California law could significantly increase tax on flavored malt beverages.

Spirits and beverages companies fear that taxes on flavored malt beverages could rise by up to 1,550% in California after the state's taxation authority voted to reclassify the drinks into the more restricted spirits category, simultaneously prohibiting their sale in supermarkets. The new measure will help curb underage drinking, according to state authorities.

Spirits company Diageo had already launched a state-wide campaign to oppose the reclassification before the announcement was made by the State Board of Equalization on November 14. Involving print advertisements and a new website called www.whataretheydrinking.com; the campaign is encouraging Californians to join the debate by writing letters to board members and by phoning in to talk radio shows. "Underage drinking is a very serious issue, but raising taxes and falsely claiming it will address the issue is fiscally irresponsible and socially misguided," said Guy Smith, executive vice president of Diageo North America, announcing the campaign ahead of the vote. "If the Board of Equalization votes to reclassify then the outcome would affect law-abiding consumers distributors and retailers in an already fragile market."

Implementation of the ruling is scheduled for 1 July 2008, according to the Board. However, the decision must first be approved by the state's legal department before it can come into effect. The board had already voted in favor of the reclassification in July, earlier on in the legislative process.

The decision by the California State Board of Equalization however means that all non-beer malt drinks are presumed to be distilled spirits. Currently, beer and beer products are taxed at US$0.20 per gallon in California, while distilled spirits are taxed at $3.30 per gallon. Underage drinkers consume 12.4% of all alcohol drunk in California, according to the Pacific Institute of Research and Evaluation -providing $1.1 billion in annual sales to the alcohol industry. However, underage drinking also results in direct costs of $2.6 billion each year to the Californian state through medical bills and loss of work.