Should Alcohol Taxes Be Raised? Alcohol Tax Rates Have Fallen by Half over the Past Quarter-Century

By Parry, Ian W. H. | Regulation, Fall 2009 | Go to article overview

Should Alcohol Taxes Be Raised? Alcohol Tax Rates Have Fallen by Half over the Past Quarter-Century


Parry, Ian W. H., Regulation


Although excise taxes on beer, wine, and spirits raise about $15 billion a year in revenue for federal and state governments, current alcohol tax rates in the United States are low by historical standards. In 1980, alcohol taxes represented about 22 percent of the pre-tax price of alcohol, whereas now, with the failure to raise nominal rates in line with inflation, they have fallen to about 10 percent of the pre-tax price (see Figure 1). Are current alcohol tax levels about right, or should they be increased?

HEALTH AND PRODUCTIVITY

Alcohol taxation is warranted to the extent that its consumption leads to broader societal costs--what economists call "negative externalities"--that are not taken into account by individual drinkers.

One possible externality is the burden of medical treatments, which are largely borne by third parties (the government and insurance companies), for liver cirrhosis and other alcohol-induced illnesses. Some studies suggest that the annual medical burden for alcohol-related illnesses easily justifies what federal and state governments collect in alcohol tax revenues. However, these estimates overstate the external cost because heavy drinkers tend to die younger, which lowers the burden of medical costs over their lifecycle. A 1989 study by Willard Manning et al., which compared lifecycle health outcomes for heavy and moderate drinkers, suggested a much smaller corrective tax--at most a few percent of pre-tax alcohol prices. Moreover, moderate alcohol consumption itself may have health benefits, implying a corresponding reduction in near-term health care costs, though this might be offset by higher longer-term medical costs as a result of prolonged longevity.

Alcohol abuse may also have broader societal costs if it results in reduced workplace productivity. For example, it seems plausible that heavy drinkers suffer from difficulty in finding and retaining employment, concentrating on the job, and may acquire less human capital through education and training programs. Heavy drinkers themselves bear much of the cost of reduced productivity and employment, in terms of less take-home pay, and should take this into account. However, a substantial portion is also borne by the government through reduced income and payroll tax revenues.

Disentangling, statistically, the productivity effect of alcohol consumption has proved difficult, however. For example, for some people, higher wages (which are often used to proxy for productivity) may be positively associated with alcohol consumption, if they drink more when they have more money, while for heavy drinkers a negative association between productivity and alcohol could reflect poor work motivation rather than the impairing effects of drinking per se. In short, the jury is still out on whether or not productivity effects justify a significant alcohol tax. Based on the wide range of empirical estimates in the literature, the appropriate tax appears to range from almost zero to as much as 40 percent of pre-tax alcohol prices.

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DRUNK DRIVING

Alcohol-related crashes account for around 40 percent of the roughly 40,000 or so people killed each year on U.S. highways, according to the National Highway Traffic Safety Administration (NHTSA). However, the bulk of fatalities occur in single-vehicle crashes where fatality risks should be taken into account by individuals when they decide whether or not to drink and drive. For example, a 2001 paper by Steven Levitt and Jack Porter estimates that only 17 percent of fatalities in drunk driver accidents represent external risks. Nonetheless, if a statistical life is valued at $6 million (which is approximately the value assumed by the U.S. Department of Transportation), the social costs of these deaths is substantial, about $15 billion a year. Broader costs from accident risks that drunk drivers do not take into account include non-fatal injury risks to other vehicle occupants and pedestrians, third-party medical burdens for treating injuries, and property damages to automobiles (though a minor part of property risk may be taken into account if drivers anticipate elevated future insurance premiums should they cause a crash). …

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Should Alcohol Taxes Be Raised? Alcohol Tax Rates Have Fallen by Half over the Past Quarter-Century
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