Are US alcohol taxes way too low? They represent only a tenth of the cost incurred to the government

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The US government levies a tax on alcohol in order to both increase revenue and deter excessive drinking. This tax is passed on to consumers as retailers, bars, and restaurants hike the price at the point of sale. A new study, however, found that alcohol taxes are extremely low compared to the cost incurred by excessive alcohol consumption.

Researchers at the Boston University School of Public Health and the University of Illinois found that alcohol taxes account for only one-tenth of alcohol-related costs. Most of this tax is paid by casual drinkers rather than those who drink excessively. These findings make a case for substantially raising alcohol tax across the country in order to pay for the damages of alcohol consumption.

Many might raise an eyebrow while reading this but the truth is that alcohol is a huge public health hazard when it is not consumed in moderation. According to a 2015 study, excessive drinking costs the United States approximately $249 billion, or $2.05 per drink, of which approximately 40% was borne by the federal and state governments.

This is money out of our pockets. Raising alcohol taxes leads to higher prices for drinks, which ultimately reduces excessive alcohol consumption and its related harms (cancer, hypertension, violence, etc.).

There are three types of taxes that may be applied to alcoholic beverages sold in states: specific excise taxes, ad valorem excise taxes, and general sales taxes. 

Specific excise taxes are typically imposed at the wholesale level and are assessed per unit of volume rather than relative to the retail price. For this reason, specific excise taxes can erode over time due to inflation unless they’re increased periodically. Case in point, alcohol-specific excise taxes across all states and all beverage types declined by approximately 30% from 1991 to 2015.

Ad valorem taxes automatically adjust based on changes in the price of alcoholic beverages. However, these price-based taxes may drive consumers toward lower quality beverages or those with higher alcohol content in order to reduce consumers’ tax burden per unit of ethanol.

General sales taxes are also assessed as a percentage of the retail price of alcohol, just like ad valorem excise taxes. However, they are not alcohol specific.

Finally, there are federal-specific excise taxes on alcohol that are applied based on a fixed amount per volume of alcohol at the wholesale price. Federal alcohol excise taxes are identical across all states, unlike state alcohol excise taxes. In 2010, the federal excise tax per standard drink was $0.05 for beer, $0.04 for wine, and $0.16 for distilled spirits.

That sounds like a lot of taxes, but the conclusions of the new study suggest that their levels are inadequate because they don’t nearly cover the costs of excessive drinking.

The researchers collected and analyzed tax data on beer for all 50 states and tax data on wine and distilled spirits for 32 states plus Washington D.C. The taxes were then compared to the state-specific cost of excessive drinking, calculated using a standard cost-of-illness approach, which included lost productivity, medical costs, and legal and criminal justice system costs. 

“The median-weighted total state alcohol taxes per drink across all beverage types in the 32 license states and Washington, D.C., was $0.13 (range: $0.03 [Delaware] to $0.27 [Tennessee]). After also including federal alcohol taxes, the median-weighted total alcohol taxes in states per drink across all beverage types was $0.21 (range: $0.11 [Delaware] to $0.35 [Tennessee]),” the researchers wrote in the Journal of Studies on Alcohol and Drugs.

Meanwhile, the cost of excessive drinking is priced at $2.05 per drink, meaning that taxes covered only one-tenth of the total cost of excessive drinking.

In other words, most of the burden of excessive drinking is covered by all taxpayers and casual drinkers. The difference is raked in as profit by alcohol companies.

“Increasing alcohol taxes could improve public health and reduce the disparity between alcohol-related costs and total alcohol taxes in states. This could also help prevent the reallocation of the societal cost of drinking from those who drink excessively to the general public. Conversely, if specific excise taxes are not increased, these taxes are likely to further erode over time because of inflation, which could result in an even greater disparity between alcohol taxes and alcohol-attributable costs,” the researchers concluded.

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