Can a Tax Put the Axe on Drinking?

By Powers, Mike | Human Ecology Forum, Summer 1996 | Go to article overview

Can a Tax Put the Axe on Drinking?


Powers, Mike, Human Ecology Forum


Alcohol abuse claims 100,000 lives and costs the nation's economy more than $98 billion every year. Associate Professor Donald Kenkel says a fivefold increase in the tax on alcoholic beverages - almost doubling current prices - would reduce the economic and social costs of drinking.

Don't get Don Kenkel wrong. The associate professor of consumer economics and housing likes a beer on a hot day or a glass of wine with dinner just as much as the next person. What he doesn't like are the huge social and economic costs of alcohol abuse, and he's trying to do something about it.

Kenkel's solution? Generate a little behavior modification by hitting drinkers where it hurts - right in the wallet. In a recent study, he concludes that a fivefold increase in federal taxes on alcoholic beverages, which would roughly double the retail cost to consumers, would significantly reduce alcohol-related deaths without putting an undue economic burden on people who do not drink heavily.

"I believe that the most important area in which we can improve the health of Americans is not health care but personal health habits," he says. "The tax rate I propose would reduce the amount of heavy drinking and drunk driving as well as the costs of heavy drinking on society."

In the United States, an estimated two-thirds of adults drink, and 10 percent are considered to be problem drinkers. Alcohol is involved in approximately 40 percent of all fatal car crashes and is a factor in many other accidents, homicides, and suicides. Cirrhosis of the liver killed 26,000 Americans in 1988, making it the ninth leading cause of death. All told, alcohol abuse claims 100,000 lives and costs the nation's economy more than $98 billion every year.

Kenkel says that, except during Prohibition, taxes on alcohol have been a traditional part of American fiscal policy for more than 200 years. Alexander Hamilton helped pay off the nation's Revolutionary War debts by persuading Congress to institute a tax on whiskey. Colonial elbow benders soon responded with the Whiskey Rebellion of 1794.

The practice of taxing alcohol also has historically been linked to controlling alcohol consumption in the interest of public health. Supporting Hamilton's request to Congress to enact the whiskey tax, the Philadelphia College of Physicians stated that "a great proportion of the most obstinate, painful, and mortal disorders which affect the human body are produced by distilled spirits." More recent increases have been inspired by a combination of fiscal and health concerns.

A two-hundred-year span of alcohol taxation has given economists a great deal of time to observe the relationship between tax rates and drinking habits. They have found a direct correlation.

"Historically, alcohol consumption has decreased when taxes are high," says Kenkel. "So have cirrhosis rates, traffic fatality rates, and self-reported incidences of heavy drinking and drunk driving. The problem is that taxes on alcohol have not kept pace with the rate of inflation, so it's comparatively cheaper to drink today than it was thirty or forty years ago."

The tax rates on alcohol in the United States are inconsistent from state to state, a fact that also has allowed researchers to compare the effects of different tax rates on drinking. While the federal tax is applied across the board, inconsistencies in state taxes result in a wide variation in costs to the consumer.

Some states, such as Maryland, are well known for their low taxes, and it's common to find huge liquor retailers operating near the state's borders to entice out-of-state shoppers. Other states such as Florida have taxes three to four times higher. Still, Kenkel says, the states also have generally fallen behind the inflation rate in their tax increases.

In the 1950s, he points out, the average combined local, state, and federal tax on alcohol was around 55 percent "net-of-tax" (meaning the tax imposed was 55 percent of the before-tax retail cost). …

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Can a Tax Put the Axe on Drinking?
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