Jewish World Review Jan. 2, 2003 / 28 Teves, 5763

Monty Warner

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Consumer Reports


Liquor companies out-fox the tax man


http://www.jewishworldreview.com -- The marketing whizzes at the mammoth alcohol companies have earned their bonuses this year. At places like Diageo, Anheuser-Busch, and Miller Brewing Company they have created a whole new market, selling distilled spirits to women and young people while skirting the tax and advertising laws that tend to take the profits out of such products. While a boon to their companies' shareholders, the real losers are taxpayers, and the children taken in by questionable ad campaigns.

Beer and "hard" alcohol have long been separated, both in law and in target audience. Beer may be advertised on television, sold in convenience stores, and is taxed on the federal level at $.58 per gallon. Distilled spirits have severe advertising restrictions, including a outright ban on TV ads, and are taxed at a federal rate of $13.50 per gallon -- 23 times higher than beer.

At the same time, women, and young people new to alcohol, are the weakest market segment for beer. These groups do not like the taste or the image of beer. Alcohol producers' ultimate goal has been to find a product that will appeal to women and young people in both taste and image, but that is taxed and regulated like beer instead of hard liquor. Wine coolers and Zima are two examples of failed attempts to get the best of both worlds.

With the creation of so-called Flavored Malt Beverages (FMBs) the liquor companies seem to have achieved their goal. But our children stand to be seduced by products that taste like soda pop. And in a time of massive deficits, federal and state governments are losing tax revenues that could reach into the billions of dollars.

FMBs include wildly popular products as Bacardi Silver, Skyy Blue, and Smirnoff Ice. In a very short time, FMBs have captured 2.5% of the total beer market, about the same share owned by microbrews. Industry analysts predict that number will soon rise to 10%.

FMBs are taxed and regulated like beer because they start life as malt brews, and contain the federally-mandated minimum quantities of malt and hops. But the liquor companies' goal is not to produce yet another beer; it is to produce a more potent liquor that can still be sold under the permissive beer rules. So liquor companies remove the characteristic color and flavor associated with beer. That leaves a clear, tasteless liquid, to which they add "flavors," including significant amounts of distilled spirits.

The resulting beverage is more like soda pop spiked with vodka than it is like any beer, is more potent than beer, and carries the brand name of popular hard liquors. Yet it can be sold in convenience stores right between beer and Pepsi, and it pays none of the taxes imposed upon spirits.

Thus, our children have an easy transition from soda to alcohol, with no need for the taste of beer to "grow on you," and no need to drink a product associated with their fathers and other "uncool" people. The hip new "spiked soda" drinks, drilled into their heads through TV advertising, are cheap and easily available, and more potent than ever. And by getting young people hooked on their hard liquor brand names, the companies ease the move to ever-more potent drinks.

Further, FMBs cheat the government of needed revenue, forcing us all to pay higher taxes. By exploiting the definition of beer to sell spirits without paying spirit-level taxes, these crafty companies have transferred money directly from the public treasury to their private bottom lines. It is estimated that Diageo paid $10 million in federal taxes on its Smirnoff Ice product in 2001. If Diageo had paid taxes at the spirit rate instead of the beer rate, that would be about $233 million. Multiply that number across the entire industry, and add in state excise taxes lost, and we see a major shift of wealth from public to private hands. In our new era of deficits, the American people cannot afford this raid on the public treasury.

The introduction of FMBs was brilliant marketing, but it was bad for the public health and bad for public finances. Currently, the Bureau of Alcohol, Tobacco, and Firearms is studying this new category of liquor, and is scheduled to promulgate new regulations. These regulations must redefine malt beverages in such a way as to close the loopholes FMBs exploit.



Monty Warner is a principal of Warner-Lewis Media and a former director of the Center for the Study of Popular Culture. Comment by clicking here.

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© 2003, Monty Warner