The Money Cost of Prohibition

THE fight for prohibition is over. It is far from my purpose to awaken the old and bitter controversy. Rather, it is because prohibition is now our adopted and definitive policy, that it seems worth while to find out approximately what its cost is in dollars and cents.

There can be no doubt that economic considerations had a great deal to do with the adoption of national prohibition. Although the earlier reformers had stressed the moral side of their propaganda to the exclusion of all else, the later generation, which succeeded in bringing about the Constitutional Amendment, gave much more emphasis to the economic side. An indication of the extent of this emphasis is found in the utterance of Mr. Frank A. Yanderlip before the Economic Club of New York, in February, 1920. He said: —

With a clear insight and common sense we have amended our Constitution and have provided the greatest single economic factor looking toward material prosperity ever created by legislative enactment. I believe that the economic value of prohibition will eventually he an influence for the prosperity of society, the like of which will amaze ourselves and the world.

This forecast of Mr. Vanderlip’s has been put forward with approval by leading prohibitionists. Presumably, it is not an overstatement of their anticipations.

Time must pass before it will be practicable to undertake an assessment of the moral advantages and disadvantages derived from prohibition. To-day there is a vast and widening difference of opinion on this subject. It is true, however, that many reliable sources of information exist as to the economic effects. Fortunately, it is possible to discuss these effects from the standpoint of fact rather than from that of opinion; and it is with such an aim that the preparation of this paper has been undertaken. It is not unlikely that, as the passing months focus intelligent opinion upon the effects and effectiveness of national prohibition, increasing attention will be directed toward such topics as its relation to governmental revenues, enforcement costs, and the various direct and indirect economic results that may properly be attributed to it. The subject of taxation is of particular importance at this time, when the Congress is searching so anxiously for suitable objects of taxation that will somewhat relieve the pressure on individual and corporation incomes.

I

The liquor industry has for many years been a tested and profitable source of Federal, state, and municipal income. Taxes on intoxicating beverages were generally viewed with favor by the public before prohibition was adopted, in so far as it can truthfully be said that any tax is acceptable. The Federal government has collected many hundreds of millions from the industry since the Civil War; and until the adoption of the income-tax law it was the chief source of internal revenue. The years of the war, with their great fiscal burdens, found the government at Washington turning with larger and larger exactions toward the liquor industry. Collections in 1917 amounted to $284,000,000. In 1918, these taxes increased to $443,000,000,¹ and in 1919, to the peak point of internal revenue from liquor — $483,000,000.² This is the first point at which we can definitely ascertain the loss of Federal revenue due to prohibition. Collections in the fiscal year 1920 (which saw several months of so-called war-time prohibition, followed by national prohibition on January 16) dropped from $483,000,000 to $139,800,000. In 1921 collections dropped to $82,000,000. The figures for 1920 and 1921 also include the revenue from non-beverage spirits. Thus in less than two years of national prohibition, the Federal government was deprived of the larger part, of a billion dollars of revenue as a result of national prohibition.

The government’s loss of revenue, however, does not stop here. At the same time that these enormous internal taxes were being collected upon intoxicants, the breweries and distilleries were operating as successful businesses. That they were prolific sources of Federal income-tax revenues, is demonstrated by the Treasury Department’s analysis of income-tax payments for the calendar year 1918. In that year a total of 657 establishments of this nature paid income and excess-profits taxes amounting to more than $15,000,000.

It is important to refer, in this connection, to the success attained by many of the corporations engaged in the manufacture of intoxicants, in transforming their plants to legitimate uses with the advent of prohibition. The story is one of remarkable resourcefulness. The brewers developed numerous non-intoxicating beverages which were manufactured at a profit. Distilleries increased their production of industrial alcohol. Many of these establishments are to-day manufacturing glucose, or other food-products, and many others are serving as cold-storage plants. As a class, they have done much toward vindicating the predictions of ihc prohibitionists that the capital invested in the liquor industry would not be lost as a result of prohibition; no doubt they pay a considerable volume of income taxes.

It is not in regard to this phase of prohibition’s effect upon the liquor industry, however, that we must make our assessment. Rather, we must turn to its effect on tax-evasion. No industry in the country was more closely scrutinized by the Federal government than was the liquor industry. This scrutiny had a decided moral effect. We can safely say that the manufacturers of intoxicants, as a class, paid their full quota of income taxes, as we can safely assume that the companies that have been transformed to legitimate uses continue to contribute importantly to the Federal Treasury. The fact remains, however, that the liquor industry has not been destroyed by prohibition: it has changed hands. The 987 manufacturers who made incometax returns in 1918 have been replaced by bootlegging manufacturers. The 71,000 payers of direct and occupat ional taxes in 1918 have been replaced by an army of smugglers and illicit venders of intoxicants. Thus we have extensive and profitable returns to men engaged in an outlawed occupation. Tax-evasion is not the exception, but the rule, among them, for it is dictated by the necessity of concealing the source of their income.

The losses of the Federal government have been extensive also in the field of customs revenues. In the years 1910, 1917, and 1918, the government collected a total of more than $33,000,000 in import duties on wines and distilled spirits — tin annual average of more than $11,000,000. In 1919 and 1920, the average has been a little greater than $1,000,000; and, presumably, when the time comes that prohibition is rigidly enforced, there will be an even greater curtailment.

Forecasting an increased consumption of soft, or non-alcoholic, beverages as a result of prohibition, the Federal government prepared to levy larger taxes upon the manufacture and sale of these products. The government succeeded in 1920 in collecting $57,000,000 from this source, this being presumably as heavy an exaction as the traffic would bear. It is clear, therefore, that the soft-drink industry has proved an inadequate substitute for the liquor industry as a source of Federal revenue.

The taxation problem of the states growing out of prohibition is likewise a considerable one. Despite the expansion of state-wide prohibition prior to the year 1919, many of the larger states were collecting large annual revenues from liquors. New York collected nearly $5,000,000 in 1919; Missouri, $2,000,000; Kentucky, Ohio, and Pennsylvania, more than $1,000,000 each; and state revenues from this source throughout the Union amounted to $14,000,000. This was a very substantial proportion of the total of state revenues — $527,000,000. In addition, certain departments of states concerned with the regulation of the liquor traffic collected $74,000 in the form of fees. The cities have traditionally relied upon the liquor business for a considerable proportion of their revenues. The 69 leading cities collected $35,000,000 from this source in 1918, and $32,000,000 in 1919. New York and Chicago collected $8,000,000 and $4,000,000, respectively, in the latter year.

II

We come now to the expenditure of the Federal, state, and municipal governments for the enforcement of prohibition. It will be recalled that the Eighteenth Amendment makes prohibition enforcement a concurrent obligation of the states and of the Federal government.

Recognizing the traditionally close relationship between the Bureau of Internal Revenue at Washington and the liquor business, the Federal government decided to place the duties of Federal enforcement in the hands of this Bureau. The first six months of enforcing national prohibition, which fell in the fiscal year 1920, cost the Federal government $2,000,000. Expenditures in the fiscal year 1921 (including a comparatively small sum for enforcing the Harrison Narcotic Act and the Child-Labor Act) reached $7,100,000. The appropriation for 1922 (likewise including the enforcement of the Harrison Narcotic Act and the Child-Labor Act) was $7,500,000. Thus the total enforcement expenditure on the part of the Federal government will be slightly in excess of $16,000,000 at the end of the present fiscal year. There are partial offsets to these expenditures, however, in the form of receipts under the national prohibition act, and of fines, forfeitures, and so forth, obtained by the Department of Justice, which already have exceeded $5,000,000.

It is relevant in this connection to make a proper note of the mounting costs of administration of the Bureau of Internal Revenue. Upon this Bureau devolve the two major tasks — prohibition enforcement and income-tax administration. The total cost of administrat ion of the Bureau was approximately $20,000,000 in 1919. This total increased to $29,000,000 in 1920, and to $40,000,000 in 1921; and the appropriation for the present fiscal year is $42,000,000. While the reports of the Commissioner of Internal Revenue ascribe only a fraction of these increases to the cost, of prohibition enforcement, it is clear, beyond question, that a considerable additional part of the increased cost of administration represents the indirect toll levied by prohibition upon the Federal Treasury. This indirect toll is in the form of the higher costs of collecting the taxes which have been substituted for the liquor taxes. It is a notorious fact that the income tax is costly of collection as compared with the internal-revenue taxes on liquor.

The states have not all been of one mind in assuming the duties of prohibition enforcement. Some of them have been slow, indeed, in taking adequate measures to supplement the activities of the Federal government. In t he fiscal year 1919, prior to the effective date of national prohibition, — we must remember that many states had prohibition laws before national prohibition went into effect, — the states spent $1,664,000 for the support of their police organizations, and $373,000 for the regulation of the liquor traffic. Just how much prohibition enforcement has added to state budgets, their bookkeeping systems do not permit us to say. The State of North Carolina, for instance, does not segregate prohibition expenditures, but includes them in general appropriations for law and order. The State of Ohio created a Prohibition Department under the Crabbe Act and the Miller Act, and appropriates $106,000 annually for its maintenance, $56,000 of which goes for salaries, $30,000 for traveling expenses, and $10,000 for the purchase of drinks in securing evidence. Each state must evolve its own statutory method of enforcement, and must decide how much enforcement should cost. The total of state expenditures to date is probably well under $5,000,000.

Considerable offsets to enforcement expenditures have been found in the fines and penalties assessed for violation of the state laws. A lively activity in obtaining these offsets is indicated in the following letter from the State Prohibition Commissioner of Ohio: — There has already been paid into the State of Ohio approximately $300,000, as the state’s share of fines in liquor cases, and an equal amount into the city, township, or county where the cases were filed. Many cities have ordinances under which they do their prosecuting and which keep all the fines in their own treasuries. There are also a great many thousands of dollars collected that have not as yet been turned into the State Treasurer but which will be turned in at proper settlement times. We have also placed the liquor tax, and a penalty of $200 in each, against about one hundred and sixty (160) liquor-law violators; so that you will see that in Ohio the collections have already amounted to probably more than five times the expense. This department has been in existence since the first day of March, 1921, and the Crabbe Act since November 4, 1920. We believe that, as soon as we secure proper cooperation from all local officials, our liquor laws should produce a revenue of $1,000,000 or more per year; and while this law is principally to enforce the Constitutional Amendment, it at the same time is one of the best revenueproducing laws we have. In seven months, this department has made considerable change in the liquor situation in Ohio. The lines are gradually being tightened, and it is not as easy to purchase liquor here as it was the first of March. Dealers are not now selling openly or to strangers, and we feel that, as soon as the Federal government gets control of the output of alcohol and liquor from bonded warehouses, and sees that such liquor goes only to legitimate trade, we will be able to bring the liquor-law violations in Ohio down to the level of other misdemeanors. It is only a question of local authorities, state authorities, and Federal authorities properly using the tools given them by the legislature.

The most important battles of prohibition enforcement are being won and lost in the cities. The cities were the last strongholds to repel the prohibition advocates, and it, is among their population that violations of the law most abound. Police departmental appropriations reflect municipal-enforcement costs. The tot al of such appropriat ions in the 69 leading cities, in 1918, was $75,000,000. In 1919, this total increased approximately $6,000,000, or less than 10 per cent. At the same time, the total governmental costs of these 09 cities increased from $690,000,000 to $753,000,000; so it will be seen that the increased appropriations for police departments no more than kept pace with the mounting costs of municipal government.

The figures for the two years preceding national prohibition are given here, to provide a proper indication of the tendency of departmental costs. While the totals for the 69 cities are not yet available for the fiscal years 1920 and 1921, it is possible to obtain from such leading cities as New York, a trustworthy basis of opinion as to the effect of attempted enforcement upon municipal expense. The police appropriation in the City of New York was $17,900,000 in 1918. It increased to $18,100,000 in 1919. In 1920, — the first year of national prohibition, — the New York police appropriation increased to $24,500,000. This appropriation reached $30,000,000 in 1921, and stands at $30,372,000 in the proposed municipal budget of 1922. Thus it will be seen that a sharp and continuing rise in police appropriations has taken place in New York City, concurrently with the city’s efforts with reference to prohibition. The jump from 1919 to 1922 has been more than $12,000,000, an increase of approximately 66 per cent. If this rate proves to have been maintained in the 69 leading cities, we shall find an increase of municipal policing-costs already exceeding $50,000,000 — a sum greater than the enforcement expenditure of the Federal government thus far.

It is held that the cost of municipal enforcement, at least so far as New York City is concerned, has made itself evident, not only in increased police appropriations, but in the sacrifice of effective service in other phases of police activity. A presentment handed up to Supreme Court Justice O’Malley by the Grand Jury of Bronx County, New York, in September, 1921, attributed startling effects to the New York State prohibition law.

The members of this Grand Jury [said the presentment] are unable to understand why the Federal government, which inaugurated prohibition, has practically ceased to enforce it. The special squads employed by the Federal government to do this work only have abandoned their duties in the City of New York. By doing so, they have turned over to an already overworked police department this unpleasant and unpopular duty. Instead of spending its energy in the prevention and detection of crimes, in the regulation of traffic, and the enforcement of other laws, which mean so much for the life and welfare of our five million people, great numbers of the uniformed force have been taken away from important and much needed police activities, and have been assigned to the work of visiting saloons and searching for citizens carrying liquor upon their persons. We deplore the necessity for the assignment of trained police officers to this wasteful work.

There are, no doubt, considerable offsets to municipal enforcement-expenditures in many cities, due to fines and penalties. It would be mere guesswork to attempt an estimate of them at this time.

We find the cost of prohibition enforcement reflected, not only in actual appropriations by the Federal, state, and municipal governments, but in the condition of the courts. Congestion of the Federal court s reached such a point in the spring and summer of 1921, that the Attorney-General appointed a special commission to investigate and suggest a remedy. That commission in its report attributed no small part of the congestion to the attempted enforcement of national prohibition. Said the commission:—

The congestion existing in the United States District. Courts, due, not only to our country’s normal growth in population and business, but also to the increase of business caused by the war, the subsequent depression and readjustment, the increased activities of the Federal government, as evidenced by statutes enacted under the power of Congress to regulate interstate commerce, the recent internal-revenue laws, including the income-tax and excess-profits laws, and especially to the national prohibition act, presents an exigency which demands immediate relief. . . . The facts now before us warrant the assertion that the pending cases at the close of the past month (June, 1921) exceed 140,000. Although the increase over the preceding year is mainly due to cases arising under the bankruptcy and prohibition acts, it is noteworthy that there has also been a decided gain in civil jury and equity cases, cases whose disposal requires relatively more time and exacts greater consideration than cases of any other kind. If their disposal is to be prompt and speedy, criminal cases must be held in abeyance. If, as is usually done, criminal cases are given precedence, civil cases, to the great injury of the business world, will remain untried.

The numerical extent of the congestion of the Federal courts is revealed by the following statement in the report of Mrs. Mabel Walker Willebrandt, Assistant Attorney-General, for the fiscal year ending June 30, 1921: —

The period covered by this report is the first complete fiscal year in which the national prohibition act has been in effect. The year has seen a tremendous growth in cases coming to the courts, the greatest increase probably being caused by violations of the liquor laws, and the inability of the courts to handle cases promptly is materially interfering with adequate law-enforcement. One of the most serious results of delay in the disposition of pending suits is the burden imposed upon the United States marshals in protecting liquors and property seized as evidence, or held pending its libel under the Volstead Act. The cost of storage alone has grown in some districts to figures which cause much concern. During the fiscal year ending June 30, 1921, there were 29,114 criminal and 1898 civil prosecutions commenced under the national prohibition act in the various district courts. Twenty-one thousand, two hundred and ninety-seven criminal cases and 622 civil cases have been terminated during that period. In the criminal cases, 17,962 convictions were secured, and there were 765 acquittals. Three hundred and ninety-one cases were dismissed on motion or demurrer, and 2179 were discontinued. The aggregate amount of fines and penalties imposed was $3,360,298. In civil cases the aggregate amount of judgments obtained by the United States was $64,735. There are 10,365 criminal prosecutions pending at the close of the year.

A great many cases that logically involve similar violations have been brought under the internal-revenue laws and the customs statutes, the defendants being charged usually with violations of the revenue or customs laws and the national prohibition act, in the same indictment or information. The figures set out above cover national prohibition act cases only.

The total number of criminal prosecutions under the Internal Revenue Bureau, including illicit distilling cases not included in the above summary, was 6024. There have been 4153 convictions and $ 1,012,000 of fines and forfeitures collected.

In commenting upon this situation, Attorney-General Daugherty observes : —

It is no uncommon thing for a district court docket to be from six montlis to two years in arrears. This, of course, means loss of evidence, death of witnesses, defeat of justice, and expense to the taxpayers. Many criminal cases can never be tried. Large business interests lose heavily through delay.

The point of view of the Department of Justice, in recommending the creation of additional district judgeships to relieve the congestion, was upheld by Chief Justice Taft, who appeared before the Senate Committee on the Judiciary to urge favorable action on a bill estabfishing eighteen new judgeships. The Chief Justice predicted that prohibitionlaw violations will increase before they begin to abate; and believes that prohibition violations have increased the business of the Federal courts about 8 per cent. A similar increase in the business of the states and of the 69 leading cities, reflected in a proportionate increase of their judiciary budgets, would mean an increased expenditure of more than $3,000,000.

III

Pursuing the economic aspects of prohibition, we encounter a number of topics, in addition to taxation and government expenditures associated, like them, with most urgent public problems. We have seen that Mr. Vanderlip did not hesitate to characterize prohibition as a great, factor in material prosperity. The Anti-Saloon League Year Book for 1920, taking up conditions in New York State as influenced by prohibition, gave prominence to the following assertion: ‘Business and industrial conditions are better, and real-estate prices, both sale and rental, were never higher.’ As was natural, prohibitionists were prepared to take credit to themselves for prosperity, if the country had maintained a prosperous condition in the first few years of prohibition. However, regardless of the prohibitionists, who may have been willing to accept credit for prosperity, it would be an obvious fallacy to put prohibition forward as a major cause of the business depression which has recently visited the United States. The common-sense conclusion is that prohibition is at most but a contributing cause to either prosperity or depression.

Prohibition and unemployment is another economic topic which we should be drawn into if we sought to follow out the lines of thought developed in the prohibition propaganda. Recently, the unemployment commission of the City of St. Louis considered a resolution introduced by a representative of the Building Trades Council, urging repeal of the prohibition law as a source of relief for the unemployment situation.

There is at hand [said the resolution] a simple, effective, permanent and popular remedy to relieve the present unfortunate conditions, and bring prosperity and contentment to the workers, farmers, and therefore the citizens generally. The reopening of the breweries in St. Louis would mean the immediate employment in this community of no less than 10,000 persons in the brewery and allied industries. The employment of these men, through the exchange of their earnings, would stimulate business generally, so that, in the aggregate, the restoration of beers and light wines in St. Louis would support at least 50,000 properly cared-for and satisfied men, women, and children. The men in the brewery and allied industries have suffered much. They had no opportunity of earning war-time wages. Many lost their positions shortly after the enactment of the prohibition law, thus at this time aggravating the crisis by swelling the present number of unemployed.

One economic fact concerning prohibition stands out in relief: that is the continued exportation of capital for intoxicants. In days when the debate concerning the country’s policy was at its height, much was said about the large expenditures for liquors of foreign manufacture; prohibition would divert these funds to the enrichment of domestic manufacturers of legitimate luxuries and necessities of life. But, despite prohibition, this exportation of capit al goes on at a great rate. We imported $5,000,000 of liquors through our own customs houses in the last fiscal year.

Smuggling operations across the Canadian border are large, indeed. ‘We are as a people,’ says the Globe of Toronto, Canada, ‘ smuggling, or conniving at smuggling, a million gallons a year or more of whiskey, on which Canada collects duty before it finds its way into our neighbor’s backyard.’ Canada’s own imports of distilled and fermented liquors, according to the same authority, have increased from less than $2,000,000 in 1919, to more than $34,000,000 in 1921.

In seeking to summarize the data included in this article, we naturally reject any thought of including such items as state-enforcement expenditures, state and city collections from fines, forfeitures, and levies, on which complete information is not available. We do realize, however, that in 1921, the Federal, state, and city governments were deprived of approximately $472,000,000 of revenue derived from liquor levies; and that an expenditure hardly less than $25,000,000, but possibly much larger, was made for inadequate enforcement. If we deduct $65,000,000, to cover soft-drink taxes and Federal fines and seizures, and still refuse to consider debatable and uncertain items which might unfairly augment our total, we have a minimum prohibition cost exceeding $400,000,000 to put alongside the economic gains which may be attributed to the movement — a sum greater perhaps than the taxpayers will be saved in a year by the Hughes limitation-of-armaments proposal.

One reason why generalizing is more restrained than it otherwise would be is the fact that the statutes bearing on the Constitutional Amendment have not been enforced. What will be the course of opinion if, and when, prohibition is really enforced? There can be no question that the expense involved will be infinitely heavier than now.

In the meantime, we are making large expenditures and enduring even larger sacrifices of revenues, as well as the depressing effect of substitute taxes. Of that there is no possible doubt.