Tax Analysts Blog

It's 5 O'Clock Somewhere for Alcohol Taxes

Posted on Apr 22, 2015

Taxing booze doesn't get much attention in the United States. Recently, a legislator from a very low-alcohol-tax state asked me why the nation doesn't tax alcohol more heavily. I will note that this legislator is looking for revenue and not dreaming of idyllic tax policies.

Here is my take on state alcohol taxes. I am a purist who believes excise taxes should be levied only to pay for externalities. And there are externalities associated with drinking -- society spends more money on healthcare and public safety because of alcohol. I don't know the societal costs of drinking and thus cannot judge whether alcohol-related health and public safety expenditures are more than the $8 billion a year the states collect in taxes. If they are, there is an argument for higher taxes on alcohol. That is the opposite of cigarette taxes, which I am pretty sure raise more revenue than smoking-related healthcare costs. It is also the opposite of marijuana taxes, which are probably 90 percent more than the cost of externalities associated with getting high.

Alcohol taxes are relatively low on average. Historically, the Bible Belt and tourist destinations had the highest taxes. The former taxed alcohol because it frowned on imbibing. The latter merely wanted to export tax burdens. Neither are good rationales for high taxes. But even in those states, the burdens have been modest. That is in part because culturally, we do not view alcohol with the same disdain that we view cigarettes. For most people, having a beer at a ballgame or a glass of wine with dinner is no big deal. In part, the relatively low taxes are a leftover from Prohibition. We tried to ban booze and failed because people like to drink. Politicians recognize that. The other complicating factor is that 17 states operate liquor stores and have a monopoly on all sales. That is awful because it results in much higher prices, which essentially amounts to a tax.

In the last couple of years, four states (Mississippi, Montana, Utah, and Vermont) raised taxes on liquor, four (Arkansas, Kentucky, North Carolina, and the District of Columbia) raised taxes on beer, and two (Kentucky and North Carolina) increased taxes on wine. Kentucky, by the way, has the highest wine tax in the country because a certain industry would rather you drink bourbon.

There are more proposals every year to increase alcohol taxes. These proposals are driven by revenue needs and not nannyism. Should states raise alcohol taxes? If we can determine that the societal costs of alcohol use exceed the current tax revenue, the answer is probably yes. But alcohol taxes should mirror the externalities and not be used to pay for anything you might think is worthy of my money.

Here's why I don't like alcohol taxes. First, they represent a government intrusion into my life. I do not want to be lectured through the tax system about what I drink. And if you aren't going to tie the tax to externalities, you have no claim to levy a special tax on my consumption. Second, alcohol taxes are decidedly regressive. Poor people pay more than wealthy folks. Regressive taxes are terrible. The poor should not pay relatively more than the rich. So if you're concerned about income inequality, you should approach all excises with great caution.

This is an excerpt of an article that appeared in State Tax Notes.

Read Comments (2)

emsig beobachterApr 21, 2015

David: I detect a bit of contradictory policy prescriptions in your post.
First, you opine that special excise taxes should be imposed to mitigate
negative externalities. Professors Ramsay, Pigou, Mirrlees, and Diamond salute
you. Second, you abhor regressive taxation -- lower income drinkers pay more
alcoholic beverage excise taxes relative to their income and/or wealth than do
more well-to-do drinkers. Good tax policy would not take cognizance of the
economic status of the generator of negative externalities. There are other
methods (income/wealth transfers, for example) to reduce the regressivity of
the excise tax on alcoholic beverages.

If the combination of higher excise taxes and income/wealth transfers resulted
in lower income consumers of alcoholic beverages switching from drinking rotgut
whiskey to a better grade of whiskey that may be considered a positive
unintended consequence of raising the tax on alcoholic beverages.

Affectionately yours.
Emsig Beobachter
A frequent thorn in your side.

david brunoriApr 23, 2015

Emsig, What I was trying to say is that I recognize the regressivity of alcohol
taxes which is why they should be imposed judiciously. That is, they should
only be imposed to cover known externalities and not for general fund purposes.
So I agree, if the poor are causing the externalities swilling their cheap
beer, they should pay. And if they pay more (because they are creating the
externalities) so be it.

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