How Alcohol, Tobacco, and Drug Use Affect Economics and Government

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How Alcohol, Tobacco, and Drug Use Affect Economics and Government

The alcohol and tobacco industries play large roles in the U.S. economy. Both industries not only provide jobs and income for those involved in growing, manufacturing, and selling these products but also contribute significant tax revenues to the federal, state, and local governments. The U.S. economy also feels the effects of alcohol, tobacco, and illicit drug use in other, less beneficial, ways. All of these drugs can have significant health consequences, with associated health care costs. There are also costs in the form of loss of productivitywork that was never performed because of poor health, death, or imprisonment. The cost of enforcing drug laws, and incarcerating those convicted of breaking such laws, are significant as well.


Retail sales of alcoholic beverages are divided into three groups: beer, wine, and distilled spirits. According to "Numbers Crunchers" (July 2006,, of all the beverage categories in retail sales such as bottled water, carbonated beverages, and coffee, alcoholic beverages made up 38.5% of the dollars spent on beverages in 2005. Of the three alcoholic beverage categories, beer had the highest share at 20.6% of all dollars spent on all beverages, wine was second at 12%, and distilled spirits (including premixed cocktails and coolers) were last at 5.9%


The Economic Research Service (ERS; December 21, 2005, notes that per capita consumption of beer fell almost steadily through the 1980s and early 1990s. Beer consumption was 24.6 gallons per person in 1981 and 21.6 gallons per person in 2003, with the 21.6 figure being relatively constant during the late 1990s and early into the twenty-first century. According to the report "Beer State-of-the-Industry" (Beverage Dynamics, September-October 2005,, in 2004 the beer industry grew by only 0.7%. The report notes, however, that beer still claims more than half the retail sales of alcoholic beverages.

There were an estimated 1,367 domestic brewers in the United States in 2005, well over four times the number in 1990, according to the Beer Institute's Brewer's Almanac 2006 (2006, Microbreweries and brewpubs account for this increase. Nonetheless, the Modern Brewery Age (2006, reports that Anheuser-Busch, Inc., a traditional brewery, was the top brewer in the country with a 2005 market share of 49.5%. Anheuser-Busch also controlled 55.3% of industry production in that year. Miller Brewing Company was next (20.9% of industry production), followed by Coors Brewing Company (12.4%).


Statistics gathered by the Wine Institute, in "2005 California Wine Sales Continue Growth Trend as Wine Enters Mainstream U.S. Lifestyle" (April 2006,, show that 2005 wine sales in the United States grew 5.4% to 703 million gallons, for a retail sales value of $26 billion. In comparison, a total of 612 million gallons of wine were sold in the United States in 2002, for a retail sales value of $21.6 billion, up from $20.2 billion in 2001. Nonetheless, the ERS notes that per capita consumption of wine was at its peak of 2.4 gallons a year in the mid-1980s before beginning a slow decline to 1.7 gallons per capita in the early to mid-1990s. The per capita consumption rate in 2004 was 2.3 gallons per person, having risen close to the peak consumption.

The Wine Institute reports that the California wine industry accounted for a 63% share of the U.S. wine market in 2005. Red wines held a 41.7% market share in 2005, white wines a 41% share, and blush wines a 17.4% share. Chardonnay was the leading varietal wine (a wine produced from a single variety of grape) followed by Merlot.

Distilled Spirits

According to the U.S. Department of Agriculture (USDA), in U.S. Market Profile for Distilled Spirits (April 2005,, 2003 retail sales of distilled spirits (for example, whiskey, vodka, rum) were $42.7 billion, an increase of 7.1% from 2002.

How Much Do Individuals and Families Spend on Alcohol?

The U.S. Bureau of Labor Statistics reports in Consumer Expenditures in 2004 (April 2006, that the average American family (or other consumer unit) spent $459 on alcoholic beverages in 2004, up from $376 in 2002 and $391 in 2003. This figure represents about 1% of the average annual expenditures for the American family. This percentage has remained relatively stable since 1993.

The amount spent on alcohol varied in 2004, depending on the characteristics of the household. On average, single parents with at least one child under age eighteen spent only $219 on alcoholic beverages in 2004, or about 0.7% of their average annual expenditures. Married couples with no children spent $567 (up from $388 in 1999), which was 0.8% of their average annual expenditures. The percentage other groups spent on alcohol varied within a range of 0.7% to 1.1%, except for the "single person and other consumer units" group. This group spent the largest proportion of its average annual expenditures on alcohol: nearly 1.3%.


Farming Trends

Thomas C. Capehart notes in "Trends in U.S. Tobacco Farming" (November 2004, that, sparked by the invention of the cigarette-making machine by James A. Bonsack in 1881, which made cigarettes cheaper and faster to manufacture, tobacco production in the United States grew from three hundred million pounds in the mid-1860s to over one billion pounds in 1909. In 1946, at the end of World War II, tobacco production was above two billion pounds. During the 1960s changes in tobacco preparation and the introduction of new machinery increased the amount of tobacco production per acre, although the number of tobacco farms dropped from about 512,000 in 1954 to 56,977 in 2002.

Tobacco crops by area, yield, production, price, and value, 19962005
YearArea harvestedYield per acreProduction*Marketing year average price per pound received by farmersValue of production
AcresPounds1,000 poundsDollars1,000 dollars
*Production figures are on farm-sales-weight basis.
Source: "Table 2.43. Tobacco: Area, Yield, Production, Price, and Value, United States, 19962005," in Agricultural Statistics 2006, U.S. Department of Agriculture, National Agricultural Statistics Service, 2006, (accessed October 17, 2006)

Table 7.1 shows that beginning in 1998 acreage devoted to tobacco and the value of production declined steadily. According to "Trends in U.S. Tobacco Farming," the number of acres used to grow tobacco fell from 1.5 million in 1954 to 717,620 in 1998 to 298,020 in 2005. The 2005 harvest produced 639.7 million pounds of tobacco, valued at about $1 billion, down from a high of $3.2 billion in 1997.

In 2005 North Carolina led in tobacco production, followed by Kentucky, Tennessee, South Carolina, Georgia, and Virginia. (See Table 7.2.) Tobacco plays a major role in the agricultural economies of the leading half-dozen tobacco-producing states.

Value and Income

According to the USDA (July 2006,, in 2002 tobacco crops had a value of approximately $1.7 billion in cash receipts. Preliminary USDA figures about the 2002 tobacco crop indicate it represented 0.90% of all cash receipts from crops and 1.75% of all farm commodities.

Tobacco is a labor-intensive crop to produce. Brazilian researchers estimate that it takes up to three thousand person-hours per year to grow one hectare of tobacco. (A hectare is 2.47 acres.) By comparison, vegetables take about one-tenth the labor to grow. Although tobacco pays more per hectare than any other commonly grown farm crop, more than half of tobacco growers cannot support themselves purely through tobacco farming because of high costs for labor. They must also work at other jobs to support themselves and their families.

Area, yield, and production of tobacco, by tobacco-growing states, 200305
StateArea harvestedYield per harvested acreProduction
AcresAcresAcresPoundsPoundsPounds1,000 Pounds1,000 Pounds1,000 Pounds
bEstimates discontinued in 2005.
Source: "Table 2.44. Tobacco: Area, Yield, and Production, by States, 20032005," in Agricultural Statistics 2006, U.S. Department of Agriculture, National Agricultural Statistics Service, 2006, (accessed October 17, 2006)


In Tobacco Situation and Outlook Yearbook (December 2005,, Thomas C. Capehart estimates that in 2005 U.S. factories produced 481.9 billion cigarettes, of which 109.2 billion were shipped to other countries. This is down from a peak output of 754.5 billion cigarettes produced by U.S. factories in 1996. Exports were high that year as well: 243.9 billion cigarettes.

Tobacco Consumption

The ERS (October 3, 2005, notes that cigarette smoking in the United States has been dropping almost every year since 1963, when per capita consumption reached a record high of 4,345 cigarettes. Preliminary USDA figures estimated the 2006 per capita cigarette consumption of the population aged eighteen years and older at 1,691 cigarettes. (See Table 3.1 in Chapter 3.)

Table 3.1 also shows that per capita consumption of all tobacco products generally decreased from 1996 to 2006, from 4.8 pounds in 1996 to 3.7 pounds in 2006. Per capita consumption of large cigars by males, however, increased during the period, jumping from nearly 31.9 large cigars and cigarillos (small cigars) per adult male in 1996 to 47.8 in 2006.

Consumer Spending on Tobacco

Americans spent an estimated $88.9 billion on tobacco products in 2005, more than double that of 1989 spending. (See Table 7.3.) The majority ($82 billion, or 92%) was spent on cigarettes. This was slightly less than 1% of all disposable personal income. Although the per capita consumption of cigarettes has declined, expenditures (after adjustment for inflation) have increased because of increasing cigarette prices and an increase in the population of people of smoking age.

Table 7.4 shows that the average American family (or other consumer unit) spent $288 on tobacco products and smoking supplies in 2004. In 2003 the average spent per consumer unit was $290, and in 2002 the average spent was $320. These data appear to be in contradiction with the data shown in Table 7.3, in that spending seems to be decreasing rather than increasing. However, the data in Table 7.4 are per consumer unit, and the number of consumer units increased from 2002 to 2004. In addition, the two data sets were collected differently. The data in Table 7.4 are averages of self-reported survey data, and the data in Table 7.3 are economic data (adjusted for inflation) compiled by the U.S. Department of Commerce. Thus, the data cannot be directly compared.


Capehart, in Tobacco Situation and Outlook Yearbook, reports that in 2005, 109.2 billion cigarettes were exported. From 1996 to 2004 cigarette exports fell by about 135 billion pieces. In 2004 most of the cigarettes exported went to Japan (71 billion), Iran (14.5 billion), and Saudi Arabia (10.7 billion). Other major importers of American cigarettes were Israel (5.1 billion), Lebanon (4 billion), Hong Kong (2 billion), Kuwait (1.8 billion), the United Arab Emirates (1.7 billion), and Taiwan (1.5 billion). Many of the importers in these countries then export these cigarettes to other countries.

Personal spending for tobacco products, 19892005
YearTotalCigarettesCigarsaOtherbDisposable personal incomePercent of disposable personal income spent on tobacco products
Million dollarsBillion dollarsPercent
aIncludes small cigars (cigarette-size).
bSmoking tobacco, chewing tobacco, and snuff.
cSubject to revision.
Note: Expenditures exclude sales tax.
Source: Tom Capehart, "Table 21. Expenditures for Tobacco Products and Disposable Personal Income, 1989/2005," in Tobacco Briefing Room, U.S. Department of Agriculture, Economic Research Service, March 2006, (accessed October 18, 2006)


The National Agricultural Statistics Service, in Agricultural Statistics, 2005 (2005,, estimates the world production of tobacco in 2004 at 6.6 million metric tons (a metric ton equals 1,000 kilograms, or 2,204.6 pounds), down from 6.9 million in 2000. China produced over 36% (about 2.4 million metric tons). Other leading tobacco producers included Brazil (890,500 metric tons), India (665,000 metric tons), the United States (397,347 metric tons), Indonesia (158,900 metric tons), Argentina (154,300 metric tons), and Turkey (153,750 metric tons).

The Campaign for Tobacco-Free Kids reports in "Tobacco Facts" (June 2005, how lucrative overseas markets can be for cigarette makers. In 2003 Philip Morris had global revenue of $81.8 billion, producing 887.3 billion cigarettes, or 16.5%, of the total world cigarette production. Furthermore, more than half of all smokers in 1999 were in Asia. Concerning cigarette consumption, in 2002 China was the top consumer (2.2 trillion cigarettes) and the United States was the third-highest consumer (463 billion).

On February 27, 2005, the world's first tobacco control treaty, the World Health Organization's Framework Convention on Tobacco Control (, became binding international law with ratification by fifty-seven countries, including Canada. The United States signed the measure on May 10, 2004, but as of the end of 2006 had still not ratified it (become bound by it). However, 142 other countries had ratified the treaty by the end of 2006. The goal of the treaty is to improve global health by reducing tobacco consumption by setting international standards on tobacco price and tax increases, tobacco advertising and sponsorship, labeling, illicit trade, and secondhand smoke.


Alcohol Advertising

The Center for Science in the Public Interest (CSPI), in "Alcoholic-Beverage Advertising Expenditures" (December 2003,, the most recent fact sheet on alcohol advertising published by the CSPI, indicates that the beer industry spent approximately $1.2 billion in 2002 on advertising, up from $799.7 million in 1999. The liquor industry spent $408.1 million, up from $321.4 million in 1999. The wine industry spent $122.4 million, up from $120.5 million in 1999.

According to the CSPI fact sheet, in 2002 the beer industry focused most of its advertising dollars on television, and the wine industry on both print media (magazines, newspapers, and billboards) and television. The liquor industry focused its advertising primarily on print media, but its spending on television and radio advertising rose substantially between 1999 and 2002 as a result of this industry's decision to lift its self-imposed ban on radio and television advertising.

Average annual consumer spending and percent changes, by category, 200204
Item200220032004Percent change
Source: "Table A. Average Annual Expenditures of All Consumer Units and Percent Changes, Consumer Expenditure Survey, 20022004," in Consumer Expenditures in 2004, U.S. Department of Labor, U.S. Bureau of Labor Statistics, April 2006, (accessed October 18, 2006)
Number of consumer units (in thousands)112,108115,356116,282
Income before taxes$49,430$51,128$54,453
Age of reference person48.148.448.5
Number of persons in consumer unit2.52.52.5
Number of earners1.41.31.3
Number of vehicles2.01.91.9
Percent homeowner666768
Average annual expenditures$40,677$40,817$43,3950.36.3
   Food at home3,0993,1293,3471.07.0
      Cereals and bakery products4504424611.84.3
      Meats, poultry, fish, and eggs7988258803.46.7
      Dairy products328328371013.1
      Fruits and vegetables5525355613.14.9
      Other food at home9709991,0753.07.6
   Food away from home2,2762,2112,4342.910.1
Alcoholic beverages3763914594.017.4
   Utilities, fuels, and public services2,6842,8112,9274.74.1
   Household operations706707753.16.5
   Housekeeping supplies5455295942.912.3
   Household furnishings and equipment1,5181,4971,6461.410.0
Apparel and services1,7491,6401,8166.210.7
   Vehicle purchases (net outlay)3,6653,7323,3971.89.0
   Gasoline and motor oil1,2351,3331,5987.919.9
   Other vehicle expenses2,4712,3312,3655.71.5
   Public transportation3893854411.014.5
Personal care products and services526527581.210.2
Tobacco products and smoking supplies3202902889.4.7
Cash contributions1,2771,3701,4087.32.8
Personal insurance and pensions3,8994,0554,8234.018.9
   Life and other personal insurance4063973902.21.8
   Pensions and Social Security3,4933,6584,4334.721.2

After the liquor industry lifted its ban, the National Broadcasting Company (NBC) also ended its ban on hard liquor advertising and became the first network television station to do so. The broadcaster's 2001 decision was met with nearly universal derision, and a short time later NBC returned to its ban on hard liquor advertisements. As a response, the liquor industry developed guidelines to restrict advertising to publications or television programs with at least 70% of readers or viewers being age twenty-one or older. Stuart Elliott reports in "Thanks to Cable, Liquor Ads Find a TV Audience" (New York Times, December 15, 2003) that by the end of 2003 hard liquor was being advertised on two dozen national cable networks, 140 local cable systems, and 420 local broadcast stations. In a subsequent article, "In a First, CNN Runs a Liquor Commercial" (New York Times, March 2, 2005), Elliott notes that CNN became the first national cable news network to air, in March 2005, ads for hard liquor with a commercial for Grey Goose vodka. Then, in August 2006 the National Highway Traffic Safety Administration (NHTSA) announced that it would use the same mediumtelevisionto stress the threat of being arrested for driving under the influence. According to Matthew L. Wald, in "Highway Safety Agency Unveils New Campaign against Drunken Driving" (New York Times, August 17, 2006), the NHTSA budgeted $11 million for these television advertisements.


In "Effects of Alcohol Advertising Exposure on Drinking among Youth" (Archives of Pediatric Adolescent Medicine, January 2006), Leslie B. Snyder et al. state that their objective was "to test whether alcohol advertising expenditures and the degree of exposure to alcohol advertisements affect alcohol consumption by youth." Their results reveal that people aged fifteen to twenty-six who reported seeing more alcohol advertisements drank more, on average, than those who reported seeing fewer or no alcohol advertisements. By analyzing data on alcohol advertising expenditures on television, radio, billboards, and newspapers with the rest of the data they collected, Snyder et al. determine that young people in markets with greater alcohol advertising expenditures drank more than those in markets with less alcohol advertising expenditures. These findings suggest that attempts to reduce youth drinking must involve limiting or changing alcohol advertising to lessen its effect on youth and/or countering alcohol advertising with public health campaigns to reduce youth drinking as the NHTSA was planning in 2006.

Tobacco Advertising

According to the U.S. Federal Trade Commission (FTC), in Cigarette Report for 2003 (2005,, cigarette sales in 2003 fell 4.2% from the previous year, to 360.5 billion cigarettes. Advertising expenditures in 2003 increased 21.5% from 2002, to approximately $15.1 billion, the most ever reported to the FTC. As expenditures increased, however, per capita cigarette consumption continued to drop.

The tobacco industry is forbidden by law to advertise on radio and television. Where do the industry's advertising dollars go? The largest share (about $10.8 billion) of the approximately $15.1 billion spent in 2003 was used for price discounts, which are paid to cigarette retailers or wholesalers to discount the price of the cigarettes to the consumer. About $1.2 billion was used for retailer promotional allowances, which pays them for stocking, shelving, and displaying cigarettes.


Taxation is an age-old method by which the government raises money. Alcoholic beverages have been taxed since colonial times, and tobacco products have been taxed since 1863. The alcohol and tobacco industries contribute a great deal of tax money to federal, state, and local governments.

Alcohol Taxes

According to the Distilled Spirits Council of the United States (2006,, hard liquor is the most highly taxed consumer product in the nation. The organization estimates that direct and indirect local, state, and federal taxes and fees accounted for 57% of the typical bottle price in 2006. Even though the beer and wine industries are taxed at lower levels, they still contribute a significant amount of tax revenue.

According to Table 7.5, in fiscal year (FY) 2005 the federal government collected approximately $8.9 billion in excise taxes on alcoholic beverages. (Excise taxes are monies paid on purchases of specific goods, such as alcohol and tobacco.) Federal excise taxes on distilled spirits amounted to half that totalabout $4.5 billion, which included taxes on both domestic and imported distilled spirits. Distilled spirits are taxed by the proof gallon, which is a standard U.S. gallon of 231 cubic inches containing 50% ethyl alcohol by volume, or 100 proof.

Excise taxes on wine and beer make up the other half of the excise taxes collected on alcoholic beverages. The calculation of wine taxes depends on several variables, such as alcohol content and the size of the winery; in 2005 federal excise taxes on wine totaled $806.8 million. Total beer excise taxes were much higher, at $3.6 billion. (See Table 7.5.) According to the Alcohol and Tobacco Tax and Trade Bureau (TTB; 2006,, brewers who produce fewer than two million barrels (one barrel equals thirty-one gallons) get a reduced excise tax rate of $7 per barrel on the first sixty thousand barrels. Those who produce more than two million barrels pay an excise tax of $18 per barrel.

Besides the federal excise taxes, the states levy sales taxes on alcohol. In 2005 the per capita state sales tax collected on alcoholic beveragesaveraged across stateswas $15.99. Total state tax collections from alcohol include not only the sales tax ($4.7 billion in 2005) but also payments for alcoholic beverage licenses ($389.3 million in 2005). Taxes on alcohol amounted to about 0.7% of the nation's total state taxes collected in 2005. (See Table 7.6.)

Tobacco Taxes

The ERS (March 2006, reports that in 200405 federal, state, and local governments collected $20.3 billion in excise taxes on tobacco products. Most of this revenue came from the sale of cigarettes. According to the National Conference of State Legislatures (July 2006,, the federal excise tax on cigarettes was $0.39 per pack as of January 1, 2006.

States have raised their excise taxes on cigarettes to help defray health costs associated with tobacco, to discourage young people from starting to smoke, and to motivate smokers to stop. Table 7.7 shows state cigarette excise tax rates and rankings in 2006. New Jersey had the highest state excise tax on cigarettes at 257.5 cents per pack. Rhode Island was a close second with 246 cents excise tax per pack. South Carolina (a tobacco-growing state) had the lowest excise tax of 7 cents per pack. The average tax in the nation in 2006 was 96.1 cents per pack.

Federal government tax collections on alcohol and tobacco, October 2004September 2005
[In thousands of dollars]
Reporting period: October 2004September 2005
Revenue source1st quarter2nd quarter3rd quarter4th quarterCumulative
1. This is an unofficial report. Official revenue collection figures are stated in the Alcohol and Tobacco Tax and Trade Bureau (TTB) Chief Financial Officer Annual Report.
2. All "imported" tax collection figures are obtained from U.S. Customs data.
3. Addition of current fiscal year prior quarter figures may not agree with cumulative figures for current fiscal year due to the figures being adjusted to reflect classification of unclassified alcohol and tobacco tax collections previously reported, to reflect collection adjustments for prior tax periods and to reflect rounding adjustments.
4. Source for other tax collection figures on this report is a TTB database that records tax collection data by tax return period. This data is summarized on this report by the quarter in which an incurred tax liability is satisfied.
5. Unclassified Alcohol and Tobacco Tax is tax collected, but not yet posted to a taxpayer account due to missing employer identification number (EIN), permit number, and/or other taxpayer identity information.
Source: "Tax Collections TTB S 5630-FY-2005 Cumulative Summary Fiscal Year 2005 Final," in Alcohol and Tobacco Tax and Trade Bureau Statistical Release, U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau, April 2006, (accessed October 18, 2006)
Excise tax, total$4,159,910$3,620,468$4,375,858$4,808,283$16,964,519$16,851,969
Alcohol tax, total$2,235,142$1,879,706$2,307,117$2,479,399$8,901,364$8,725,491
    Distilled spirits tax, total$1,228,237$911,329$1,141,823$1,170,010$4,451,399$4,295,742
    Wine tax, total$229,302$175,673$192,282$209,535$806,792$769,225
    Beer tax, total$777,603$792,704$973,012$1,099,854$3,643,173$3,660,524
Tobacco tax, total$1,868,904$1,687,381$2,016,325$2,264,654$7,837,264$7,910,259
         Floor stocks$0.250$10$0.000$0.200$9.950$0.100
Unclassified alcohol and tobacco tax (domestic) Total$43$5$21$9$78$213
Firearms and Ammunition tax, total$55,821$53,376$52,395$64,221$225,813$216,006
Special (occupational) tax, total$1,868$1,176$5,629$1,516$10,189$102,165
    Total tax collections$4,161,778$3,621,644$4,381,487$4,809,799$16,974,708$16,954,134


Besides taxation, the alcoholic beverage and tobacco industries are subject to federal and state laws that regulate factors such as sales, advertising, and shipping.

Alcohol Regulation

The best-known pieces of legislation regarding alcohol are the Eighteenth and Twenty-First Amendments to the U.S. Constitution. The Eighteenth Amendment prohibited the manufacture, sale, and importation of alcoholic beverages. Ratified in 1919, it took effect in 1920 and ushered in a period in U.S. history known as Prohibition. After twelve years, during which it failed to stop the manufacture and sale of alcohol, Prohibition was repealed in 1933 by the Twenty-First Amendment.

Most interpretations of the Twenty-First Amendment hold that the amendment gives individual states the power to regulate and control alcoholic beverages within their own borders. Consequently, every state has its own alcohol administration and enforcement agency. "Control states" directly control the sale and distribution of alcoholic beverages within their borders. According to the TTB (2006,, there are eighteen control states: Alabama, Idaho, Iowa, Maine, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. Some critics of this policy question whether such state monopolies violate antitrust laws. The other thirty-two states are licensure states and allow only licensed businesses to operate as wholesalers and retailers.


A legislative controversy has developed over the direct shipment of alcoholic beverages from one state directly to consumers or retailers in another. Under the U.S. Constitution's Interstate Commerce Clause, Congress has the power to regulate trade between states. Nevertheless, the Twenty-First Amendment gives states the authority to regulate the sale and distribution of alcoholic beverages. Furthermore, it allows states to set their own laws governing the sale of alcohol within their borders.

State government tax collections, by source of revenue, 2005
[Amounts in thousands. Per capita amounts in dollars]
ItemUnited States*
AmountPer capita
*U.S. totals include the 50 state governments and do not include the District of Columbia or any local government.
Note: X=not applicable.
Source: "State Government Tax Collections: 2005," U.S. Census Bureau, Governments Division, May 22, 2006, (accessed October 18, 2006)
Population, July 2005295,860    X
    Total taxes647,886,4102,189.84
Property taxes11,349,052   38.36
Sales and gross receipts311,074,0391,051.42
    General sales and gross receipts212,246,900  717.39
    Selective sales taxes98,827,139  334.03
        Alcoholic beverages4,731,621   15.99
        Amusements5,241,621   17.72
        Insurance premiums14,842,349   50.17
        Motor fuels34,570,428  116.85
        Pari-mutuels309,789    1.05
        Public utilities11,022,793   37.26
        Tobacco products13,216,670   44.67
        Other selective sales14,891,868   50.33
Licenses42,702,918  144.33
    Alcoholic beverages389,263    1.32
    Amusements242,023    0.82
    Corporation7,280,358   24.61
    Hunting and fishing1,263,309    4.27
    Motor vehicle18,220,765   61.59
    Motor vehicle operators2,110,390    7.13
    Public utility473,972    1.60
    Occupation and business12,068,439   40.79
    Other licenses654,399    2.21
Income taxes258,945,643  875.23
    Individual income220,254,617  744.46
    Corporation net income38,691,026  130.77
Other taxes23,814,758   80.49
    Death and gift5,341,720   18.05
    Documentary and stock transfer10,049,250   33.97
    Severance8,131,446   27.48
    Other292,342    0.99

Because the laws of the states are not uniform, several states passed reciprocity legislation, allowing specific states to exchange direct shipments, thus eliminating the state-licensed wholesalers from the exchange. Wholesalers and retailers have charged that reciprocity and direct shipment are violations of the Twenty-First Amendment. They fear being bypassed in the exchange, as do states that prohibit direct shipments of alcohol. Other stakeholders in this issue are consumers and wine producers who want the right to deal directly with each other.


In January 2001 the Twenty-First Amendment Enforcement Act became law. This legislation makes it difficult for companies to sell alcohol over the Internet or through mailorder services. It allows state attorneys general in states that ban direct alcohol sales to seek a federal injunction against companies that violate their liquor sales laws.

State cigarette tax rates and rankings, 2005
Overall all states' average: 96.1 cents per pack
Major tobacco states' average: 26.5 cents per pack
Other states' average: 105.4 cents per pack
StateTax (in cents)Rank
aAdditional 20-cent increase effective 7/1/06.
bIncludes 20-cent increase effective 9/30/06; part of 6-stage increase through 2011.
cIncludes $1 increase effective 1/1/07.
Source: "State Cigarette Excise Tax Rates & Rankings," Campaign for Tobacco-Free Kids, September 1, 2006, (accessed October 18, 2006)
New Jersey257.51
Rhode Island  2462
Washington   202.53
Maine  2004
Michigan  2004
Alaskaa  1806
Vermont  1797
Montana  1708
Hawaiib  1609
Connecticut  15110
Masschusetts  15110
New York  15012
Texas  141c13
Pennsylvania  13514
Ohio  12515
Minnesota  12316
Arizona  11817
Oregon  11817
Oklahoma  10319
DC  10020
Maryland  10020
Illinois   9822
New Mexico   9123
California   8724
Colorado   8425
Nevada   8026
New Hampshire   8027
Kansas   7928
Wisconsin   7729
Utah 69.530
Nebraska   6431
Wyoming   6032
Arkansas   5933
Idaho   5734
Indiana 55.535
Delaware   5536
West Virginia   5536
South Dakota   5338
North Dakota   4439
Alabama 42.540
Georgia   3741
Iowa   3642
Louisiana   3642
North Carolina   3544
Florida 33.945
Kentucky   3046
Virginia   3046
Tennessee   2048
Mississippi   1849
Missouri   1750
South Carolina    751
Puerto Rico  123NA
Guam  100NA
North Marianas  175NA

Within a month of the passage of this legislation, the high-tech community voiced its concern over such legislation, suggesting that if states could ban Internet wine sales they might restrict other electronic commerce as well. Senator Orrin Hatch said he crafted the bill to take other e-commerce concerns into account and insisted that the measure is narrowly tailored to deal with alcohol only.

On May 16, 2005, the U.S. Supreme Court ruled on three cases that had been consolidated under the name Granholm v. Heald (544 U.S. 460). At issue were state laws in Michigan and New York that prohibited out-of-state wineries from selling their products over the Internet directly to Michigan and New York residents, but allowed in-state wineries to make such sales. The Michigan and New York state governments argued that these laws were permissible under the Twenty-First Amendment. A group of wineries and business advocates argued that the state laws were unconstitutional restrictions of interstate trade. In a 5-4 decision the Court agreed that the state laws were unconstitutional, stating, "States have broad power to regulate liquor under §2 of the Twenty-first Amendment. This power, however, does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on even-handed terms. Without demonstrating the need for discrimination, New York and Michigan have enacted regulations that disadvantage out-of-state wine producers. Under our Commerce Clause jurisprudence, these regulations cannot stand."

Early Tobacco Regulation and Legislation

Federal tobacco legislation has covered everything from unproved advertising claims and warning label requirements to the development of cigarettes and little cigars that are less likely to start fires. In the past the FDA prohibited the claim that Fairfax cigarettes prevented respiratory and other diseases (1953) and denied the claim that tartaric acid, which was added to Trim Reducing-Aid cigarettes, helped promote weight loss (1959).

The FTC has also been given jurisdiction over tobacco issues in several areas. As early as 1942 the FTC had issued a "cease-and-desist" order in reference to Kool cigarettes' claim that smoking Kools gave extra protection against or cured colds. In January 1964 the FTC proposed a rule to strictly regulate cigarette advertisements and to prohibit explicit or implicit health claims by cigarette companies.

The tobacco industry has managed to avoid federal regulation by being exempted from many federal health and safety laws. In the Consumer Product Safety Act the term consumer product does not include tobacco and tobacco products, nor does the term hazardous substance in the Hazardous Substances Act. Tobacco is similarly exempted from regulation under the Toxic Substance Control Act and the Fair Packaging and Labeling Act.

Some of the legislation of the late 1980s included requiring four alternating health warnings to be printed on tobacco packaging, prohibiting smokeless tobacco advertising on television and radio, and banning smoking on domestic airline flights. In 1992 the Synar Amendment was passed. The amendment said that states must have laws that ban the sale of tobacco products to people under eighteen years of age.

In 1993 the U.S. Environmental Protection Agency released its final risk assessment on environmental tobacco smoke (ETS, or secondhand smoke) and classified it as a known human carcinogen (cancer-causing agent). In 1994 the Occupational Safety and Health Administration proposed regulations that would prohibit smoking in workplaces, except in smoking rooms that are separately ventilated. As of the end of 2006 the United States did not have federal smoking control legislation, but many states and municipalities did have legislation that banned smoking in a variety of public places and workplaces.


The Internet plays a role in the distribution of tobacco as well as of alcohol. There are more than four hundred Web sites that sell tobacco products.

There are a number of problems with such Web sites. Kurt M. Ribisi, Annice E. Kim, and Rebecca S. Williams, in "Are the Sales Practices of Internet Cigarette Vendors Good Enough to Prevent Sales to Minors?" (American Journal of Public Health, June 2002), indicate that 18.2% of online cigarette vendors do not say that sales to minors are prohibited on their sites. More than half require that the user simply state that he or she is of legal age. According to the Campaign for Tobacco-Free Kids (October 21, 2005,, three-quarters of Internet tobacco sellers explicitly say that they will not report cigarette sales to tax collection officials, a violation of federal law.

In July 2003 the Senate Judiciary Committee approved the Prevent All Contraband Tobacco Act (S. 1177). The Senate passed the act by unanimous consent in December 2003. Similar legislation (amended H.R. 2824) passed the House Judiciary Committee in January 2004. This legislation requires Internet tobacco vendors to register with the states in which they intend to sell their products. They are then required to comply with all state laws regarding tobacco tax collection and reporting. The bill allows states to block the delivery of cigarettes and smokeless tobacco sold by Internet vendors who fail to register with the state.


In 1994 the FDA investigated the tobacco industry to determine whether nicotine is an addictive drug that should be regulated like other addictive drugs. Weeks of testimony before Congress indicated that tobacco companies may have been aware of the addictive effects of nicotine and the likely connection between smoking and cancer as early as the mid-1950s.

In August 1995 the FDA ruled that the nicotine in tobacco products is a drug and, therefore, liable to FDA regulation. However, the tobacco, advertising, and convenience store industries filed a lawsuit against the FDA, claiming it did not have the authority to regulate tobacco as an addictive drug. After conflicting decisions in the lower courts, the Supreme Court, in FDA v. Brown and Williamson Tobacco Corp., ruled 5-4 that the government lacks this authority. Although the ruling did not allow the FDA to regulate tobacco, state laws on selling cigarettes to minors were not affected.

In "FDA Regulation of Tobacco Products: Why It's Needed and What It Will Do" (March 10, 2006,, the Campaign for Tobacco-Free Kids notes that in March 2005 bipartisan bills were introduced in the House and Senate to grant the FDA the authority to regulate tobacco products. The Family Smoking Prevention and Tobacco Control Act would grant the FDA the authority to control tobacco advertising and sales to children, require changes in tobacco products to make them less harmful, prohibit health claims that have no scientific backing, and require the contents and health dangers of tobacco products to be listed on the packaging. As of the end of 2006, the bills were still in committee.


Few reports are available on the economic costs of alcohol and other drug abuse, and fewer still on the economic costs of tobacco use. The more recent prominent documents are based on the original report The Economic Costs of Alcohol and Drug Abuse in the United States, 1992 (1998; by the Lewin Group for the National Institute on Drug Abuse and the National Institute on Alcohol Abuse and Alcoholism (NIAAA). The report estimated the economic cost of alcohol and drug abuse (everything from crime, treatment services, health care costs, and lost wages) to be $246 billion in 1992. Alcohol abuse and alcoholism were estimated at $148 billion, whereas drug abuse and dependence were at $98 billion. Tobacco use was not addressed.

Then in 1999 Dorothy Rice published her report "Economic Costs of Substance Abuse, 1995" (Proceedings of the Association of American Physicians, February 1999). In this report Rice estimated the economic costs of alcohol, other drug abuse, and smoking in 1995. She estimated the cost of alcohol and drug abuse in 1995 by updating the 1992 data from the Lewin Group report and based the smoking-attributable costs on a published study conducted by herself and her colleagues in 1993 and updated to 1995. The total economic costs of substance abuse were estimated at $428.1 billion in 1995: alcohol abuse and alcoholism at $175.9 billion, drug abuse and dependence at $114.2 billion, and smoking at $138 billion.

Economic Costs of Alcohol Abuse

After the initial Lewin Group report was prepared, the NIAAA asked the Lewin Group to develop a 1998 update for alcohol abuse alone, which resulted in Updating Estimates of the Economic Costs of Alcohol Abuse in the United States: Estimates, Update Methods, and Data (December 2000; This report estimated national costs related to alcohol abuse and dependence to be approximately $185 billion in 1998, up from about $148 billion in 1992 (Lewin report) and $175.9 billion in 1995 (Rice report).

Economic Costs of Drug Abuse

Following the 1998 update, the Office of National Drug Control Policy (ONDCP) asked the Lewin Group to develop even more current data on the costs to society of illicit drug abuse alone. The report, The Economic Costs of Drug Abuse in the United States, 19922002 (December 2004,, the most current as of the end of 2006, does not include the costs of alcohol abuse or smoking-attributable costs.

Figure 7.1 shows the progression of the economic costs of drug abuse from 1992 through 2002. The 1992 figure of $98 billion from the original Lewin Group report differs from the figure of $107.5 billion shown in Figure 7.1 because the economic cost of drug abuse was reestimated for the 2002 report. The overall cost to society of drug abuse in 2002 was estimated to be $180.8 billion, rising approximately 5.3% per year from 1992 to 2002.

The ONDCP report divides the costs of drug abuse into three major cost components: productivity, health, and other. They are shown within the bars in Figure 7.1. The proportion of each cost component remained relatively stable from 1992 to 2002.

Figure 7.2 shows the proportion of each cost component in 2002. Productivity is the largest cost component at 71.2%. Productivity means loss from productivity. It is an indirect cost that reflects losses such as work that was never performed because of poor health, premature death, or incarceration. Productivity losses because of drug abuse were estimated to be $128.6 billion in 2002.

The second-largest cost component is "other," which includes drug-related crime costs such as the operation of prisons, state and local police protection, and victim costs. It also includes drug-related costs of the social welfare system. These costs totaled $36.4 billion in 2002.

The third-largest cost component associated with drug abuse are the health care costs. Table 7.8 compares the health care costs between 1992 and 2002 and shows the annual change. The report notes that drug abuse-related health care costs are considerable. In 2002 total health care costs were $15.8 billion, up from $10.7 billion in 1992. The largest share ($3.8 billion) was the cost of treating HIV/AIDS patients who had a history of intravenous drug use. Other significant drug-related health care costs in 2002 were hospital and ambulatory care (outpatient) costs at about $1.5 billion and federal efforts to prevent drug abuse at $1.2 billion.

Economic Costs of Tobacco Use

As mentioned previously, the 1999 Rice report estimated the economic costs of smoking at $138 billion in 1995. Another report was published a few months earlier in 1998 by the U.S. Department of the Treasury: The Economic Costs of Smoking in the United States and the Benefits of Comprehensive Tobacco Legislation (March 1998, The report divided the costs into direct costs (for example, adult medical spending, and lost output and workdays) and indirect costs (for example, lower productivity and health costs from secondhand smoke), concluding with a similar overall economic cost of smoking to the Rice report of about $130 billion per year.

In 2005 the Centers for Disease Control and Prevention (CDC) published "Annual Smoking-Attributable Mortality, Years of Potential Life Lost, and Productivity LossesUnited States, 19972001" (July 1, 2005,, which included data on the economic costs of tobacco use. The CDC estimates the economic cost of smoking-attributable lost productivity at $92 billion annually. The CDC suggests, however, that with smoking-attributable health care expenditures added to this figure, the annual economic cost of cigarette smoking exceeds $167 billion per year.

Health care costs resulting from drug abuse, 1992 and 2002
Detailed cost components19922002Annual change
Source: "Table III.1 Health Care Costs, 1992 and 2002 (in Millions of Dollars)," in The Economic Costs of Drug Abuse in the United States 19922002, Executive Office of the President, Office of National Drug Control Policy, December 2004, (accessed October 18, 2006)
Community-based specialty treatment$3,770$5,9974.8%
Federally provided specialty treatment
Department of Defense$14$85.8%
Indian Health Services$26$547.6%
Bureau of Prisons$17$398.8%
Department of Veterans Affairs$113$1160.2%
Health infrastructure and support
Federal prevention$616$1,2036.9%
State and local prevention$89$1485.2%
Prevention research$158$4029.8%
Treatment research$195$56411.2%
Insurance administration$268$4765.9%
Medical consequences
Hospital and ambulatory care costs$518$1,45410.9%
Special disease costs
   Drug-exposed infants$407$6054.0%
   Hepatitis B and C$462$3123.9%
Crime victim health care costs$92$1101.8%
Health insurance administration$340$5134.2%


Between 1960 and 1988 approximately three hundred lawsuits sought damages from tobacco companies for smoking-related illnesses; courts, though, consistently held that people who choose to smoke are responsible for the health consequences of that decision. This changed in 1988, when a tobacco company was ordered to pay damages for the first time. A federal jury in Newark, New Jersey, ordered Liggett Group Inc. to pay $400,000 to the family of Rose Cipollone, a longtime smoker who died of lung cancer in 1984. The case was overturned on appeal, but the Supreme Court ruled in favor of the Cipollone family in Cipollone v. Liggett Group, Inc. (505 U.S. 504 [1992]). In the 7-2 ruling, the Court broadened a smoker's right to sue cigarette makers in cancer cases. The justices decided that the Federal Cigarette Labeling and Advertising Act of 1965 (PL 89-92), which required warnings on tobacco products, did not preempt damage suits. Despite the warnings on tobacco packaging, people could still sue on the grounds that tobacco companies purposely concealed information about the risks of smoking.

Tobacco Master Settlement Agreement

Following the Supreme Court's decision, the tobacco industry was faced with the possibility of never-ending lawsuits and massive damage awards. Many state governments began lawsuits against major cigarette companies, seeking to recover the costs the states had paid in caring for those with smoking-related health problems. The tobacco industry responded by negotiating with the states, offering money and changes in their business practices in exchange for an end to the lawsuits and protection from future lawsuits.

On November 23, 1998, the attorneys general from forty-six states (excluding four states that previously settled), five territories, and the District of Columbia signed an agreement with the five largest cigarette companiesPhilip Morris, R. J. Reynolds, Brown and Williamson, Lorillard, and Liggett and Myersto settle all the state lawsuits brought to recover the Medicaid costs of treating smokers. The Master Settlement Agreement (MSA) required the tobacco companies to make annual payments totaling more than $200 billion over twenty-five years, beginning in the year 2000. It also placed restrictions on how the companies could advertise, market, and promote tobacco products. Since the original signing, more than thirty additional tobacco firms have signed the MSA, and Philip Morris has contributed more than half of the payments received by the states under the agreement. Although the MSA settles all the state and local government lawsuits, the tobacco industry is still subject to class-action and individual lawsuits.

The four states that negotiated their own lawsuit settlements began receiving payments from the tobacco companies in 1998. Payments to other states began in 1999. A July 2006 fact sheet released by the Campaign for Tobacco-Free Kids details the amount of money the states have received each year since the start of the agreement. (See Table 7.9.)


The MSA did not establish place any restrictions on how state governments used the funds that they received under the agreement. Anti-smoking and public health organizations have argued that the most appropriate use for MSA money is to fund smoking prevention and cessation programs. Since the November 1998 tobacco settlement, the Campaign for Tobacco-Free Kids, the American Lung Association, the American Cancer Society, and the American Heart Association have published an annual report to monitor how states are handling the settlement funds. The FY2007 report, A Broken Promise to Our Children: The 1998 State Tobacco Settlement Eight Years Later (December 6, 2006,, notes that states fell short in their efforts to adequately fund tobacco prevention and cessation programs. The joint report also notes that "states that have

Payments received from tobacco settlements, by state, 19982006
Source: Eric Lindblom, "Actual Payments Received by the States from the Tobacco Settlements (Millions of Dollars)," Campaign for Tobacco-Free Kids, July 2006, (accessed October 18, 2006)
Alabama$0.0$0.0$131.7$104.7$120.0$109.9$101.9$101.9 $93.4
Alaska$0.0$8.4$19.6$21.5$24.8$23.2$21.5$21.5 $19.7
Arizona$0.0$0.0$120.3$90.0$110.4$101.6$92.7$92.9 $85.2
Arkansas$0.0$0.0$0.0$124.0$60.2$56.3$52.1$52.2 $47.9
Colorado$0.0$33.8$78.6$86.4$99.6$93.2$86.2$86.4 $79.2
Delaware$0.0$9.8$22.2$23.9$29.6$27.3$24.9$24.9 $22.9
DC$0.0$15.0$34.8$38.2$44.1$41.3$38.2$38.3 $35.1
Hawaii$0.0$14.9$33.8$36.4$45.1$41.5$37.8$37.9 $34.8
Idaho$0.0$9.0$20.8$22.9$26.4$24.7$22.8$22.9 $21.0
Iowa$0.0$21.5$49.9$54.8$63.2$59.2$54.7$54.8 $50.3
Kansas$0.0$20.6$47.8$52.5$60.6$56.7$52.4$52.5 $48.2
Maine$0.0$19.0$44.1$48.5$55.9$52.3$48.4$48.5 $44.5
Montana$0.0$10.5$24.4$26.8$30.9$28.9$26.7$26.8 $24.5
Nebraska$0.0$14.7$34.1$37.5$43.2$40.5$37.4$37.5 $34.4
Nevada$0.0$15.1$35.0$38.4$44.3$41.5$38.3$38.4 $35.2
New Hampshire$0.0$16.4$38.2$42.0$48.4$45.3$41.9$42.0 $38.5
New Jersey$0.0$0.0$318.6$244.5$281.0$263.0$243.1$243.8$223.5
New Mexico$0.0$14.7$34.2$37.6$43.3$40.6$37.5$37.6 $34.5
New York$0.0$315.1$715.8$772.4$955.8$879.7$802.3$804.4$737.5
North Carolina$0.0$57.6$130.8$141.2$174.7$160.8$146.6$147.0$134.8
North Dakota$0.0$9.0$21.0$23.1$26.6$24.9$23.0$23.1 $21.2
Oklahoma$0.0$25.6$59.4$65.3$75.3$70.5$65.1$65.3 $59.9
Oregon$0.0$28.3$64.4$69.5$86.0$79.1$72.1$72.3 $66.3
Rhode Island$0.0$17.7$41.2$45.3$52.2$48.9$45.2$45.3 $41.5
South Carolina$0.0$29.0$67.5$74.1$85.5$80.0$73.9$73.4 $68.0
South Dakota$0.0$8.6$20.0$22.0$25.4$23.7$21.9$22.0 $20.2
Utah$0.0$11.0$25.5$28.0$32.3$30.3$28.0$28.0 $25.7
Vermont$0.0$10.2$23.1$24.9$30.8$28.3$25.8$25.9 $23.8
West Virginia$0.0$21.9$50.8$55.8$64.4$60.3$55.7$55.9 $51.2
Wyoming$0.0$6.1$13.9$15.0$18.6$17.1$15.6$15.7 $14.4
Am. Samoa$0.0$0.4$0.9$0.9$1.1$1.0$1.0$1.0  $0.9
Guam$0.0$0.5$1.2$1.3$1.6$1.5$1.4$1.4  $1.3
No. Mariana$0.0$0.2$0.5$0.5$0.3$0.7$0.5$0.5  $0.5
Puerto Rico$0.0$27.7$62.9$67.9$36.6$95.8$70.8$70.7 $64.8
Virgin Islands$0.0$0.4$1.0$1.1$0.6$1.5$1.1$1.1  $1.0
MSA total$0.0$2.0 bill.$5.9 bill.$6.4 bill.$7.3 bill.$6.9 bill.$6.3 bill.$6.3 bill.  $5.8
Ind. state total$1.4 bill.$2.0 bill.$2.0 bill.$2.3 bill.$2.4 bill.$1.6 bill.$1.1 bill.$1.2 bill.   $14*
    National total$1.4 bill.$4.0 bill.$7.9 bill.$8.7 bill.$9.7 bill.$8.5 bill.$7.4 bill.$7.5 bill.  $7.1*

implemented comprehensive tobacco prevention and cessation programs have achieved significant reductions in tobacco use among both adults and youth."

The report says that in FY2007 only three statesMaine, Delaware, and Coloradowere funding tobacco prevention and cessation programs at the minimum levels recommended by the CDC. Mississippi, a state that previously met the CDC recommendations, was last that year. The report suggests that this drastic change was because of the efforts of the Mississippi governor Haley Barbour to eliminate the funding. Governor Barbour, the report notes, was a former tobacco lobbyist. In FY2007 fourteen states were funding tobacco prevention and cessation programs at half the recommended minimum level, twenty-eight states and the District of Columbia were funding the programs at less than half the recommended minimum, and five states did not fund tobacco prevention programs. Together, the states allocated only 2.8% of their revenue from the settlement agreement for tobacco prevention and cessation programs in FY2007. To fund these programs at the CDC minimum level, states should have allocated 7.3% of their settlement agreement funds to this purpose.

What have states done with the tobacco settlement funds not allocated to tobacco prevention and cessation programs? The answer to this question varies among the states; they used the settlement monies to fund such things as other health- and youth-related programs, capital projects (for example, building hospitals), medical research, medical education, enforcement of tobacco control laws, and expansion of health clinics for low-income citizens. Some states also used part of the money to pay down their debt or to help balance their budgets.

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How Alcohol, Tobacco, and Drug Use Affect Economics and Government

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