Do Higher Taxes Reduce Drinking’s Problems?

Like most things, alcohol is susceptible to the law of demand: when the price rises, demand falls. So, given a robust distribution system that keeps market rates for booze pretty steady from state to state, it seems evident that higher taxes should mean lower consumption—and in turn, fewer alcohol-related problems. But does it?

The short answer is yes. The Dude on this subject is one Philip Cook, emeritus at Duke. Cook put out an article in 1982 linking tax levels to alcohol-related health issues, and has been arguing passionately for increasing excise taxes ever since. His opus on the subject is Paying the Tab: The Costs and Benefits of Alcohol Control.

Cook has since been joined by myriad other academic and health professional voices, running similar studies in which tax changes are shown to impact drunk driving, underage drinking, and more of drink’s societal ills. These studies generally look at most of the non-control states over a number of years, note changes in tax rates, and see how those changes affected whatever indicator of misbehavior the authors are addressing. Almost across the board, raising the price by raising taxes reduces drinking problems.

The thing is, especially at the federal level, we don’t really like raising taxes. We famously haven’t raised our country’s largest excise tax (on gasoline) since 1993, and alcohol is in the same boat: it’s been the same since 1991. As the Washington Post puts it,

“Consider this: being a really heavy drinker — a 10-drink-a-day drinker — cost about 45 percent of the average person’s disposable income in 1950. In 2011, you could buy those same 10 daily drinks using only 3 percent of the average disposable income, according to a 2013 analysis published in the American Journal of Preventative Medicine. (…)

Rising incomes and falling prices are the main driver of this trend. But one often-overlooked component is plummeting state and federal excise taxes on alcohol. Since 1951, Congress raised the excise tax on beer and wine exactly once, in the early 1990s. Liquor taxes received two modest bumps over the same period.

Since these taxes are levied by volume, inflation has steadily gnawed away at their real value over the past 60 years. (…) In 1951, the federal excise tax on a standard shot of 80-proof whiskey was about 90 cents in today’s dollars. Today it stands at about 13 cents, a seven-fold decrease. The real federal beer tax has fallen about fivefold over the same period, with a more modest drop for wine.”

Some states have tried to make up that ground, but in general, the impact of taxes on the price of booze has been dropping for decades. The costs associated with excessive drinking have not, leading many to push for raising federal taxes to defray some of that burden on society.

Not everyone, of course, thinks that’s a good idea. The Spirits Council, chief lobbyist for your friendly neighborhood liquor peddler, claims that “responsible consumers of distilled spirits already pay more than their fair share”, and they have a point. The majority of drinkers—those who drink moderately and responsibly—are covering the expenses of the minority who abuse it.  But what’s the alternative? How do you only charge the guilty parties here? Make cirrhosis treatment extra expensive? Steal the allowance of underage drinkers? In all seriousness, every potential solution has enormous negative side effects. Raising the price of my next Manhattan is probably the lesser evil. The caveat here is that, like so many other product-specific taxes and fees, there’s a good case to be made that use of the money ought to be restricted to related programs. When Alaska saw drinking increase after a large tax hike in the early 2000s, critics noted that the budget for alcohol and drug programs “plummeted” the year after the tax took effect. If the justification for high taxes is the societal cost of alcohol, perhaps government should make sure that’s what responsible consumers are helping to alleviate.

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Super Nerdy Side Note!

Saying that tax increases affect consumption is not the same as saying that high-tax states have fewer drinking-associated problems. While I was lit-reviewing this article, I threw together data from the Tax Policy Center and the CDC Prevention Status Reports, among other places, to compare tax burden to drinking-related problems. The graph below shows one measure of a state tax burden (the excise tax rate on spirits in non-Control states) descending from highest to lowest, paired with the Cost of Excessive Drinking per capita, as determined by the CDC. Pretty easy to see that there’s no correlation—there are simply too many other factors at play. You can replace either measure with another proxy and it’s still noise. What Cook et al have shown is simply that, if any of these states raise their taxes, they ought to see that red line drop a bit.