How Prohibition made us more reliant on the income tax

Detroit police inspecting illegal alcohol distilling equipment found in a clandestine underground brewery during Prohibition. (Photo: National Archives and Records Administration via Wikipedia Commons)

Last week was the 100th anniversary of a momentous, and eventually failed, effort by U.S. lawmakers to control public actions.

Following ratification of the 18th Amendment in 1919, Congress followed up with the National Prohibition Act, commonly referred to as the Volstead Act. It outlawed the production, distribution and transportation of alcohol.

The United States officially went dry on Jan. 17, 1920.

Not only did Prohibition, authorized by the 18th Amendment, fail to stop Americans from imbibing alcoholic beverages, it's also blamed by some for creating organized crime.

Booze and taxes: Right now, you're waiting for my inevitable link to some tax matter.

I won't disappoint you. But if you're thinking that Prohibition tax connection is going to be Al Capone, think again.

True, the most wanted man in American during the speakeasy era finally went to jail not for his alleged murders, but for not paying federal income tax on his bootlegging profits.

As a devotee of true crime stories and a tax geek, the fact that enforcers of the Internal Revenue Code brought down Scarface definitely is icing on the tax crime cake (sans a file.)

The American Issue, the newspaper of the Anti-Saloon League, celebrates the coming Prohibition in its Jan. 25, 1919, issue. (Source: Anti-Saloon League Museum)

Income tax effects: But there's another Prohibition tax angle, one that more directly affects all Americans to this day.

The outlawing of alcohol entrenched the U.S. income tax.

Although the 16th Amendment that established a national income tax was enacted pre-Prohibition — Feb. 3, 1913, to be precise in case you want to mark your calendars to commemorate that day — it wasn't until governments lost tax money they had been collecting on booze that the income tax became so important.

Before Prohibition, as much as 30 percent of federal revenue had come from excise taxes on alcohol. States, too, had relied heavily on excise taxes from liquor sales to fund their budgets.

With that money gone, they turned to the income tax.

Talk about your unintended tax consequences!

Probing Prohibition and tax troubles: As this weekend's Saturday Shout Out, I recommend three items that deal with Prohibition and taxes.

The first two, The New Yorker magazine article "Drunk With Power" from December 2015 and Boston University's BU Today opinion piece "POV: The 100th Anniversary of Prohibition Reminds Us That Bans Rarely Work," tangentially mention taxes in their examinations of Prohibition. Still they are interesting reads.

The third item is from PBS' documentary Prohibition by Ken Burns and Lynn Novick. In the unintended consequences segment, the filmmakers look at the tax and other fallout from what President Herbert Hoover called "a great social and economic experiment, noble in motive and far-reaching in purpose."

If you want to read all of these as you enjoy the adult beverage of your choice, nobody would mind. Cheers!

You also might find these items of interest:

• IRS celebrating 100 years of capturing tax criminals
• Legal or illegal doesn't matter to the IRS; the tax man just wants his cut
• Celebrate continued lower alcohol excise taxes with a beer and cookie party

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