OPINION:
The second Trump administration has picked up where the first left off in its commitment to overhauling America’s trade policies. The next logical step should be to eliminate long-standing loopholes that give foreign producers an unfair advantage over American producers.
A prime example is Section 5010, known as the foreign liquor loophole.
This is a little-known tax carve-out that has been on the books for more than 40 years and concerns the excise taxes that hard liquor manufacturers pay the federal government.
Right now, the standard rate is $13.50 per proof gallon of alcohol in the bottle. A whiskey bottle on a store shelf is not anywhere near that volume or proof. As a result, a standard, large-scale brand selling a typical 750-milliliter bottle of 80-proof liquor pays roughly $2.14 per bottle in federal excise tax.
That is where Section 5010 comes in. This part of the tax code offers much lower rates for bottles containing “flavoring” ingredients. These are often high-proof wines made from things such as fermented orange juice byproducts.
According to the law, up to half the alcohol in a bottle of liquor can come from these blended ingredients without any transparent labeling required. Two bottles sitting side by side on a shelf, with the same alcoholic strength, can be taxed at vastly different rates if one of them uses this technique and the other does not.
What is foreign about the foreign liquor loophole? The nickname points to the biggest beneficiaries of this carve-out: not local craft distillers, but rather large multinational conglomerates.
There are a few reasons for this. For one, the Alcohol and Tobacco Tax and Trade Bureau often conducts on-site inspections of distilleries to verify the flavoring content of alcohol. However, the bureau can perform these inspections only at domestic distilleries. Foreign companies can claim the tax break with far less scrutiny.
Beyond that, some foreign countries allow higher levels of wine and flavoring than American law permits. This translates to lower excise tax rates for these foreign products once they are imported.
The foreign liquor loophole is projected to cost the U.S. government at least $2.5 billion over the next decade. However, because the program has not been fully reviewed since 1993, the actual cost is likely much higher. There have been calls to repeal the loophole since the mid-2010s, when the Obama administration argued that doing so would save consumers money.
It should be repealed. Closing loopholes that benefit foreign producers and enable the practice of filling whiskey with wine is a perfect complement to the work the Trump administration is doing to establish better trade policy.
Naturally, the hard-liquor multinationals oppose Mr. Trump’s “America First” trade policy and any attempt to repeal the foreign liquor loophole.
America’s tax and trade policy should not be based on the desires of liquor multinationals. It should be built around American producers and American consumers. Closing the foreign liquor loophole is a simple but powerful next step toward putting America first.
• Anthony J. Constantini is policy director at the Bull Moose Project.
Please read our comment policy before commenting.