Tuesday, August 16, 2022

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The Free-Three-Martini Lunch

Over the past two decades, a few states have taken up distillery deregulation with excellent results to show for it. In New York state, for example, craft distilling became legal in 2002 for the first time since prohibition. The change in the legal environment has made it possible for entrepreneurs to start 30 new distilleries in the state in the past 10 years. Aside from creating profit and jobs for these business owners and their employees, this change has permitted the development of a greater variety of liquors than are possible from large companies, benefiting consumers who are now able to enjoy greater variety.

Most public policy decisions create distinct groups of winners and losers. All transfer payments, for example, make one group better off at the expense of another. Deregulation, on the other hand, benefits new businesses, consumers, and contributes to economic growth at the same time. The only group who could suffer from this change is large distillers that have been shielded from competition. Even they could benefit, however, if the novelty of craft liquors gets consumers more interested in trying new spirits generally.

Despite the economic benefits of this type of deregulation, it took nearly 80 years for states to begin unraveling the rules created during Prohibition, designed to protect people from alcohol. Despite some of the good intentions behind this effort, Prohibition clearly created more problems than it solved, and similarly states’ blue laws, like those outlawing small distilleries, have unintended consequences today. While licensing requirements and regulations are typically framed as policies which will help consumers, in fact delicensing typically proves the opposite, showing that increasing competition between businesses is the best way to help consumers.

After having achieved improved regulatory freedom in some states, some craft distillers are looking to public policies that will offer them additional help. Last year some distillery owners worked with Congress to help draft a bill which would have lowered the federal excise tax on craft spirits to $0.43 per 750 mL, 80 proof bottle from the $2.14 tax that larger distillers pay. While this policy would help more small distillers enter the market, it also creates a disincentive for craft distillers to grow to the point where they would have to pay the higher tax. Additionally, it would create a more significant incentive for large distilleries to lobby for regulations to outlaw their smaller competitors. The right policy question isn’t whether small businesses should get a tax break relative to their larger competitors, but whether the excise tax level on spirits is necessary and if so set at the appropriate level.