Economic Economic Perspectives on Perspectives on Alcohol TaxationAlcohol Taxation

Frank J. ChaloupkaUniversity of Illinois at Chicago and the National Bureau of Economic

Research

and

Michael Grossman, CUNY and NBERHenry Saffer, Kean College and NBERHenry Wechsler, Harvard University

Adit Laixuthai, Chulalongkorn University Rosalie Liccardo Pacula, USD and NBER

Ismail Sirtalan, New York Hospital Assn/NBER

Sara Markowitz, CUNY and NBER

Rationales for Rationales for Alcohol TaxationAlcohol Taxation

• Revenue GenerationRevenue Generation

• Public Health Public Health ImprovementImprovement

• Economic EfficiencyEconomic Efficiency

Revenue Revenue GenerationGeneration

17911791 First federal excise tax: First federal excise tax:9 cents per gallon9 cents per gallon

17941794 “Whiskey Rebellion” “Whiskey Rebellion” response to near tripling of response to near tripling of taxtax

Raised several times during Raised several times during both World Wars, Korean both World Wars, Korean WarWar

19511951 federal taxes for: federal taxes for:• Beer: $9 per barrelBeer: $9 per barrel• Distilled spirits: $10.50 per Distilled spirits: $10.50 per

proof gallonproof gallon• Wine (unfortified): 17 cents Wine (unfortified): 17 cents

per gallonper gallon

More recent increases for More recent increases for deficit reductiondeficit reduction

Current federal taxes:Current federal taxes:

• Beer: $18 per barrelBeer: $18 per barrel• Distilled spirits: $13.50 per Distilled spirits: $13.50 per

proof gallonproof gallon• Wine (unfortified): $1.07 Wine (unfortified): $1.07

per gallonper gallon

Revenue Revenue GenerationGeneration(continued)(continued)

Price Elasticity of Price Elasticity of DemandDemand

• Revenue generating Revenue generating potential of alcohol taxes potential of alcohol taxes depends on price depends on price sensitivity of demand for sensitivity of demand for alcoholic beveragesalcoholic beverages

• Price Elasticity of Demand Price Elasticity of Demand defined as the percentage defined as the percentage change in consumption change in consumption resulting from a one resulting from a one percent increase in pricepercent increase in price

Price Elasticity of Price Elasticity of Demand for AlcoholDemand for Alcohol

• Estimated price elasticities Estimated price elasticities (Leung and Phelps, 1993):(Leung and Phelps, 1993):– Beer: -0.3Beer: -0.3

– Wine: -1.0Wine: -1.0

– Distilled Spirits: -1.5Distilled Spirits: -1.5

– Larger long-run effects of Larger long-run effects of price on addictive price on addictive consumption (Grossman, consumption (Grossman, Chaloupka and Sirtalan, 1998)Chaloupka and Sirtalan, 1998)

Taxing Alcohol to Taxing Alcohol to Improve Public Improve Public

Health Health

• Based on argument that Based on argument that higher alcoholic beverage higher alcoholic beverage taxes reduce morbidity, taxes reduce morbidity, mortality, and other mortality, and other consequences of alcohol use consequences of alcohol use and abuseand abuse

• Large/growing literature from Large/growing literature from economics examining effects economics examining effects on accidents, violence/other on accidents, violence/other crime, health consequences, crime, health consequences, illicit drug use, and moreillicit drug use, and more

Public Health: Public Health: AccidentsAccidents

• Large economics literature Large economics literature on impact of alcohol on impact of alcohol prices and taxes on prices and taxes on drinking and driving and drinking and driving and alcohol-related motor alcohol-related motor vehicle accidentsvehicle accidents

• 10 percent increase in 10 percent increase in price would reduce price would reduce probability of drinking and probability of drinking and driving by 7.4 percent driving by 7.4 percent (males) and 8.1 percent (males) and 8.1 percent (females). Larger impact (females). Larger impact on underage drinkers on underage drinkers (Kenkel, 1993).(Kenkel, 1993).

Public Health: Public Health: Accidents Accidents

(continued)(continued)

• Policy indexing federal beer Policy indexing federal beer tax to inflation since 1951 tax to inflation since 1951 would reduce total annual would reduce total annual motor vehicle accident motor vehicle accident fatalities by 11.5 percent fatalities by 11.5 percent (32.1 percent for 18-20 year (32.1 percent for 18-20 year olds) (Chaloupka, Saffer and olds) (Chaloupka, Saffer and Grossman, 1993)Grossman, 1993)

• Youth non-fatal motor vehicle Youth non-fatal motor vehicle accidents inversely related to accidents inversely related to beer taxes (Chaloupka and beer taxes (Chaloupka and Laixuthai, 1997)Laixuthai, 1997)

Public Health: Public Health: AccidentsAccidents

Less extensive literature Less extensive literature suggests higher alcoholic suggests higher alcoholic beverage taxes would beverage taxes would reduce injuries and deaths reduce injuries and deaths in other accidents:in other accidents:

Example:Example:25 cent increase in 1992 25 cent increase in 1992 federal beer tax would federal beer tax would have reduced work-loss have reduced work-loss days from non-fatal days from non-fatal workplace accidents by 4.6 workplace accidents by 4.6 million and lost million and lost productivity by $491 productivity by $491 million (Oshfeldt and million (Oshfeldt and Morrisey, 1997).Morrisey, 1997).

Public Health: Public Health: ViolenceViolence

• Large literature linking Large literature linking alcohol abuse to violencealcohol abuse to violence

• Early estimates suggest Early estimates suggest higher taxes would reduce higher taxes would reduce violent crime (Cook and violent crime (Cook and Moore, 1993)Moore, 1993)

• Doubling federal beer tax Doubling federal beer tax would reduce homicides by would reduce homicides by 3 percent, rapes by 2 3 percent, rapes by 2 percent, robberies by 4.7 percent, robberies by 4.7 percent, and total crime by percent, and total crime by 1.3 percent (Chaloupka and 1.3 percent (Chaloupka and Saffer, 1992)Saffer, 1992)

Public Health: Public Health: ViolenceViolence

(continued)(continued)• 10 percent rise in federal 10 percent rise in federal

beer tax would reduce beer tax would reduce probability of child abuse by probability of child abuse by 2.2 percent and all violence 2.2 percent and all violence towards children by 1.1 towards children by 1.1 percent, or 1.1 million percent, or 1.1 million (Markowitz and Grossman, (Markowitz and Grossman, 1997)1997)

• Higher beer prices would Higher beer prices would reduce violence and other reduce violence and other problem behaviors on problem behaviors on college campuses college campuses (Markowitz and Grossman, (Markowitz and Grossman, 1998)1998)

Public Health: Liver Public Health: Liver Cirrhosis and Other Cirrhosis and Other

Alcohol-Related Alcohol-Related DiseasesDiseases

• $1 increase in distilled spirits $1 increase in distilled spirits tax would lower cirrhosis tax would lower cirrhosis deaths by 5.4 to 10.8 percent deaths by 5.4 to 10.8 percent (Cook and Tauchen, 1982)(Cook and Tauchen, 1982)

• Long-run price elasticity of Long-run price elasticity of cirrhosis deaths -1.3 cirrhosis deaths -1.3 (Chaloupka, Grossman, (Chaloupka, Grossman, Becker and Murphy, 1992)Becker and Murphy, 1992)

• Higher taxes reduce other Higher taxes reduce other alcohol related deaths alcohol related deaths (Sloan, Reilly and Schenzler, (Sloan, Reilly and Schenzler, 19941994

Public Health:Public Health:Polysubstance UsePolysubstance Use

• Higher beer taxes reduce Higher beer taxes reduce the likelihood of marijuana the likelihood of marijuana use among young adults use among young adults (Pacula, 1998) and adults (Pacula, 1998) and adults (Chaloupka and Saffer, (Chaloupka and Saffer, 1997). They also reduce 1997). They also reduce the current likelihood of the current likelihood of cocaine and heroin use cocaine and heroin use (Chaloupka and Saffer, (Chaloupka and Saffer, 1997).1997).

• Recent evidence suggests Recent evidence suggests that higher beer taxes may that higher beer taxes may reduce future marijuana reduce future marijuana use as well (Pacula, 1998).use as well (Pacula, 1998).

Economic Economic Efficiency and Efficiency and

Alcohol TaxationAlcohol Taxation

• Alcoholic beverage taxes can Alcoholic beverage taxes can correct for the external costs correct for the external costs associated with alcohol associated with alcohol consumption (in absence of taxes, consumption (in absence of taxes, prices understate the social costs of prices understate the social costs of alcohol use)alcohol use)

• Complicated in the case of alcohol Complicated in the case of alcohol since not all drinking results in since not all drinking results in external costs (external benefits of external costs (external benefits of moderate drinking?)moderate drinking?)

Economic Economic EfficiencyEfficiency

and Alcohol and Alcohol TaxationTaxation

• ““Optimal” (economically Optimal” (economically efficient) tax depends on:efficient) tax depends on:– magnitude of social costs of magnitude of social costs of

alcohol use and abusealcohol use and abuse

– relative numbers of abusive relative numbers of abusive and non-abusive drinkersand non-abusive drinkers

– relative price relative price responsiveness of abusive responsiveness of abusive and non-abusive drinkersand non-abusive drinkers

(Pogue and Sgontz, 1989)(Pogue and Sgontz, 1989)

Economic Economic EfficiencyEfficiency

• Pogue and Sgontz (1989) Pogue and Sgontz (1989) estimate that 1983 alcohol taxes estimate that 1983 alcohol taxes were about half the efficient level were about half the efficient level of these taxes based on their of these taxes based on their model/”best guess” using a wide model/”best guess” using a wide range of estimates.range of estimates.

• Manning, et al. (1989) estimate Manning, et al. (1989) estimate on optimal tax of 48 cents per on optimal tax of 48 cents per ounce in 1985 (compared to ounce in 1985 (compared to average tax of 23 cents per oz.)average tax of 23 cents per oz.)

• Kenkel (1996) estimates optimal Kenkel (1996) estimates optimal tax of about 106 percent of net of tax of about 106 percent of net of tax pricetax price

Economic Economic EfficiencyEfficiency

• Saffer and Chaloupka (1994) Saffer and Chaloupka (1994) extend the Pogue and Sgontz extend the Pogue and Sgontz approach to examine the approach to examine the relative taxation of distilled relative taxation of distilled spirits, wine, and beer.spirits, wine, and beer.

• Estimate weighted average Estimate weighted average optimal tax 2.3 times the optimal tax 2.3 times the 1991 level1991 level

• Estimates support tax system Estimates support tax system closer to equalization across closer to equalization across all alcoholic beveragesall alcoholic beverages

SummarySummary• Increases in alcoholic beverage Increases in alcoholic beverage

taxes and prices lead to significant taxes and prices lead to significant reductions in drinkingreductions in drinking

• Increases in alcohol taxes will Increases in alcohol taxes will generate significant new tax generate significant new tax revenuesrevenues

• Long-run effects of price on alcohol Long-run effects of price on alcohol demand larger than short-run demand larger than short-run effectseffects

• Youth and young adults more Youth and young adults more responsive to price changes than responsive to price changes than adultsadults

SummarySummary

• Increases in alcoholic Increases in alcoholic beverage taxes and prices beverage taxes and prices reduce many consequences reduce many consequences of alcohol use and abuse, of alcohol use and abuse, including accidents, violence including accidents, violence and other crime, alcohol-and other crime, alcohol-related morbidity and related morbidity and mortality, illicit drug use, and mortality, illicit drug use, and moremore

• Estimates of optimal Estimates of optimal alcoholic beverage taxes alcoholic beverage taxes well above the current levels well above the current levels of these taxesof these taxes

Policy OptionsPolicy Options

• Economic and Public Health Economic and Public Health arguments support:arguments support:

– significant increases in significant increases in alcoholic beverage tax ratesalcoholic beverage tax rates

– indexing of alcohol taxes to indexing of alcohol taxes to the rate of inflationthe rate of inflation

– equalization of taxes on equalization of taxes on alcohol contained in different alcohol contained in different alcoholic beveragesalcoholic beverages

– tax increases as part of a tax increases as part of a comprehensive program comprehensive program aimed at reducing alcohol aimed at reducing alcohol use and abuseuse and abuse