Deficit hawkery and alcohol taxation

The Simpson-Bowles plan leaves $15 billion of free money on the table by not raising alcohol taxes. In addition to the revenue, higher taxes would improve health and safety and reduce crime.

I haven’t run the numbers carefully, but the back of my envelope tells me that tripling the Federal alcohol tax – still leaving it below Korean War levels in inflation-adjusted terms – would bring in on the order of $15 billion a year in net revenue, after adjusting for the (entirely desirable) reduction in volume.

As Phil Cook points out, moderate taxes on drinking – tripling would put the federal tax at about 30 cents a drink – have almost all of their impact on drinking by heavy drinkers; if you’re having the proverbial “two beers,” tripling the tax adds a negligible 40 cents to your tab. But if you’re soaking heavily, the bill starts to mount.

Teenagers, who on average have less disposable income than adults, would feel the pinch disproportionately; since drinking by teenagers is especially bad for their health, and they’re especially likely to act violently or wreck their cars when drunk, I’d call that a feature, not a bug.

Tripling the alcohol tax would, in addition to the revenue it brought in, reduce violent crime and auto fatalities by something like 5% each: that’s about 800 fewer murders, 10,000 fewer rapes, and 1700 people not killed on the highways. The total impact on health is harder to compute, but heavy drinking kills about 100,000 people a year; if tripling the tax, which would raise the price by about 20%, led to a 10% reduction in volume, that would certainly show up in morbidity and mortality statistics, and in health-care costs.

And yet alcohol taxation never even came up in drafting health-care reform; there was talk of taxing soft drinks, but not beer. And the Simpson-Bowles plan is so focused on inflicting pain (on the non-rich) that it ignores an opportunity to raise revenue in a way that prevents pain.

Most taxation has an over-burden in the form of distorting economic activity. But raising alcohol taxes actually moves us in the direction of economic efficiency. Even ignoring the costs alcohol imposes on the people who drink too much of it and on their families, the external costs of heavy drinking – costs on various public budgets plus losses to individuals as a result of drinking people outside their families – are several times as high as the taxes collected on it. So even in purely free-market terms, alcohol is currently grossly under-taxed; in effect, the rest of us get to subsidize the brewers and their best customers through our health insurance bills, our auto-insurance bills, and our police budgets.

If you’re a pessimist, the current level of alcohol taxation is an outrage. If you’re an optimist, it’s an opportunity for a free lunch. If you’re a “deficit hawk,” you can’t even see it, as you scan the horizon for people to hurt. The Very Serious People really ought to restrict their S&M proclivities to their bedrooms.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

15 thoughts on “Deficit hawkery and alcohol taxation”

  1. Awesome idea, but won't go anywhere. Cause not only do you have producers but you have the side industries of "recovery", social services programs to help "develop awareness" etc. Sin taxes never seem to go very far it seems.

  2. Whatever the benefits, taxing alcohol is political suicide. On Nov 2, Democrat Dan Onorato lost the Pennsylvania Governor's race to Republican Tom Corbett–hardly a surprise given the election results in the rest of the country. What is surprising is that Onorato lost in heavily Democratic Allegheny County 212,115 to 211,466 and Onorato had been Allegheny County Commissioner since 2003 (by way of comparison, though he lost the election for Pennsylvania Senator, Democrat Joe Sestak won in Allegheny County over Republican Pat Toomey 230,934 to 190,572). One of the major issues that killed support for Onorato was his passage of a 10% tax on alcoholic beverages to support the struggling public transportation system in 2007.

  3. The basic objection to tax increases to balance the budget, is that they are likely to simply result in a budget still unbalanced, only at a higher level of spending. The voters, especially Republican voters, want to see some evidence Washington is actually capable of controlling spending, before they give them more money on the premise that it won't be spent.

    I'd say any proposal for a tax increase is a non-starter until some real spending discipline has been demonstrated, and rightfully so. It's not an accident that the only people advocating increased taxes to balance the budget are folks who want a bigger government regardless of whether it's running a deficit. Balancing the budget is just a pretext.

    On the merits of a tax increase on alcohol specifically, wouldn't impact me much, about the only use I have for alcohol is cooking breakfast sausage in beer. But I observe that medical research suggests that moderate alcohol consumption is actually good for you, (Too bad it tastes so bad!) and whose alcohol consumption is most likely to respond to a tax increase?

    That of people who aren't drinking enough.

    Maybe you can figure out a practical way to implement a progressive tax on alcohol consumption?

  4. A progressive tax on alcohol is precisely what Mark wants to avoid! Hit those most impacted by heavy drinking, get them to cut down the most.

    The number of poor drunks passed out in downtown San Francisco makes me think a regressive alcohol tax is desirable.

  5. Brett, you're not reading carefully. Moderate drinkers would pay trivial amounts. (See the Cook article I linked to.) Heavy drinkers, whose drinking imposes costs on the rest of us, would pay almost all of the tax: 80% of the volume of alcohol sold in the U.S. is sold to heavy drinkers. So there would be almost no reduction in healthy drinking, and a big reduction in unhealthy drinking. The only reason to oppose higher alcohol taxes is unreasoning hatred of public spending.

  6. Mark: ¨The Very Serious People really ought to restrict their S&M proclivities to their bedrooms.¨ I get the French baron, but where´s the German one? The whole point is that rich people must not be inconvenienced in any way.

  7. Mark, you're ignoring my (Not entirely serious) point: Whose drinking rate is likely to be more responsive to price? That of addicts, or that of those who aren't particularly committed to drinking? Aren't you just going to reduce drinking by those who aren't over-drinking, while leaving the over-drinkers drunk AND broke?

    Anyway, nice of you to admit that the point of your tax increase is to increase government spending, not reduce the deficit.

  8. "It’s not an accident that the only people advocating increased taxes to balance the budget are folks who want a bigger government regardless of whether it’s running a deficit."

    Right. The people who advocate a bigger government, funding ever increasing amounts of Medicare, regardless of its running a deficit, and who would never fund any of their mandatory increased expenditures via taxation, putting every last bit of it into the deficit, are the ones we should trust.

    Left is Right, Up is Down. It is all so double plus ungood, and it never ends.

  9. Brett, your not entirely serious point has an answer, well known to those who study drug abuse: the consumption of "addicts" is more sensitive to price than the consumption of casual users, because the price of a drug matters more to people who spend most of their income on it than it does to those for whom the cost of drug use is trivial. And no, I don't concede your point at all. Raising alcohol taxes will reduce drug abuse, and I am, therefore, in favor of it. The resulting revenues could be used to lower other taxes or to reduce the deficit, or it could be spent on other urgent public needs. I'm for it in any case. But my point is that, to be against it, you have to so hate public spending that you prefer it to death and disease. Got a mirror?

  10. Mark, if my opposition to tax increases is to be attributed to "unreasoning hatred of public spending", then one must assume that the tax increases are going to be used to increase public spending. If they were used for deficit reduction, they'd have no effect on public spending, and even somebody who hated public spending would have no reason to oppose them.

    My position is quite simple, I suppose you'd say simplistic: Until I've seen some evidence of spending restraint, I'm going to assume that every cent of added revenue will result in added spending. (I think history is on my side in this.) I will view tax increases for deficit reduction as pretextual, until presented with actual evidence that they will result in reduced deficits, rather than the same deficit at higher spending levels.

    Let's see real spending cuts, and then we can talk about increasing taxes. Not before.

  11. Brett seems to have amnesia about the past 10 years, especially the period 2001-2008. One the federal level, at least, the equivalence has been transformed to "every cent of reduced revenue goes directly to a cent of increased spending".

  12. Brett, your arguments in general suffer from severe status quo bias. If you think alcohol taxes don't help reduce drinking, and the money will be misspent, argue that they should be lower. Why is the current specific value the optimal one? Mark's notion that booze taxes should be inflation indexed makes sense to me as a baseline. (similar for other taxes, like gas tax.)

  13. I serious question the health cost savings that would be realized by this. If the morbidity and mortality statistics are truly impacted by this, then you are also increasing health care costs by lengthening lives – the cost of treating a liver disease over 5 years can become the costs of many additional years of life, including things such as assisted living facilities, hip replacements, etc…

    It also impacts the poor disproportionately. The middle class alcoholic can get treatment through their health insurance of just switch to cheaper booze. People who are scraping are less likely to have access to treatment, and are less likely to even be aware that treatment exists. An alcoholic will find the money to pay, and for many that money will come from their family's budget. The fiscal savings behind this are questionable, and from a social policy perspective it is incredibly regressive.

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