Illinois Alcohol Tax Proposal

Alcohol taxes in Illinois have been broken for decades, and the state is now considering a “fix” that moves policy in the wrong direction.

Currently, the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates established by Illinois statutes in the Liquor Control Act are vastly different from the tax rates in the state’s administrative code—which are then vastly different from the taxes the Department of Revenue actually collects. The Illinois Register, for 2026, proposes to amend the Liquor Control Act and how the state taxes different types of alcohol, seeking to align the administrative code with current statutes. However, the proposed changes would establish a tax structure strikingly similar to the one that the state supreme court struck down as unconstitutional decades ago.

How did Illinois’ alcohol taxes become so messy? A 1988 state supreme court decision, Federated Distributors v. Johnson, struck down the state’s contemporary alcohol tax scheme as violative of the Illinois Constitution’s uniformity clause.

In 1988, the state applied the tax on spirits, $2.00 per gallon, to low-alcohol content beverages with added spirits rather than the much lower tax rate, $0.23 per gallon, for wine and wine coolers that were most like these beverages. However, the uniformity clause in the state constitution provides that: “In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly.”

The Illinois Supreme Court found that the state could not constitutionally apply drastically different rates to such similar products, as the “method-of-production regulatory taxation scheme” purported to do at the time. They emphasized that the determination of tax rates is left to the legislature and “the need for legislative action on this subject.”

This should have been a simple problem to fix. The legislature should have established statutory tax rates consistent with the state’s constitutional mandates in 1989. They didn’t. In the legislature’s failure to rectify the situation, the administrative code could have been updated to reflect the rates to be applied. It wasn’t.

Instead, the Department of Revenue simply pretended the changes were made. This pretension has been the basis of the state’s real tax rates collected on alcohol.

The State’s Proposed “Solution”

The Illinois Register proposes amending the administrative code to align with current statutes in the Liquor Control Act. Those rates include $0.231 per gallon on all beer regardless of alcohol by volume (ABV) and alcoholic cider with no more than 7 percent ABV; $1.39 per gallon on wine, regardless of ABV, and cider with more than 7 percent ABV; and $8.55 per gallon on alcohol and spirits.

The changes would also update the definitions of the various alcohol categories that differentiate alcohol types solely by their production process. The definition of “spirit” would extend to any beverage with an added spirit, like ready-to-drink cocktails, regardless of the ultimate alcoholic content of that beverage. Any product with added alcohol would also be considered a “spirit,” meaning alcohol-infused ice cream, whipped cream, or similar products more than 0.5 percent ABV would be taxed as hard liquor.

This proposal clearly goes against the best practices for alcohol taxation, and seems to revert the state’s taxes back to a scheme that is counter to the stated purpose of the Liquor Control Act and violative of the Illinois Constitution’s uniformity clause.

The state supreme court noted that the “validity of a tax classification under the uniformity clause is to be determined based on the ‘real and substantial differences’ test and whether the classification bears some reasonable relationship to the object of the legislation or to public policy.” The source of a product’s alcoholic content alone was not then and is not now a real and substantial difference justifying differential taxation.

The proposed amendments to the administrative code fix the discrepancy between the code and the governing statutes. However, they fail to address the unconstitutionality of those statutes or established principled and efficient taxes on alcohol.

Principled Reform Would Create Neutral Alcohol Taxation

The administrative code needs to be changed.

Illinois should take this opportunity, though 37 years late, to reform alcohol taxes to be principled and effective.

The arcane categorical system based on method of production is complex. Every product must be considered under both the statutory definitions of the different types of alcohol and the existing framework of similar products to comply with uniformity requirements.

This leads to compliance difficulties as businesses try to understand which tax rate applies to them, and sometimes the Department of Revenue itself struggles to decide which tax rate applies to which products. The Department of Revenue decided the new products in the 1988 court case should be taxed at the lower rate until they later reversed themselves and applied the higher rate (which was then challenged in court). In 2018, the Department of Revenue decided that some beer products would be taxed as wine due to their elevated alcohol content, then superseded themselves months later and applied the lower rate instead.

The categorical system is also non-neutral. It taxes one gallon of pure alcohol differently according to how it was produced. In Illinois, the Department of Revenue typically taxes pure alcohol 4.35 times as much in spirits as it does in beer. Treating alcohol differently according to production method unduly preferences certain sectors of the industry and creates incentives based on production process rather than consumer enjoyment, public health, or alcohol temperance.

Under the state’s proposed amendments, alcohol in 0.5 percent ABV bourbon-infused ice cream would be taxed more than 1,000 times as much as alcohol in moderately high-alcohol-content, 14 percent ABV beer.

This unprincipled system is also inefficient. The tax does not effectively target the harm causing element in alcoholic beverages: the actual alcohol content. The purpose of the Liquor Control Act is to foster temperance in alcohol consumption. To that end, the tax system was designed with a graduated rate by alcohol type because that indirectly provided for a graduated rate by alcohol content.

When this system was being designed, production process was a primary determinant of alcoholic content. Beer had a lower alcohol content than wine, and wine was less alcoholic than spirits. Perhaps this is why the current administrative code does not even consider the possibility of spirits with less than 20 percent ABV and leaves those products out of the tax structure entirely.

However, as the lines of the categorical system continually get blurred with innovative products like ready-to-drink cocktails, hard seltzers, higher-alcohol-content beers like malt liquor, and more, the efficacy of the categorical system breaks down. Fortunately, there exists an easy way to levy a simple, neutral, and effective tax on alcohol that is immune to semantic technicalities and innovations that challenge rigid definitions.

An optimal tax on alcohol would actually tax alcohol, regardless of how it is made. An alcohol by volume tax would levy a tax directly on the alcohol content of alcoholic products. This means one “standard drink” of 0.6 ounces of alcohol—whether in 12 ounces of 5 percent ABV beer, 5 ounces of 12 percent ABV wine, or 1.5 ounces of 40 percent ABV spirits—would bear the same tax burden.

An ABV tax would levy a simple, neutral tax on alcohol that most effectively promotes the purpose of the Liquor Control Act: temperance in the consumption of alcohol by directly incentivizing actual temperance. The tax would also automatically comply with the uniformity clause’s requirements that objects within each class be taxed uniformly.

The Illinois administrative code and the Liquor Control Act statutes should be reformed to be principled and effective, not reverted to the same distortionary and inefficient taxes the state supreme court struck down almost 40 years ago.