In recent weeks, the web has been buzzing with excitement over Palcohol, the powdered alcohol that can turn water into vodka, rum or any one of four specialty cocktails. While it remains unclear when — or if — the product will hit stores, due in part to some backtracking by the Alcohol and Tobacco Tax and Trade Bureau (TTB), states including Vermont and Minnesota are already moving to ban it.

In early April, the TTB granted Palcohol label approval, then rescinded it roughly two weeks later, according to Bevlaw.com, a blog maintained by the Lehrman Beverage Law firm in Virginia. The federal agency said in a statement that it had issued the approvals "in error."

Lipsmark, the company that makes Palcohol, said on its website that the product was developed originally to take on hikes or backpacking "to enjoy a drink out and about." The product could save airlines millions in fuel costs by lightening an airplane's load, Lipsmark said, and may have other applications. The company is exploring whether Palcohol could be turned into an antiseptic for medical use in remote areas. But critics have raised concerns, among them that powdered alcohol is easy to conceal and could be abused by children.

The TTB is also unclear on how to handle the substance. There are no clear guidelines for the taxation of powdered alcohol because tax rates are determined by the Alcohol By Volume (ABV) concentration of liquid denominations. The TTB bases its rates on a "proof gallon … of liquid," for example, while Washington state notes that taxes are to be levied on "spirits" or "any beverage containing alcohol obtained by distillation."

No statutes presently exist that apply to alcohol in powder form, and so any decision taken will inevitably set a precedent. The creation of powdered alcohol should spur the creation of laws that allow for products like Palcohol to exist, though, not ban their existence.

Using laws or taxes to stifle innovation in the market does not make for sound tax policy; products should be treated neutrally and included in the tax base. While many concerns have been expressed over the tentative approval of powdered alcohol, an opportunity to increase revenue should not go ignored.

For this reason, ad valorem and per volume taxes should be considered instead of bans. Similar tax issues have been encountered by states including Colorado and Washington when dealing with marijuana and soda syrup, respectively, and could be used as points of reference. Either a sales tax on each individual unit of packaged powder or a tax on the volume of powder itself would ensure that powdered alcohol could form part of the tax base.

Some taxes that might be considered are referred to in the United States as "sin taxes" and are excise taxes levied by the federal, state and local governments on goods that are deemed socially undesirable with the intention of curbing their consumption. They are included in the final price of products and are thus hidden from consumers, clearly skirting transparency. While it might appear that they are paid by retailers and distributors, they are actually picked up by often unsuspecting taxpayers. Sin taxes also tend to be regressive and therefore target the poor. They are widely levied on spirits, beer and wine across the United States. While such taxes are not favorable, they are a far superior alternative to an overall ban on powdered alcohol.

All in all, it will be interesting to see how the federal, state and local governments decide to treat powdered alcohol. Nanny-state concerns will continue to exist as innovation continues to introduce products to the market, but law makers should remember that neither bans nor sin taxes are healthy for the economy.

Undoubtedly, it is the role of government to promote growth, not deter it. Palcohol is certainly an exciting product, and we can only hope that regulation won't stop us from turning water into a Powderita sometime in the near future.

Johannes Schmidt is a recent graduate of the George Washington University and currently works within the Liberty Movement. His email is schmidtj@gwu.edu.


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