Alcohol Prohibition Taxes - A Lesson to be Applied to Cannabis Legalization

If the federal government legalizes cannabis, will federal cannabis tax revenue plummet? This is a question several members of Congress ask as bills are discussed regarding cannabis legalization.

Cannabis prohibition has been compared to alcohol prohibition in several ways. This blog, specifically, will address the tax effects of legalizing alcohol v. banning it. A later blog will discuss how cannabis legalization could potentially realize the same benefits as alcohol legalization did.

Alcohol prohibition began January 17, 1920 and ended in 1933. Prior to prohibition, Federal revenues derived from liquor amounted to $284,000,000 in 1917 (equivalent to $6,378,995,000.00), $444,000,000 in 1918 (equivalent to $8,453,760,000.00), and $483,000,000 in 1919 (equivalent to $8,026,845,780.35).[1]

By 1930, federal revenue from alcohol had plummeted, as there were no Federal taxes on alcohol being collected. As a result of the prohibition cases prosecuted in Federal courts, there were collected in fines and penalties and covered into the United States Treasury the mere sum of $4,709,851.53 (equivalent to $81,083,901.45) for the year 1930.[2] Without collecting tax on alcohol, the federal government lost approximately $11 billion in tax revenue and spent more than $300 million trying to enforce prohibition.[3] What’s more, doctors pocketed an estimated $40 million in medicinal whiskey prescriptions and the bootleg market saw earnings of $3.6 billion in 1926, or approximately $50 billion in today’s dollars. The consumption of distilled spirits between 1922 and 1930 was from a minimum of 82,000,000 gallons to a maximum of 113,000,000 gallons a year.[4] The Federal government missed all the tax revenue that could have come from these consumption amounts.

Total government revenues from liquor have been higher in every full calendar year since repeal of the eighteenth amendment than in any year before its adoption. Predictions that taxation of legalized liquor would prove to be one of the government's most important sources of revenue were among the most effective arguments for repeal of the eighteenth amendment and these arguments have been fully justified by results. According to an estimate prepared by the New York Journal of Commerce, liquor taxes, customs duties and license fees furnished over 12 per cent of all federal revenues for the calendar year 1940, and nearly 9 per cent of all state revenues. As a source of taxes collected by the federal government, liquor was outranked only by income and social security levies. In the states, the only larger sources of income were automobile and gasoline taxes.[5]

The following charts show reports from the Commissioner of Internal Revenue pre, during, and post prohibition. The data demonstrates the Prohibition law clearly reduced the amount of tax generated by the sale of alcohol and increased it after Prohibition ended.

The following chart shows the collection of internal-revenue taxes for the fiscal years 1933 and 1934, immediately after prohibition was repealed. 1933 is the first-year alcohol taxes resumed after prohibition. As is shown, there is an increase of alcohol taxes in 1934 in the amount of $209,159,057.05.

The most lasting consequence of Prohibition was that many states and the federal government would come to rely on income tax revenue to fund their budgets going forward.

[1] Annual report of the Commissioner of Internal Revenue for Fiscal Year Ending 1925 -
[2] Annual report of the commissioner of prohibition fiscal year ended June 30, 1930. pg. 10.
[4] Noyes, C. E. (1941). Taxation of alcoholic beverages. Editorial research reports 1941 (Vol. I).
[5] Lewis H. Kimmel, “Liquor Excises and Federal Revenues,” New YOTK Journal of Commerce supplement. January 24, 1941. p. 10.

Thorburn Law Group is a full service Colorado/Denver cannabis law firm, and represents the cannabis industry in most aspects of the law. We offer a full suite of legal services to entities of all types and sizes that work within or alongside the regulated cannabis industry, and have over 30 years experience in what we do. We have working relationships with many state and federal representatives. We have taken our vast knowledge and have applied it within the cannabis sphere for the past 10 years, helping to pave the way for the industry.