Bottoms up! Bill to study updating WA’s alcohol tax system moves ahead

A bill to have the Legislature evaluate how to modernize Washington state’s alcohol tax system passed out of executive session in the Senate Way & Means Committee without recommendation on Thursday afternoon.

That means the bill now goes to the Rules Committee, where it can be pulled to the Senate floor for a vote at any time.

Substitute Senate Bill 5368 would require the Washington State Institute for Public Policy to conduct a study regarding alcohol taxation and fees in the state. It would also require the Department of Revenue and the Liquor and Cannabis Board to provide data for that study.

The marketplace is different than it was in 2011 when a Costco-led campaign to privatize liquor sales in the state succeeded in passing Initiative 1183. This made Washington the first state in the nation to fully privatize liquor sales and distribution.

According to Andrea McNeely, executive director of the Association of Washington Spirits & Wine Distributors, the current alcohol taxation system is at odds with the modern marketplace.

While beer products are taxed at 26 cents per gallon, spirits are taxed at a rate of between $26 and $34 per gallon.

But because the current system taxes products based on the manufacturing process – brewed, distilled, fermented – rather than a product’s alcohol content, there is something of a mismatch in the marketplace. High-alcohol products not anticipated by the current system receive the lowest tax rate, while other established products are hit with a higher tax burden.

Washington’s alcohol tax system, which McNeely characterized as out of date, has created an incentive to circumvent state laws regarding alcohol and taxes. She explained that companies are taking advantage of the ability to manufacture high-alcohol beer-based products that mimic spirits.

“We think that the market has changed very much in terms of the types of products and the alcohol content, whether they’re made with malt, wine or spirits,” McNeely told The Center Square earlier this week. “And so what we’d like to ask the state to do is find out what revenue is being generated in those various categories and how does that compare to other states where the taxation is in a different system.”

The Department of Revenue reported collecting more than $211 million in taxes on spirits in 2024. The Liquor and Cannabis Board reported collecting more than $197 million in fees on spirits, which are separate from taxes, last year. The state also collects taxes from beer and wine sales.

Not everyone in the alcohol industry, however, is on board with SSB 5368.

At a Wednesday public hearing before the Senate Way & Means Committee, Washington Brewers Guild Executive Director Daniel Olson rhetorically tore the bill apart.

“Right now our breweries are struggling,” he told the committee. “Closures are outpacing new openings. Beer sales are down. Our farmers in eastern Washington are planting less. This isn’t just a study bill. It lays the groundwork for liquor companies to push for massive tax breaks that will lead to higher tax rates for small independent breweries [that] are still recovering from the COVID shutdowns.”

He also noted, “Washington’s alcohol tax rates are nationally competitive. There is no need to spend taxpayer money on a study designed to favor out-of-state corporations over local businesses.”

According to the bill’s fiscal note, it would cost $148,000 in the 2025-2027 biennium.

The legislation requires the Washington State Institute for Public Policy's final report to be submitted to the relevant legislative committees by the end of the year.