Problem Statement
Excessive alcohol consumption leads to drunk driving and increases in violence, suicide, and crime, as well as chronic health conditions such as addiction. What can Congress do to reduce the negative externalities associated with excessive alcohol consumption?
Background
Excessive alcohol consumption leads to 79,000 premature deaths per year and shortens the life of the average victim by over 30 years (Daley, Stahre, Chaloupka, & Naimi, 2012). In addition to the deaths associated with alcohol, excessive alcohol consumption also increases rates of injuries, crime, domestic violence, alcohol related diseases, addiction, and the associated costs to families, healthcare providers and law enforcement (Looney, 2017). Alcohol excise taxes are levied on producers and importers of alcohol and can be used to diminish these negative externalities by increasing the price of alcohol paid by consumers and purchasers of alcohol (Tyger, 2019). This revenue can be used to fund programs to further combat the externality, general revenue or for deficit reduction. Although substantial state-by-state variation exists in alcohol taxation, Federal excise taxes on alcohol producers have not been raised since 1991, when they were increased but not indexed to inflation. Accounting for inflation, there was a 36% cut in the rate from the enactment of the taxes until 2017. In 2017 Congress cut the excise taxes on alcohol further, while adding complexity to an already complex enforcement apparatus. For example, the Tax Cuts and Jobs Act (TCJA) cut the rate on the first 100,000 gallons of spirits produced by 80%, making enforcement complicated, as different amounts of different types of alcohol (beer, wine, and spirits) are taxed differently.
The tax increase of 1991 is estimated to have saved about 7,000 lives per year after it was enacted by reducing the three primary externalities associated with alcohol consumption: vehicle accidents, violence and non-actuarially fair medical costs (Cook & Durrance, 2011; Looney, 2017). It is estimated that because the real rate of the tax from 1991 has decreased over time, 1,550 additional people died in 2016 as a result of excessive alcohol consumption.
Excessive alcohol consumption affects the drinkers, especially the heaviest drinkers, but also, as a negative externality, adversely affects others in society. When alcohol is involved in a car crash, the other drivers and passengers are affected by alcohol, as well as first responders and the legal and healthcare systems. When alcohol is involved in violent crimes, the victims, law enforcement and the judicial system are adversely impacted. Alcohol creates unnecessary medical costs, through both addiction and the destructive physiological effects of alcohol consumption, creating costs for the healthcare system, first responders and close family and friends.
The total cost to society is substantially higher than the tax rate on alcohol, even accounting for the addition of state and local taxes to Federal taxes (Looney, 2017). An increase in Federal excise taxes on alcohol will be more effective than state or local taxes because Federal taxes reduce geographic variability and prevent producers of alcohol in some regions from gaining a competitive advantage.
Landscape
Federal excise taxes used to be a major source of Federal revenue, dating back to before the individual income tax was in place (Looney, 2017). If the 1951 Federal excise tax rate on alcohol had been adjusted for yearly inflation, it would currently be $95.85/proof gallon, far above the estimated current average rate of $13.50 (Lowry, 2015; Congressional Budget Office, 2018). An exact current rate is impossible to calculate due to the complexities in the tax code, with different types of alcohol taxed at different rates at different levels of production and importation.
In the United States, the vast majority of the drinks consumed are consumed by the people who consume the most, with the top 10 percent of drinkers consuming 73.85 drinks/week (see Exhibit 1) (Ingraham, 2014). 30% of Americans do not consume any alcohol and the next 30% consume less than a drink/week. In fact, it is estimated that if the top ten percent of drinkers drank like the 80th-89th percentile, drink sales would fall by 60%. As a result, any attempt to curb the drinking of this top group of drinkers will be met with resistance by alcohol producers who rely on this group for their revenue. The fact that the top groups drink much more alcohol than lower drinking groups means that any increase to the alcohol excise tax will not affect most Americans and instead fall on the group that is drinking in the most destructive ways and contributing to the negative externalities associated with alcohol consumption.
Another way to evaluate the effect of the tax is to look at burden/year on different groups. Daley et. al (2012) estimate that a $.25 increase per drink tax increase would cost non high risk drinkers (50% of drinkers, which themselves comprise 70% of adults) less than $30/year, meaning that only 35% of adults would pay more than $30/year. A high risk drinker is someone who, in a given month during the year, engages in at least one of the following behaviors: drunk driving, binge drinking, heavy drinking or drinking above dietary guidelines. This is the top group of drinkers and also the behaviors that drive the negative externalities.
Any tax policy designed to discourage a target behavior, or one meant to decrease a negative externality should achieve the following four goals: discourage the excessive consumption of alcohol which leads to the negative externalities, raise revenue for the Federal government, reduce the current complexity in enforcement and not need to be constantly revised by Congress. The amount of revenue raised by the tax is dependent on inflation and the reduction in drinking caused by the increase in prices. It is assumed that the tax on producers is fully passed on to consumers. The increased price will decrease consumption, as alcohol is not perfectly inelastic (Looney, 2017). The decreased consumption reduces the revenue from the tax and must be accounted for.
Options
Option 1 is a $.25 increase in the excise tax per drink produced by producers. Under this policy, only 30% of adults would pay more than $30/year (Daley et. al., 2012). High risk drinkers would see an average decrease in consumption by 48.4 drinks/year, a substantial decrease. The tax would raise an estimated $7.9 billion per year after accounting for that decrease in consumption by consumers. The tax burden would largely fall on men, who account for the majority of high risk drinkers. Although excise taxes can be regressive in nature, the majority of the burden would fall on male drinkers who earn more than $50,000/year. The tax would be regressive if all income groups uniformly purchased alcohol because lower income purchasers would be spending a larger percentage of their income on the tax. In reality, some income groups (in this case higher incomes) purchase alcohol at a higher rate, making the overall effect less regressive. This tax does not reduce the complexity in the tax code, as it maintains all current rates and loopholes before simply raising them all by a set amount. It also maintains inequity by keeping preferential treatment for some drinks and producers.
Option 2 is raising the Federal alcohol excise tax to $16/proof gallon and enforcing it uniformly across all spirits and production and importation levels. Enforcing the tax this way eliminates all inequity and complexity in enforcement by taxing all types of alcohol and all producers and importers equally. Exhibit 2 shows how this change will affect different types of common alcoholic purchases. The increase is not uniform and each common purchase is not uniform because the starting points are uneven and different purchases have different proofs, which is what is being taxed. The tax will raise $68.4 billion from 2020-2028 (see Exhibit 3) and discourage drinking by raising the price for consumers and decrease Federal healthcare spending related to alcohol consumption (Congressional Budget Office, 2018).
Option 3 is raising the tax to $16/proof gallon and indexing the rate to yearly inflation. This option achieves all of the goals of Option 2, decreasing consumption and healthcare spending. This raises more revenue, as inflation reduces the real rate of the tax over time. Exhibit 4 shows the 2020-2028 revenue raised when the tax is indexed to inflation. In 2020, the base year, the amount is the same. Over time, indexing for inflation raises billions of dollars more in revenue (see Exhibit 5) (Congressional Budget Office, 2018).
Recommendation
Option 3 achieves all of the original goals of an excise tax without placing a large burden on most drinkers. 50% of adults who consume alcohol will pay under $10/year under this tax. Past experience with the excise taxes of 1951 and 1991 show that indexing for inflation is necessary to prevent diminishing of the effects from the policy change over time. The tax will raise $82.5 billion dollars from 2020-2028 (Congressional Budget Office, 2018). Although no recommendation is made on how to spend the money raised, it can be used to further combat the negative effects of alcohol consumption. Alcohol is not perfectly inelastic so the tax increase will reduce consumption of alcohol, leading to fewer traffic accidents and other negative effects associated with alcohol consumption, as seen following the 1991 tax increase. Finally, a flat Federal rate will eliminate the complexity seen in the tax code currently and make enforcement easier and more equitable among producers of alcoholic beverages.
Exhibits
Exhibit 1– Drinks consumed per week by decile by American adults
Exhibit 2– Increase in tax on different common types of alcohol sales
| Current | With $16/gallon | Increase | |
| Bottle of spirits | $2.14 | $2.54 | $0.40 |
| Bottle of wine | $0.21 | $0.82 | $0.61 |
| 6 pack of beer | $0.33 | $0.81 | $0.48 |
Exhibit 3– Revenue raised by a $16/proof-gallon tax from 2020-2028 in billions
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Total |
| 5.4 | 7.5 | 7.8 | 7.9 | 7.9 | 8 | 7.9 | 8 | 8.1 | 68.4 |
Exhibit 4 – Revenue raised by a $16/proof-gallon tax indexed to inflation from 2020-2028 in billions
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Total |
| 5.4 | 7.8 | 8.4 | 8.9 | 9.5 | 10 | 10.3 | 10.8 | 11.4 | 82.5 |
Exhibit 5– Additional revenue raised by indexing to inflation 2020-2028 in billions
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Total |
| 0 | 0.3 | 0.6 | 1 | 1.6 | 2 | 2.4 | 2.8 | 3.3 | 14.1 |
References
Congressional Budget Office. (2018, December 13). Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon and Index for Inflation. Retrieved from https://www.cbo.gov/budget-options/2018/54815.
Cook, P. J., & Durrance, C. P. (2011). The virtuous tax: Lifesaving and crime-prevention effects of the 1991 Federal alcohol-tax increase.
Daley, J. I., Stahre, M. A., Chaloupka, F. J., & Naimi, T. S. (2012). The impact of a 25 cent-per-drink alcohol tax increase: Who pays the tab? American Journal of Preventive Medicine, 42(4), 382–389. doi: 10.1016/j.amepre.2011.12.008
Ingraham, C. (2014, September 25). Think you drink a lot? This chart will tell you. The Washington Post. Retrieved from https://www.washingtonpost.com/news/wonk/wp/2014/09/25/think-you-drink-a-lot-this-chart-will-tell-you/
Looney, A. (2017, November 22). Measuring the loss of life from the Senate’s tax cuts for alcohol producers. Retrieved from https://www.brookings.edu/research/measuring-the-loss-of-life-from-the-senates-tax-cuts-for-alcohol-producers/.
Lowry, S. (2015, December 23). Alcohol Excise Taxes: Current Law and Economic Analysis. Retrieved from https://www.everycrsreport.com/files/20151223_R43350_e7722cbb58efb4e2d8b08f5867ff520d34208b9e.pdf.
Tax Policy Center. (2018). What are the major federal excise taxes, and how much money do they raise? Retrieved from https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise.
Tyger, A. (2019, July 31). The proper role of excise taxes. Retrieved from https://taxfoundation.org/federal-excise-taxes-proper-role/.