Whiskey, Insurrection, and a Nation Forged in Taxation

Article 6 of our Constitution establishes the supremacy of federal law over that of the States, a change from the Articles of Confederation. It also defines the oaths that members of our three branches take upon assuming office. But then there is the first paragraph,

“All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.”

A requirement that the federal government take on the debt acquired by the States in the conduct of the Revolutionary War. Federal taxation was constitutionally limited to direct taxation, proportional to population, levied on individual taxpayers. To pay off our debt of $80 million (roughly $2.7 billion in today's dollars), the newly appointed Secretary of the Treasury, Alexander Hamilton, turned to a less cumbersome approach – indirect taxation. The concept of proportional direct taxation was altered by the 16^th Amendment, which began today’s system of income taxation. 

While there were arguments regarding direct taxation, there was a consensus that the federal government could levy indirect taxes, e.g., duties and excise taxes on consumable commodities. What separates a direct from an indirect tax remains Constitutionally ambivalent, but modern economics would posit that a direct tax is ultimately a taxpayer's responsibility; an indirect tax is one that can be shared or wholly passed on to another. Hamilton had already felt that a tax on spirits was both an economic and moral good. Writing in the Federalist papers that

“The single article of ardent spirits, under Federal regulation, might be made to furnish a considerable revenue. … That article would well bear this rate of duty; and if it should tend to diminish the consumption of it, such an effect would be equally favorable to the agriculture, to the economy, to the morals and to the health of the society. There is perhaps nothing so much a subject of national extravagance, as these spirits.” 

Secretary Hamilton proposed, Congress enacted, and President Washington approved an increase on the duty of imported distilled spirits and a new excise tax on domestic whiskey production. An additional advantage of a Whiskey tax was the anticipated substitution of “cyder and malt liquors,” an agricultural benefit, as well as an extra source of revenue. Less spoken was Hamilton’s desire to strengthen the federal government, taking liquor taxation as a source of federal rather than state revenue. To expedite collection, the Whisky Tax was taxed at its source, the producer, as it is still today. The federal government collects roughly $0.21 per ounce of pure alcohol, amounting to, in the case of distilled liquor, $6.7 billion in 2023. Today those taxes are passed on to consumers through higher prices. 

In the late 18^th century, market conditions for distilled spirits varied. In the West, many producers were small farmers pioneering the Appalachian Mountains, distilling whiskey from their surplus corn crop (as opposed to today, when corn in excess or not is converted into high fructose corn syrup). Taxes were assessed on the quantities produced, not consumed and were due and payable before the whiskey left the distillery. Small farmers had no excess capital to pay those costs before the whiskey’s sale to consumers. Additionally, the price of whiskey was generally less on the frontier, making the relative taxation twice that imposed in the East. In the East, where distilleries were company rather than family affairs, there was access to commercial loans. They could defer tax payments if they posted a bond, allowing the distilleries to bridge the revenue gap between production and sale. During the same period, the federal government began to nationalize our currency and banking system fully with the establishment of the Bank of the US and the minting of coinage in 1791. In the cash-strapped West, whiskey was often a substitute currency in the informal economy. (Much as baby formula and diapers have been used in the last few decades in Appalachia)

Opposition to the new tax centered on the more aggrieved West. Many frontiersmen, veterans of the Revolutionary War, felt they were being “taxed without representation” along with the unfair economic burdens. Tax collection and the registration of stills went slowly, if at all, along the frontier. Federal tax collectors were attacked, and the issue came to a head in southwestern Pennsylvania. 

In May 1794, subpoenas were issued for 60 distillers who had not paid their taxes, requiring them to travel to answer the charges in Philadelphia. Bloodshed and armed insurrection followed. Ultimately, President Washington nationalized State militias who marched under his direct command into Western Pennsylvania to quell the insurrection and arrest the ringleaders. With little regard for due process, about 150 “rebels” were apprehended, with many more fleeing to the mountains. These “bit players” were convicted under State law, with only ten being tried for “high treason” at the Federal level and only two being convicted. President Washington pardoned both, writing: "The misled have abandoned their errors."

The end of the Whiskey Rebellion helped secure the Federal government's power, with the blame falling more squarely on the immigrant Secretary of the Treasury, Alexander Hamilton. The opposition, the Democratic-Republican party led by Thomas Jefferson, attacked Hamilton, accusing him of misappropriating Treasury funds, for which he was exonerated. Jefferson was concerned about the excessive influence of the Executive branch over the Legislature (shades of Chevron deference?), pointing to the establishment of the US Bank, which enriched speculators, financiers, and, yes, legislators. Jefferson saw America’s future in the small farmer; Hamilton saw our future in business. 

Unsurprisingly, the whiskey tax became an issue in the presidential election of 1800, with Jefferson strongly against it. Jefferson tied with Aaron Burr in the Electoral College and went on to be named President after 36 ballots in the House of Representatives. The “whisky drinkers” had their President. A more nuanced political lens would show that Jefferson’s election was nudged far more by Hamilton, putting country over party, supporting Jefferson over the man he felt was an opportunistic, Aaron Burr. 

Burr’s second-place finish made him Vice-President, and in 1804 he sought the Governorship of New York. Hamilton continued his vocal opposition to Burr, contributing to his unsuccessful campaign. They settled their differences in Weehawken, NJ, on July 11, 1804, when the sitting Vice-President of the United States killed Alexander Hamilton. While indicted for murder, he escaped punishment and served out his term as Vice President. 

Source: Alexander Hamilton And The Whiskey Tax US Department of the Treasury