Tax Laws and Alcohol
TAX LAWS AND ALCOHOL
The first internal revenue measure adopted by the U.S. Congress, in 1790, was an excise tax on domestic whiskey; a subsequent increase in that tax from 9 to 25 cents per gallon led to an armed insurrection by the farmers of western Pennsylvania during the summer of 1794, the so-called Whiskey Rebellion.
This matter of the appropriate level for alcoholic beverage taxes has remained contentious to this day; although there is consensus that alcoholic beverages should be subject to higher taxes than other commodities, substantial disagreement remains concerning the appropriate level for such taxes. The principal impetus for raising tax rates has always been the quest for increased government revenue. Since the 1970s, however, increasing attention has been paid to the public health benefits of alcohol taxes, as research has demonstrated that raising the excise tax rates, and hence the prices of alcoholic beverages, reduces traffic fatalities and other costly consequences of alcohol abuse.
Alcoholic beverage taxes were a major source of revenues for the federal government throughout much of U.S. history. As recently as 1907, this source accounted for 80 percent of federal internal tax collections and was still as high as 10 percent on the eve of U.S. entry into World War II. Currently, the federal excise taxes and import duties continue to have a considerable effect on the prices of alcoholic beverages, but figure very lightly (less than 1%) in overall federal tax collections.
Because federal excise taxes are set in dollar terms per unit of liquid, rather than as a percentage of the price, inflation gradually erodes the real value of these taxes. For example, while Congress increased the tax per fifth of 80-proof spirits by 29 percent (to $2.16) between 1951 and 2000, the overall level of consumer prices increased by over 550 percent during this same period. The result is that the real value of the federal liquor tax had declined by 2000 to just one-fifth of its value in 1951. A considerable reduction in the average price of whiskey and other spirits relative to the prices of other commodities has been the inevitable result.
The states also impose special excise taxes on alcoholic beverages, as do some local governments. In addition, alcoholic beverages are generally subject to state and local sales taxes. The relative importance of these tax collections in state budgets differs widely, but as of 2000 is everywhere less than 10 percent of government revenues.
When a legislature raises the excise tax rates on alcoholic beverages, the resulting cost to distributors is passed along to consumers in the form of higher prices. As is true for other commodities, the sales of alcoholic beverages tend to fall when prices increase. This is not to say that price is all that matters. For example, the steady decline in sales and consumption of alcohol during the 1980s cannot be explained by increased prices, since the prices of alcoholic beverages remained more or less constant (in real terms) during this period. The downward trend in consumption presumably resulted from the aging of the population and increasing public concern with healthy lifestyles, among other factors. Per capita sales and consumption of alcohol are nevertheless negatively affected by alcohol beverage prices, and if Congress had increased federal excise taxes substantially during the 1980s, sales would have declined still more rapidly than they did.
Although they differ somewhat, a number of published estimates of the price elasticity of demand for beer, wine, and liquor tend to confirm that price is one of the important variables influencing sales. One review of these estimates concluded that the price elasticity for liquor is approximately -1.0; this implies that, other things being equal, a percentage increase in the average price of liquor will result in an equal percentage reduction in the quantity of liquor sold. Beer and wine sales tend to be somewhat less responsive to price, with estimated price elasticities in the neighborhood of -0.5 (Leung & Phelps, 1993). Estimates for other developed countries are quite consistent with these conclusions (Edwards et al., 1994; Cook & Moore, 2000).
These results do not in themselves imply that a general price increase for alcoholic beverages will reduce consumption of ethyl alcohol (ethanol), the intoxicating substance in all these beverages. In the face of higher prices, consumers can switch to higher- proof brands, reduce wastage, and attempt home production of beer or wine. But in practice, research suggests that these substitutions are not large enough to negate the price effect. Ethanol consumption does tend to fall in response to a general increase in the price of alcoholic beverages.
Given the fact that higher alcohol excise taxes increase prices and reduce ethanol consumption, there remains the vital question of whether alcohol taxes are effective instruments in preventing alcohol-related harms. Of public concern are both the harms associated with the acute effects of inebriation—injuries stemming from accidents and violent crime—and the harms resulting from chronic heavy drinking, most notably the long-term deterioration in health and productivity.
There is considerable evidence that the incidence of both inebriation and chronic heavy drinking, and the associated harms, are sensitive to the prices of alcoholic beverages. For the acute effects, Cook (1981) studied 39 instances in which states increased their liquor tax between 1960 and 1975, finding strong evidence that traffic fatalities in those states fell as a result. This result was confirmed for the beer excise tax by Ruhm (1996) and Saffer & Grossman (1987), both using panel data on state traffic fatality rates. Cook & Moore (1993), also using panel data on states, found a close link between per capita ethanol consumption and violent crime rates, and direct evidence that an increase in the beer tax helped suppress rape and robbery. And, Chesson et al. (2000) use a similar method to demonstrate that the incidence of sexually transmitted disease is inversely related to the beer tax. This literature is not without dissenters (see Dee, 1999), but the bulk of the published research results provide support for the conclusion that alcohol excises influence the incidence of inebriation and the costly consequences thereof.
There is also evidence of a link between alcohol prices and the prevalence of chronic heavy drinking. Cook & Tauchen (1982) demonstrated that changes in state liquor taxes had a statistically discernible effect on the mortality rate from cirrhosis of the liver. Since a large percentage of liver cirrhosis deaths result from many years of heavy drinking, it appears that chronic heavy drinkers are quite responsive to the price of alcohol. This conclusion is supported by evidence from clinical experiments and other sources (Vuchinich & Tucker, 1988).
Thus, there is indeed evidence that alcohol taxes are an effective instrument for preventing alcohol-related harms. The claim that alcohol taxes promote the public health is increasingly important in the public debate over raising federal and state alcohol taxes.
Although alcohol taxes reduce consumption and save some lives that would otherwise be lost to alcohol-related accidents, there remains a question of whether they are "fair." Fairness is largely in the eye of the beholder (or taxpayer); nevertheless, several standards are commonly used as bases for judging the fairness of a tax. Two of the most notable standards are that a tax should fall equally on households which are in some sense equally situated, and that it should not be regressive.
If equals are to be treated equally, is it fair that alcohol taxes force drinkers to pay more taxes than nondrinkers of similar incomes? Indeed, the bulk of all alcohol taxes are paid by the small minority who drink heavily: Half of all alcohol consumption is accounted for by just 6 or 7 percent of the adult population. One response is that it is fair for drinkers to pay more, because drinking imposes costs on others. One estimate suggests that drinkers impose an average cost on others amounting to about 25 cents per drink (Manning et al., 1990); Miller et al. (1998) provide a much higher estimate. Thus, if the alcohol tax is considered a sort of "user fee," whereby the drinker pays in proportion to the amount of alcohol consumed, then it may seem fair.
Another concern is that alcohol taxes may be regressive, meaning that on the average, wealthier households spend a smaller fraction of their income on alcohol taxes than poorer households. Although it is often taken as self-evident in political debates over raising beer taxes, the evidence on this matter is not clear (Sammartino, 1990; Cook & Moore, 1993).
Another debated issue is that of uniform taxation. A can of beer, a glass of wine, and a shot of spirits all contain approximately the same amount of ethanol, but are taxed quite differently; the federal excise tax on a shot of spirits exceeds the tax on a can of beer by a factor of 2, and on a glass of wine by a factor of 3. If special taxes on alcoholic beverages are ultimately justified by the fact that such beverages are intoxicating, then these disparities are difficult to explain. Part of the explanation may be the widespread belief that spirits are in some sense more intoxicating than beer or wine, and hence more subject to abuse, whereas beer is the "drink of moderation" and wine "the drink of connoisseurs." But much of the evidence works against this view. Indeed, beer consumption may be more costly to society (per drink) than spirits because of the demographics of beverage choice: young men, a group that consumes most of their ethanol in the form of beer, has by far the highest incidence of alcohol-related traffic accidents and violent crimes.
Chesson, H., Harrison, P., & Kassler, W. J. (2000). Alcohol, youth, and risky sex: The effect of beer taxes and the drinking age on gonorrhea rates in teenagers and young adults. Journal of Law & Economics, 43, 215-238.
Cook, P. J. (1981). The effect of liquor taxes on drinking, cirrhosis, and auto fatalities. In M. H. Moore and D. R. Gerstein (Eds.), Alcohol and public policy: Beyond the shadow of prohibition, 255-285. Washington, DC: National Academy Press.
Cook, P. J., & Moore, M. J. (1993). Economic perspectives on alcohol-related violence. In S. E. Martin (Ed.), Alcohol-related violence: Interdisciplinary perspectives and research directions. NIH Publication No. 93-3496. Rockville, MD: National Institute on Alcoholism and Alcohol Abuse.
Cook, P. J., & Moore, M. J. (1993). Taxation of alcoholic beverages. In M. Hilton and G. Bloss (Eds.), Economic research on the prevention of alcohol-related problems. NIH Publication No. 93-3513. Rockville, MD: National Institute on Alcoholism and Alcohol Abuse.
Cook, P. J., & Moore, M. J. (2000). Alcohol. In A. J. Culyer and J. P. Newhouse (Eds.), Handbook of health economics, Vol. I. New York: Elsevier Science B.V. 1-41.
Cook, P. J., & Tauchen, G. (1982). The effect of liquor taxes on heavy drinking. Bell Journal of Economics, Autumn, 13, 379-390.
Dee, T. S. (1999). State alcohol policies, teen drinking and traffic fatalities. Journal of Public Economics, 72, 289-315.
Grossman, M. (1989). Health benefits of increases in alcohol and cigarette taxes. British Journal of Addiction, 84, 1193-1204.
Leung, S.F, &Phelps C. (1993). The demand for alcoholic beverages. In M. Hilton and G. Bloss (Eds.), Economic research on the prevention of alcohol-related problems. NIH Publication No. 93-3513, 1-31. Rockville, MD: National Institute on Alcoholism and Alcohol Abuse.
Manning, W.G., et al. (1991). The costs of poor health habits. Cambridge, MA: Harvard University Press.
Miller, T.R, Lestina D. C., & Spicer R. S. (1998). Highway crash costs in the United States by driver age, blood alcohol level, victim age, and restraint use. Accident Analysis and Prevention, 30(2), 137-150.
Pogue, T. F., & Sgontz, L. G. (1989). Taxing to control social costs: The case of alcohol. American Economic Review, 79 : 235-243.
Ruhm, C. J. (1996). Alcohol policies and highway vehicle fatalities. Journal of Health Economics, 15 : 435-454.
Saffer, H., & Grossman, M. (1987). Beer taxes, the legal drinking age, and youth motor vehicle fatalities. Journal of Legal Studies, 16 : 351-374.
Sammartino, F. (1990). Federal taxation of tobacco, alcoholic beverages and motor fuels. Congresssional Budget Office Report. Washington, DC: U.S. Government Printing Office.
Vuchinich, R. E., & Tucker, J. A. (1988). Contributions from behavioral theories of choice to an analysis of alcohol abuse. Journal of Abnormal Psychology, 97 (2), 181-195.
Philip J. Cook
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