The topic of Prohibition conjures up visions of speakeasies, flappers, jazz, and hidden flasks. But what about income taxes? In addition to the history of the 18th (1919) and 21st Amendments (1933), there’s another amendment that is crucial to the story of Prohibition.
The 16th Amendment, ratified in 1913, made it possible for the federal government to establish a nationwide income tax. While we might not wish to contemplate that history as another Tax Day deadline rolls around, it was crucial for the passage of Prohibition.
Many scholars believe that without the shift to a national income tax, winning support for the 18th Amendment would have been impossible. For decades, the government relied on taxes paid by the alcohol industry to fund a healthy chunk of the national budget. While early experiments with the whiskey tax didn’t go so smoothly (among them was a little diversion in western Pennsylvania called the “whiskey rebellion”), in 1861 President Abraham Lincoln brought back an alcohol tax to help pay for the Civil War. After the war ended, the tax never went away.
By the early 1900s, as much as 30 to 40 percent of the government’s income came from taxes generated by liquor, wine, and beer. By 1910, the federal government was drawing more than $200 million per year from the alcohol industry; only external trade tariffs generated greater revenue. Taxes on alcohol were so crucial that many brewers and distillers simply didn’t take early efforts at Prohibition seriously. How could the government ever give up such a rich source of income?
But they guessed wrong. By the early 1900s, a new wave of Progressive politics was sweeping the nation. The idea of an income tax had long been favored by some tax advocates as a way to balance out the huge fortunes being earned by a few individuals. Needless to say, this idea did not appeal to everyone. An 1894 effort to establish a limited income tax was overturned by the Supreme Court in 1895. (If you want to learn more about that case, you can read about it here) But the lessons learned from that experiment helped shape the framing of the 16th Amendment, which passed as a Congressional resolution in 1909, and was ratified four years later.
Article XVI – “The Congress shall have the power to lay and collect taxes on Income, from whatever source derived, without apportionment among the states, and without regard to any census of enumeration.”
With the ability to levy a national income tax secured, the government no longer needed to rely on alcohol for federal revenue. The 18th Amendment was passed by Congress in 1917 and ratified in 1919. When Prohibition went into effect in 1920, it shut down the fifth largest industry in the nation. (An effort assisted by the anti-German sentiment that swept across the country in connection with World War I and washed away the nation’s regard for its German brewers.)
In a fitting irony, concern about taxes contributed to the downfall of Prohibition 13 years later. With the rise of the Great Depression following the stock market crash of 1929, the potential for the once mighty alcohol industry to generate new jobs as well as more income and sales taxes helped shift political will back the other direction. Cities such as New York and Detroit witnessed “Beer for Taxation” marches. Local citizens filled city streets encouraging the renewed use of beer to generate jobs and revenue. By the time Franklin Delano Roosevelt was elected President in 1932, it was clear that Prohibition was coming to an end.
On March 22, 1933, Roosevelt signed the Cullen-Harrison Act, legalizing the sale of beer and wine with an alcohol content of 3.2 percent and resurrecting the tax base that went with it; nine months later, Prohibition was officially repealed. (You can catch a glimpse of Congressmen celebrating the resumption of beer sales in this clip, which includes a salute to “the further liberation of the American people,” along with their success and their “future incomes and taxes.”)
Leslie Przybylek is senior curator at the Heinz History Center.
— Return to Of Beer and Taxes: Prohibition’s Connection to the National Income Tax to read more on the History Center’s blog.