Recent innovations in alcohol production have led to a surge in the popularity of products like hard seltzers and ready-to-drink cocktails (RTDs). However, tax policy has struggled to keep pace with these changes, often resulting in non-neutral and counterintuitive tax implications. A new bill in Maryland, however, is aiming to address this issue.
Maryland House Bill 0663 proposes to establish a new tax category for RTDs. The bill defines an RTD as a beverage containing a distilled spirit, mixed with a nonalcoholic beverage, possibly containing wine, and having 12 percent or less alcohol by volume. The packaging must be a metallic container or can that is not more than 12 ounces.
Under the proposed bill, the tax rate applied to RTDs would be reduced to $0.40 per gallon, aligning it with the tax rate applied to wine. This is a significant reduction from the current tax rate for distilled spirits, which stands at $1.50 per gallon, plus an additional $0.015 per gallon for each 1 proof over 100 proof.
The current tax system, which categorizes alcoholic beverages into beer, wine, and spirits, was designed at a time when these categories were clearly delineated. However, with the advent of products like RTDs, which often have an alcohol content closer to that of beer or wine than spirits, this system has become less effective.
At the federal level, spirits are taxed more heavily even across products containing the same alcohol content. For example, a cocktail made with 1.5 ounces of 40-proof spirits is taxed more than three times the rate applied to a 5-ounce glass of wine with 12 percent alcohol content, and more than double the rate applied to a 12-ounce beer containing 5 percent alcohol.
While a tax based on alcohol content would be the most neutral and straightforward means of raising revenue from alcohol, such a tax would require a complete redesign of the entire alcohol tax system at both the state and federal levels. As such, the next best approach is to create more categories for new products, as proposed by Maryland’s HB 663.
This bill represents a progressive step towards creating a more neutral tax policy in the rapidly evolving alcohol industry. While more categories may be needed in the future, or a complete overhaul of the system based on alcohol content, HB 663 is a promising start towards making alcohol taxes in Maryland more neutral than they currently are.
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