Prohibition and Taxes

Prohibition and Taxes

 

The Ides of April is the ideal time to look at the relationship between Prohibition and Taxes.  The place to start is to look at the relationship between the XVI^th and XVIII^th Amendments.  The untold story is that Prohibition would not have been possible without the income tax.

By 1915, around half the states had enacted some kind of alcohol prohibition law, and groups like the Anti-saloon League and the WCTU were thriving.  But congressmen were giving no serious consideration to national Prohibition.  They couldn’t afford to.  With no income tax, the federal government depended on excise taxes for over eighty per cent of its income, and the vast majority of those came from alcohol.  Prohibition would literally shut the government down.

The Income Tax amendment provided fiscal detox – it enabled the Treasury to break its dependence on alcohol.  A World War intervened, allowing near-prohibition through the subterfuge of war-time rationing; and as soon as the war was over, the Prohibition amendment raced through congress and the state legislatures.

Opposition to Prohibition grew during the twenties, but political support was strong and repeal looked unlikely.  However, by 1930 repeal began rapidly gathering strength.  The election of 1932 swept repeal to an unlikely victory.

(An interesting side note is that maps showing states still supporting Prohibition in 1930, states that have not yet adopted either marijuana decriminalization or medical marijuana, and current “red states” (those voting Republican in the last presidential election) are remarkably similar.)

One important factor in the Repeal victory of 1932, although not the controlling one, was the effect of the Great Depression on taxes.  As unemployment grew and businesses closed, governments – local, state, and federal – found their revenues from both income and sales taxes shrinking just at a time when the need for government expenditures grew.  The return of alcohol excises, while they would not solve the revenue problem completely, would provide a substantial source of new revenues.  Many politicians, even if they did not become public supporters of Repeal, silenced their vocal support of Prohibition.

Does this tale have any meaning for today?  The current Great Recession is mild compared to the Great Depression of the 1930s, but today’s governments at all levels are feeling the crunch on both the revenue and expense sides.  Employment and sales are down, both reducing income tax revenue.  Property prices have plummeted, reducing the property taxes that local governments depend on.  On the other hand, expenses are up: unemployment benefits, uninsured health costs, welfare and subsistence needs.  Governments need money today.

Would excises on marijuana solve these fiscal crises?  No, they would not.  But a ten- to fifteen- percent tax (or even twenty) on a multiple bullion industry would provide some relief.  Surely, reasonable legislators should see that the repeal of marijuana Prohibition is a reasonable trade for this much tax relief.

Happy Income Tax Day, everyone!