Whiskey Taxation, Part Two: The American Civil War And Beyond

In 1861 President Lincoln needed money to pay for troops to put down the rebellion of the Southern States. A whiskey tax was brought back but it was different from the first two periods of taxation discussed in Part One of this blog. Whiskey was now an aged product so it was decided to create a bonded warehouse system to allow distillers to age their whiskey for one year before having to pay the tax. It started at a modest 20 cents per proof gallon (a gallon of spirits at 100 proof at 68 degrees Fahrenheit). By the end of the war it was raised to $2.00 a proof gallon.

When the war ended, the tax was still at $2.00 per proof gallon and this led to rampant moonshining, particular in the Appalachian region because of the high tax rate. Legal distillers could not compete in price with illicit distillers because the high taxes drove up prices. The government tried to enforce the tax by closing down moonshiners, but could not do so. They even used troops stationed in the South during Reconstruction to try to suppress moonshining but could not they could not stop illegal distilling. Relief came in 1868 when the government lowered the tax to 50 cents a proof gallon and increased the bonding period to 3 years.

Taxes were also the root of the next big government scandal – the Whiskey Ring. During the Grant administration, some members of the Republican Party decided to raise money for campaigns by placing government gaugers sympathetic to the party in distilleries. These guagers would report production in the distillery as only half of what was actually being made. When the distiller sold the whiskey, the distiller and the guager would split the additional profit on the untaxed whiskey. The guager would keep a small part of his share and give the rest to the Republican Party organizer to pay campaign expenses for candidates. The scandal made it all of the way to the White House and President Grant’s aid and personal secretary, O.E. Babcock was convicted along with 100 other distillers, gaugers and other government officials in 1875. Over three million dollars of tax money was recovered.

Over the following years taxes steadily rose as did the bonding period. By Prohibition the tax was $1.10 a proof gallon and the bonding period was eight years. The distillers actually supported a rise in the tax in the 1870s because it helped curb over production and kept small, farmer distillers out of the market. Farmers could not afford the expense of a bonded warehouse. Just before Prohibition the government changed the tax structure to raise the tax upon spirits not sold as medicinal spirits. This is why so many brands put on their label “for medicinal use” even before Prohibition made this the only type of spirits that could be legally sold. The government was dependent upon this tax for as much as 70% of the Federal budget until the passage of the Sixteenth amendment, creating a Federal Income tax.

During Prohibition the tax was still collected on spirits. However, since whiskey sales had dramatically dropped with the onset of Prohibition, taxes were only a small fraction of what was collected before Prohibition. One of the causes for repeal of Prohibition was the collection of the tax on legal sales. The government needed the taxes to help pay for programs created during the Great Depression. With repeal of Prohibition came an increase in the tax to $2.00 a proof gallon. The tax on the proof gallon continued to rise until it hit a high of $13.35 a proof gallon under President George H.W. Bush. In 1958 the bonding period was raised to twenty years. In 1984 government de-regulation eliminated the onsite guager but the taxes were still collected based upon production tracked by computers and periodic onsite inspections.

In 2018 there were changes in the tax structure making it friendlier to smaller distilleries and giving relief to all distilleries. However the tax is still there and a significant part of the government’s income. The big distilleries like Jim Beam and jack Daniel’s write checks to the Federal Government twice a month for millions of dollars. I have not even touched upon the taxes the distilleries pay to State and Local governments. The distilleries are an important part of the economy in Kentucky and elsewhere where spirits are made. The taxes support funding for many civic benefits in local communities.