Today, a new study was released comparing state-level alcohol excise taxes with the costs of excessive drinking. According to the authors, excise taxes do not cover the costs of excessive drinking, and states should consider raising excise tax rates in the name of “public health.” But taxing alcohol isn’t nearly that easy.
Excise taxes are an important tax in a policymakers’ toolkit. Traditionally, legislators use excise taxes to correct some sort of societal harm, known as an externality. Sometimes, the price of a transaction doesn’t include all of the actual costs, such as pollution. By raising the cost of the transaction through a tax, producers and consumers will theoretically adjust their behavior, reducing social harm.
In this case, alcohol consumption can lead to negative outcomes, such as increased health expenditures and drunk driving, that aren’t borne entirely by the drinker or the producer. The rest of us pay the costs. By assessing an excise tax, individuals should in theory reduce their alcohol consumption, reducing the bad effects and costs imposed on others. That’s why some see raising alcohol excise taxes as a good idea.
The study hits on an important point, however. Not all alcohol drinkers pose the same risk to society. A person consuming the occasional glass of wine doesn’t have nearly the same cost as a binge drinker. In fact, almost 80 percent of the costs of alcohol consumption come from binge drinking.
This presents a challenge to policymakers. Casual drinkers are more price sensitive than those who engage in risky behavior. Binge drinkers are less likely to decrease their consumption as alcohol excise taxes are increased. They might shift their consumption to lower-cost alcoholic beverages rather than decreasing the amount they drink. Raising the excise tax might not be that effective of a solution in that case, since the higher tax does more to punish casual drinkers who aren’t engaging in risky behaviors.
Other studies have illustrated this point. One previous study showed that raising the state-level excise tax in Illinois was ineffective in decreasing drunk driving. Heavy drinkers still drank. In fact, they might actually driven further distances to neighboring states to avoid the tax’s reach.
Finally, while the new study doesn’t mention this explicitly, but it’s also important to consider what the revenue from alcohol excise taxes are used for. Politicians often claim that added alcohol revenue will fund drunk driving prevention programs, educate teenagers about the risks of binge drinking, or fund alcohol cessation programs, among other ideas.
That doesn’t always happen in practice, however. Policymakers too often view excise taxes as an easy path to higher overall tax burdens. They claim it is for “public health,” but then pocket the revenue to spend on other pet projects. Politicians will frequently spend the money they expect to raise from excise taxes - with disastrous results for taxpayers when those projections don’t materialize.
Lawmakers are often tempted by the siren song of a tax hike for a good cause, but the reality is never as clean as the theory.