Alcoholic beverage taxes were a major source of revenues for the federal government throughout much of U.S. history. As recently as 1907, this source accounted for 80 percent of federal internal tax collections and was still as high as 10 percent on the eve of U.S. entry into World War II. Currently, the federal excise taxes and import duties continue to have a considerable effect on the prices of alcoholic beverages, but figure very lightly (less than 1%) in overall federal tax collections.

Because federal excise taxes are set in dollar terms per unit of liquid, rather than as a percentage of the price, inflation gradually erodes the real value of these taxes. For example, while Congress increased the tax per fifth of 80-proof spirits by 29 percent (to $2.16) between 1951 and 2000, the overall level of consumer prices increased by over 550 percent during this same period. The result is that the real value of the federal liquor tax had declined by 2000 to just one-fifth of its value in 1951. A considerable reduction in the average price of whiskey and other spirits relative to the prices of other commodities has been the inevitable result.

The states also impose special excise taxes on alcoholic beverages, as do some local governments. In addition, alcoholic beverages are generally subject to state and local sales taxes. The relative importance of these tax collections in state budgets differs widely, but as of 2000 is everywhere less than 10 percent of government revenues.

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