Mechanics of the Whiskey Tax

A federal tax on whiskey was hardly, to the small distillers who made up the majority that would pay it, the mere luxury-tax-with-concomitant-health-benefit that Hamilton had described to a Congress eager to be swayed.

The poorest people, hired hands paid in kind, experienced the whiskey excise as a tax on income: if community distillers had to pay the tax, they’d have to compensate themselves by taking a larger share of whiskey from people who brought their grain salaries in for conversion. Growers too felt the pain. There was no tax on grain, but westerners who raised grain were forced to convert grain to whiskey in order to transport it eastward. The tax thus imposed a federal tax on western farmers while leaving farmers in more convenient and prosperous places untaxed.

The duty would be collected by federal officers, in coin, at the point of production, often a log stillhouse on a small farm. Having collected the duty or secured the bond, the deputy then issues a certificate stamped with a Treasury Department seal. The certificate is the prize. It travels with the whiskey, proving to buyers that the duty has been paid. Certification makes the product legal.

It wasn’t clear where cash for the payment would come from, and failure to pay would make the product non-transportable. Not registering a still was punishable by a cash fine. Assets – the whiskey and the still itself – could be seized.

Consolidating an Industry

Hamilton’s inspiration was the British Empire, where distilling and government had a long history together. From as early as the seventeenth century, large distillers had actually favored whiskey excises – had even contributed expertise to helping the government write excise laws. In 1785, an act of Parliament gave a tax rebate to big distillers, and later acts went all the way, placing an outright ban on small stills, making it actually criminal in England to distill on anything but the largest scale. Even as the U.S. Congress was passing its whiskey tax in 1791, Parliament was banning stills of less than five-hundred-gallon capacity.

The goal was industry consolidation. Hamilton had learned from the English that commercial agriculture and large industry, when publicly chartered, given tax breaks, and financed by large loans, might turn the United States into an industrial empire to compete with England’s. Big distilling had the potential, given American drinking habits, to be highly profitable – yet small, seasonal producers, especially in the west, competed with industrial distillers and kept revenues scattered, engines weak. Hamilton’s whiskey tax didn’t merely redistribute wealth from the many to the few and subdue rural economies; it also served as one of the heavier cogs in a machine for restructuring all of American life.

In every configuration, on every level, Hamilton had designed the law to charge small producers who could least afford it a higher tax. And the most significant effect of the higher tax was that it would, as Hamilton said, have to be passed on to consumers. Small producers would have to raise prices. Big producers could lower prices, sharply underselling the small distillers, taking over their customers, ultimately driving the small producers out of business. Closing down local whiskey economies, the whiskey tax pushed self-employed farmers and artisans into the factories of their creditors.

Military Contracts

The major customers for western liquor had always been armies. But now, in concert with the excise tax, Hamilton was launching from the treasury a reform of the army-supply system, dispensing with small, independent sellers. He created commissary offices willing to buy only in bulk, with responsibility for delivery shifted to the sellers.

Merchants with access to big transport could buy up small batches of whiskey cheaply, from farmers suddenly bereft of markets, and sell them in wagonloads to the commissary.

Whichever way they turned now, small producers were further overtaxed by the government and undersold by big competition, and with the new army-buying procedures in place, they lost their best local customer just as it started bringing government to the west.