California Okays 1,550% Tax Hike on Flavored Malt Beverages

Published February 1, 2008

In a move that has roused constitutional and legal concerns in California, the State Board of Equalization has voted to uphold a ruling that amounts to a huge stealth tax increase on certain alcoholic beverages.

With a vote of 3 to 2, the board raised the tax on flavored malt beverages, such as Smirnoff Ice, from 20 cents to $3.30 a gallon. They did so by changing the classification of the beverages from beer to distilled spirits.

The reclassification must be approved by the Governor’s Office of Administrative Law. Should it stick, the reclassification would amount to a tax increase of 1,550 percent.

The board took up the issue after several groups last fall petitioned for a regulation to tax flavored malt beverages at the same rate as distilled spirits. The groups included California Friday Night Live Partnership, Students Making a Community Change, and the California Youth Council.

Slammed As ‘Alcopops’

Proponents of the new tax claim the current taxes on flavored malt beverages encourage underage drinking. Michelle Simon, research and policy director with the Marin Institute, said, “by correctly taxing ‘alcopops’ as distilled spirits, we could see a 35 percent decrease in the number of youth drinking ‘alcopops.'”

Board of Equalization member Michelle Steel (R) voted against the reclassification on November 15 because she doubts its effectiveness.

In an exclusive column for the online publication FlashReport, which covers California politics, Steel wrote, “Raising taxes by fifteen hundred percent on some alcoholic beverages won’t stop underage drinking. Studies on underage drinking indicate that teens consume all types of alcohol, regardless of the alcohol’s tax rate. When was the last time you saw a teenager clip coupons, comparison shop, and fret about price when trying to score a six-pack on a Saturday night?”

‘Unaffordable’ for Many

During a Board of Equalization public hearing last August 14, Lara Diaz Dunbar spoke against the reclassification on behalf of the California Restaurant Association. She pointed out many of the association’s 22,000 members are smaller, independently owned restaurants and mom-and-pop stores that, in many instances, can obtain only beer and wine licenses.

“This increase of the tax burden from 20 cents a gallon, if it’s classified as beer to … $3.30 a gallon as a distilled spirit would certainly have an impact and make it quite unaffordable for many restaurateurs,” Dunbar said.

Legality Doubted

Beyond whether a reclassification of flavored malt beverages would be wise policy, the issue has raised other, more fundamental questions about the constitutional and statutory authority of the Board of Equalization.

“The Legislature’s own attorneys, the Legislative Counsel’s Office, issued a legal opinion questioning the Board of Equalization’s legal authority to pass a new alcohol tax increase,” Steel said. “Under the Legislature’s interpretation of the state constitution, the Department of Alcohol Beverage Control (ABC) has exclusive authority to classify alcoholic beverages. Consequently, the Board’s actions create a bureaucratic nightmare that pits one branch of state government against another.”

The chief counsel of the Department of Alcohol Beverage Control agreed in public comments submitted to the Board of Equalization.

“The ABC’s position is twofold (1) … the ABC has acted properly in treating FMB’s [flavored malt beverages] as beer; and (2) this public policy discussion is properly before and should be dealt with by the Legislature, and not before the court,” the chief counsel wrote. “Just as this important public policy discussion was improperly before the court, it is equally inappropriate before the Board.”

Board of Equalization member Bill Leonard (R), the second vote with Steel in opposition to the reclassification, sides with ABC’s legislative counsel.

“I think it would be incumbent upon this board to … work with our legislative colleagues and develop a legislative solution,” Leonard said. He added, “I think we’re exceeding our authority. We’re going to tie up our Legal Department and all sorts of complications down the line. And that’s assuming OAL [the Office of Administrative Law] even approves it, and I wouldn’t give that a great chance right now.”

Sandra Fabry ([email protected]) is state government affairs manager at Americans for Tax Reform.