NO CLOSING TIME FOR INCOME TAXES

ON March 19, 1928, eight years into the reign of constitutional
Prohibition, Pierre S. du Pont wrote a letter to William P. Smith,
one of the very few people he ever addressed by first name. Du Pont
was among the wealthiest men in the world, chairman of both his
family's chemical colossus and the du Pont-controlled General Motors
Corporation. Smith worked for a less well-known enterprise that
Pierre du Pont also dominated: the Association Against the
Prohibition Amendment.

"The object of the organization," du Pont told his friend Bill, "is
not merely the return of the use of alcoholic beverages in the United
States." He went on, "Another important factor is the tremendous loss
of revenue to our government through the Prohibition laws" -- the
revenue once collected through taxes on liquor and beer. With the end
of Prohibition, he wrote, "the revenue of the government would be
increased sufficiently to warrant the abolition of the income tax and
corporation tax."

For today's advocates of legalized, taxable marijuana -- or new
levies on, say, electricity use, baseball tickets or high-fructose
corn syrup -- it's an appealing model. Some even believe that a tax
on marijuana, which could be legalized by California voters this
November, could lead to a reduction in the state's income taxes. But
the history of the intimate relationship between drinking and taxing
suggests otherwise.

The link between the two is as old as the Republic; Alexander
Hamilton provoked the Whiskey Rebellion when he persuaded Congress in
1791 to enact the first federal tax on liquor to help pay down the
national debt. By 1910, as anti-alcohol forces were making a
significant impact on American politics, the federal government was
annually drawing more than 70 percent of its domestic revenue from
the bottle and the keg. In those years before the advent of the
income tax, only the tariff on foreign goods and materials provided a
larger share.

The nation's dependence on the alcohol tax created a vexing problem
for the leaders of the Prohibition movement. As early as 1883, the
editors of the Woman's Christian Temperance Union's official
newspaper coyly asked their readers, "How, then, will [we] support
the government" if the sale of liquor is prohibited?

The editors had a ready answer: an income tax, they wrote, was "the
most just and equable arrangement ever made for the equalization of
governmental burdens." In 1895, the Prohibition Party recognized that
an excise tax "is a pledge on the part of the state to defend and
foster the thing taxed," and it soon nailed an income tax plank to
its platform. And leaders of the most powerful Dry organization, the
Anti-Saloon League, grumpily aware of what one called the "alleged
'loss of revenue' argument," chose to focus most of its attention on
state-by-state, rather than federal, prohibitory laws.

But the league also encouraged the populist campaign to authorize an
income tax. When this support finally bore fruit in 1913, the
organization announced that "the adoption of the Income Tax Amendment
to the federal Constitution furnishes an answer to the revenue
problem." As a result, it said, the time had come for all foes of
alcohol to put aside the state-by-state strategy and focus on a new
goal. "National prohibition," its executive committee declared, "can
be secured through the adoption of a constitutional amendment." By
1920, it was law.

Through the first nine years of Prohibition, income taxes went a long
way toward covering the federal government's costs. But just as
organized Drys had backed the income tax in 1913 in order to breathe
life into Prohibition, a du Pont-led group of well-financed Wets
would eventually seek to kill Prohibition so that the income tax
might die with it.

The idea had first emerged in 1923, when the publisher of The Wall
Street Journal, Clarence W. Barron, argued that ending Prohibition
would enable the government to collect $2 billion a year and abolish
the income tax. In 1926, Pierre du Pont's brother Irenee told an
associate that General Motors would save $10 million in corporate
taxes each year with the return of the alcohol levies. Irenee's
specific solution -- imposition of a 3-cent tax on every glass of
beer -- would, effectively, make the working poor and the unemployed
finance tax relief for the rich.

These plutocratic longings began to take palpable form when
prosperity was upended by the Crash of 1929. The Depression corroded
tax collections: federal revenue based on 1930 incomes was down 15
percent, the following year saw a 37 percent drop, and the year after
that 26 percent -- a vertiginous 60 percent collapse in just three
years. Capital gains taxes that had brought $1.5 billion into the
Treasury from 1926 to 1929 dived into negative territory as the
allowance for capital losses accrued. At the same time, the demand
for government spending -- for relief, for reconstruction projects,
for anything to restart the comatose economy -- soared.

By 1930, the chemical du Ponts had recruited a roster of other
gilt-edged names to their anti-Prohibition cause: automotive Fishers,
financial Harrimans, oil Harknesses, rubber Goodriches. Their
publicity campaign featured pamphlets like "What Price Prohibition?"
(Answer: with the return of legal alcohol, "the necessity of levying
income taxes would be eliminated") and "The Cost of Prohibition and
Your Income Tax."

By 1932, as the Depression plunged toward its devastating nadir, a
new handout from the Association Against the Prohibition Amendment
spoke more urgently to the historical moment: "The Need of a New
Source of Government Revenue." The authors didn't have to look far to
identify one, as Pierre du Pont made clear in a radio address that
summer. "The income tax would not be necessary in the future," he
said, "and half the revenue required for the budget ... would be
furnished by the tax on liquor alone."

That message was for public consumption; privately, he was even more
direct. "The Repeal of the XVIIIth Amendment would permit federal
taxation in the amount of $2 billion," du Pont wrote to a relative in
April 1932, by which time the congenitally Republican industrialist
had become an ardent supporter of the pro-repeal Franklin Roosevelt.
"Such taxation would almost eliminate the income taxes of
corporations and individuals."

He didn't have to wait long to see if he was right. The repeal
amendment was ratified on Dec. 5, 1933, just nine months after
Roosevelt's inauguration, and new tax revenues began to flow. In the
first post-repeal year, the government collected $259 million from
the alcohol excise -- instantly, nearly 9 percent of total federal
revenue -- even though many states either remained dry or severely
limited the sale of alcohol.

Unfortunately for du Pont, the other half of his equation didn't work
out. Roosevelt and Congress did respond to the repeal windfall by
cutting income tax rates for workers earning less than $3,000 a year.
But the New Deal had little sympathy for the wealthy, whose taxes
actually increased over the next few years. Rather than the trade-off
du Pont expected, the government used the excise income to expand.

"I acknowledge my mistake," du Pont wrote in 1936, after he and many
of his colleagues had transferred their energies and financial
support to the rabidly anti-Roosevelt American Liberty League. "The
effort should have been directed against the XVIth Amendment" -- the
income tax amendment -- "which I believe could have been repealed
with the expenditure of less time and trouble than was required for
the abolition of its little brother," the 18th.

Prohibition had been dead for three years, but the damnable taxes
Pierre du Pont had expected to die with it lived on. Contemporary
Californians indulging a fantasy of income tax relief emerging from a
cloud of legalized marijuana smoke should realize that it is likely
only a pipe dream.