.

On August 1, 2009, the state of Massachusetts started applying the general sales tax to beer, wine, and distilled spirits. Prior to doing so, we were the only state with a sales tax exemption for all three classes of alcoholic beverages.

In addition to the sales tax, a per-unit excise tax applies. All fifty states either enforce an excise tax or directly control the sale of alcohol.

Applying both a sales tax and an excise tax probably sounds like double taxation to you. That is because it is. There is a long-standing and sound rationale for such treatment. There is a reason why everyone else was doing it before Massachusetts.

First, alcoholic beverages are a good. They are, appropriately, not classified as food. Therefore, they should not be exempt from sales taxes. If we collect the sales tax on purchases of recliners and coolers, we should tax beer and wine as well. Sales taxes serve the purpose of general revenue generation.

Second, alcoholic beverages merit special treatment due to the special problems caused by sale and over consumption of the product. Excise taxes compensate for the expenses incurred.

The sale and consumption of alcoholic beverages results in direct and indirect costs for state and local governments. Examples include the infrastructure necessary to administer vendor licenses, alcohol treatment and prevention, law enforcement, and health care.

Question 1 on the November ballot, if approved, would eliminate the sales tax for alcoholic beverages by restoring the exemption. The basic claim of supporters is that taxes lead to higher prices, and that is hurting business at Massachusetts liquor stores.

We now have a full year of data to refute that claim. Since the sales tax on alcohol started 12 months ago, liquor sales in Massachusetts are unchanged from the year before.

Border stores may be losing some customers, but the same may be true of businesses that sell many other products. The government should not be giving preferential treatment to one industry, in particular one that generates so much social cost.

Furthermore, if liquor-store owners really want to give their customers lower prices, why do they support tight restrictions on supply? Unlike most products, a strictly limited number of license holders can sell alcoholic beverages.

Massachusetts has a quota system for how many retail licenses cities and towns may issue to sell alcoholic beverages. The quota is based on population. Municipalities are free to restrict licenses even further. Some towns are completely dry; others restrict sales based on the type of license or establishment.

In the Town of Chelmsford, at least one liquor-store proprietor tried to prevent issuance of a beer and wine license to a new meat market. In 2006, license holders were successful in defeating a statewide ballot initiative that would have allowed supermarkets to sell wine. They fended off a legislative initiative to expand liquor sales in 1999.

License control is appropriate. We should not allow just anyone to sell controlled substances.

However, to the extent that supply is restricted, prices, and profits, go up. Restrictive licensing limits supply. Limited supply does more to increase prices than the sales tax.

Liquor-store owners want to have it both ways. They want to restrict supply, and they want an exemption from taxes that apply to other goods.

We should lower the tax on all goods back to 5 percent. When we do, we will be below the nationwide median of 6 percent.

The Massachusetts excise tax on beer has been 11 cents per gallon since 1975. That is only 3 cents after adjusting for inflation.

New Hampshire charges 30 cents per gallon. The U.S. median is 19 cents. Only eight states have a lower beer tax than us.

Our excise tax on wine is 55 cents per gallon, a little below the nationwide median. For distilled spirits it is $4.05, a little above.

The New Hampshire Liquor Commission made $122 million in profit last year, with a profit margin of 25 percent. They do not call it a tax, but it is.

Alcohol taxes provide a double dividend for society. They generate revenue to compensate for costs incurred, and they discourage the activity that generates the cost.

A Johns Hopkins School of Public Health study estimated that Maryland would save $250 million annually in healthcare costs with a 10-cent increase in their alcohol excise tax. A National Bureau of Economic Research study found a significant decrease in driving under the influence when states tax alcohol. The effect is most prevalent for underage drinkers. The conclusion of their study is that alcohol taxes are far below the optimal level necessary to reflect social costs.

Massachusetts has finally joined the other 49 states in doing the right thing. There is no good reason to restore this exemption. If you want to lower taxes, there are much better options.

Vote No on Question 1.