Notable Changes from 2025
The tax on spirits in Oregon increased by $0.88 per gallon, pushing the state from the 4th to 2nd highest tax rate in the country.
The tax on spirits in Mississippi increased by $0.50 per gallon.
The tax on spirits in Washington decreased by $0.30 per gallon, though the state remains the highest tax rate in the country by a significant margin.
The tax on spirits in Arkansas increased by $0.29 per gallon.
Myriad tax policies are applied to distilled spirits across state jurisdictions. To allow for comparability between states, a standard measure across the various ways spirits are taxed and sold was developed. The governments of 17 states have granted themselves a monopoly over liquor sales. In these “control” states, the government can leverage its monopoly power to increase prices in lieu of levying a formal tax. The data reflect the implied excise rates in those states with government-controlled liquor stores.
Some control states, like Oregon and Virginia, use their market power to levy notably high tax rates compared to other jurisdictions. Almost all control states have effective excise tax rates on spirits higher than the median rate across the country. Wyoming and New Hampshire, however, have set prices low enough to effectively be selling spirits without levying an additional tax. Instead, these states generate revenue from alcohol sales themselves through government stores.
The data also include any additional fees and special sales taxes applied to spirits in addition to legislated excise taxes. These include case and bottle fees, special sales taxes applied to spirits sales, wholesale taxes, and retail and distributor license fees. Distilled spirits tax rates may also vary within states according to alcohol content, place of production, or place purchased (such as on- or off-premises or onboard airlines). For these estimates, sales are assumed to be off-premises sales of 40 percent alcohol spirits in 750 mL containers.
Distilled spirits bear an additional burden in every state from a federal excise tax. The first 100,000 proof gallons of distilled spirits manufactured in America per calendar year are taxed at a reduced rate of $2.70 per proof gallon, which would be $1.08 per gallon of 40 percent ABV spirits. The next 22.13 million proof gallons manufactured in America per calendar year are taxed at $13.34 per proof gallon ($5.34 per gallon of 40 percent ABV spirits). Any additional spirits manufactured in America and all spirits imported into the country are taxed at the general rate of $13.50 per proof gallon ($5.40 per gallon of 40 percent ABV spirits).
The total impact of the many federal, state, and local taxes and fees is significant. Most of the taxes are levied on producers, wholesalers, or retailers and baked into the final retail price rather than broken out separately on a bill or receipt like a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , so consumers may not be cognizant of just how much they are paying in taxes. The various taxes combine to account for about half of the price of a typical bottle of spirits.
Just as with cigarettes, significant differentials in tax burdens between nearby jurisdictions incentivize cross-border trade and smuggling. For instance, residents of Washington, the state with the highest spirits taxes, are estimated to account for 8 percent of purchases in Idaho, a neighboring control state with a lower effective tax burden (though still the 9th highest in the country). That 8 percent of purchases amounts to approximately $25.3 million in sales.
The recent tariffs and trade war have hit the spirits industry particularly hard, amid underlying consumer trends of young people opting for less alcohol. Policymakers should remain mindful of the unsuitability of excise taxes for raising general revenues. With steady ad quantum taxes losing real value to currency debasement and ad valorem taxes subject to significant fluctuations from behavioral changes or market dynamics, state governments that depend on spirits taxes for general spending may find themselves with unforeseen budget gaps.
A recent court ruling struck down an 1868 federal law criminalizing distilling alcohol at home, a ban ostensibly put in place to prevent evasion of the federal excise tax. This could shake up the industry further, but if the Supreme Court takes up the case, it is likely to be upheld under the Court’s extremely expansive interpretation of the Commerce Clause.
Distilled spirits exist within a complex taxation and regulatory landscape. Alcohol is generally taxed using a categorical system that treats beer, wine, and spirits differently, even after adjusting for alcohol content. Oregon, for instance, taxes one proof gallon of spirits more than 33 times as much as one proof gallon of beer. The rigid statutory categories also often face challenges adapting to innovation in the industry and treating new products properly, like with ready-to-drink cocktails.
Modernizing the arcane categorical system by instead taxing according to alcohol content would make the broader alcohol tax system simpler and more neutral. Understanding the tax framework is crucial for both consumers and policymakers as the industry and the policy evolve for the most popular type of alcohol in the country.
