THIS TAX'S FOR YOU: THE CASE FOR HIGHER BEER TAXES

THIS TAX’S FOR YOU: THE CASE FOR HIGHER BEER TAXES PHILIP J. COOK* & MICHAEL 1. MOORE**

INTRODUCTION

During the early 1970s 29 states low- ered their drinking age. Eighteen-year- olds had won the right to vote (with the adoption of the 26th Amendment in 1970) and were being drafted to fight in Viet Nam; depriving them of adult status with respect to alcohol became politi- cally untenable. At the time there was little concern that a lower legal age would induce an increase in alcohol abuse, since the minimum age laws ap- peared largely ineffective. Yet as it turned out, lowering the drinking age did lead to an increase in traffic fatalities. As the evidence accumulated, a number of state legislatures reversed the earlier reduction, and in 1984, Congress mandated that a// states ban sales of alcoholic beverages to those under 21.

This “experiment” with lowering the minimum drinking age taught us that youthful drinking patterns could be modified through legal restrictions on alcohol availability. This result was a chal-

‘Terry Sanford lnstltute of Public Policy, Duke Unwerslty, Dur-

ham, NC 27708 l *Fuqua School of Business, Duke Unwersity, Durham, NC 27708

lenge to the supposed lesson of Prohibi- tion, that it was futile to “legislate morality.” But while legislatures em- braced the new view of minimum age legislation, there has been little success in launching a broader effort to restrict availability. In particular, Congress and state legislatures have been slow to raise alcohol excise taxes, and the real value of these taxes declined markedly during the inflation of the 1970s and 1980s.

In this paper, we review some of the evidence that alcoholic beverage prices influence the prevalence and social costs of alcohol abuse. We focus on youths since it is this group that is most prone to abusing alcohol and that suffers a disproportionate share of the adverse consequences of abuse. Since most youthful alcohol consumption is in the form of beer, our particular concern is documenting the effects of raising the federal and state beer excise taxes.

The next section sets the stage by de- scribing the excise tax structure and re- viewing the normative standards by which to judge the appropriate magnitudes for such taxes. A central issue is the extent to which higher alcohol prices will curtail alcohol abuse and its costly

consequences. We begin our analysis of this matter by presenting new estimates (based on the Nattonal Longitudinal Sur- vey of Youth) of the effects of beer taxes and minimurn age laws on youthful drinking. Our results tend to confirm those from a handful of other studies utilizing microdata indicating the importance of alcohol availability in determin- ing the overall quantity and pattern of youthful drinking.

We then review the evidence that increases in the tax and minimum age reduce youthful traffic fatalities, crime rates, and school dropout rates. It appears that increasing beer taxes would ameliorate rhese social problems while raising government revenue, but there remain potentially important objections, which we aiscuss in the subsequent section. The most widely voiced objection is that the beer tax is regressive. We con- clude by summing up the case for raising the federal tax on beer.

EXCISE TAX RATES, AND REVENUES

The federal excise on spirits stands at $13.50 per proof gallon,’ whereas beer is taxed at $18 per 31-gallon barrel and table wine at $1.07 per gallon. Since it is their ethanol content that justifies taxing these beverages more heavily than, say, soda pop, it is of interest to calcu- late the average tax per ounce of ethanol frorn each beverage type. This works out to $0.07 for wine, $0.10 for beer, and $0 21 for spirits. Thus, the tax on alcohol in one form, distilled spirits, is more than twice as high as the tax on alcohol in other forms. Although this differential carries the weight of tradition, it is not justified by arguments based on public health c:oncerns or neg- (ative externalities (Cook and Moore, 1993~; Saffer and Chaloupka, 1994).

Maintaining the redI value of the excise tax rates requires tihat their nominal

value be increased witq inflation. How- ever, Congress took n

3

action to change alcohol excise taxes du ing the period 195’1-90, except for a Ismall increase in the liquor tax in 1985. was a result of inflation during this peri 0 d, by 1990 the federal excise tax rates were only about 20 percent of their real value four de- cades earlier. The tax iicreases imple- mented in January 19911 temporarily reversed this long-term dkcline:’ the real value of the federal liquor tax was re- stored to its 1989 valu and the beer

l! tax to its 1978 value. he wine tax increase was more than large enough to restore its 1951 value. ~

The ‘state excise taxes h ave also declined in real value over the I st several de- cades. For example, av rage state excise taxes on both beer ancj wine increased

between 1966 and 1979 (to $0.22 per gallon for beer and $0.168 per gallon for wine), but the real valu of these taxes decliiqed by over 50 pe cent during this

P period (Center for Scie ice in the Public interest, 1990, p. 6).

The decline in the valu of excise tax e rates has contributed tc/ a long-term decline in tile prices of al$oholic beverages relative to other goods ,and services. The ratio of alcoholic bever ‘ge prices to the

1 CPI clropped 28 percen between 1967 and 1982, and has bee roughly con- stant since then. Liquor prices dropped 50 plercent, and beer a I d wine declined about 25 percent during this period (Cook and Moore, 1993c).

In the quest for increased federal revenues in recent years, the possibility of a dramatic increase in thq alcohol excise tax rates has been widqly discussed. In 1993, these taxes gene ated $7.6 billion, somewhat less than on B percent of total federal revenues. A recqnt Congressional Budget Office report prbposes to raise rates and equalize the ethanol at $0.25 per

560

TAXING UNHEALTHY BEHAVIOR

proposal, the tax on a six-pack would increase from $0.33 to $0.81, whereas the tax on a bottle of wine would go from $0.21 to $0.70.3 This change is projected to increase federal revenue by $4.6 billion per year (Congressional Bud- get Office, 1994).

There are two justifications for such a tax increase in addition to historical precedent and the need for increased federal revenues. The first justification is to make consumers pay the full social costs of producing and consuming alcoholic beverages. The second justification for raising taxes is that the resulting increase in prices would deter alcohol abuse.

Fairness

The first principle, that the “drinker should pay” the full social cost, can be developed either in terms of fairness or efficiency. The fairness of raising the tax has been suggested by, among others, Surgeon General C. Everett Koop, who referred to the alcohol excise tax as a “user fee” (CSPI, 1990). The notion is that heavy drinkers claim a disproportionate share of government expenditures on medical care, long-term care, and criminal justice services (Rice et al., 1990), so it seems appropriate that heavy drinkers also contribute more tax revenues than abstainers and light drinkers.4 Excise taxes on alcoholic beverages are the obvious device to accomplish this purpose.

The drinker-should-pay principle can be extended to include external costs other than those engendered through government programs, most importantly the costs stemming from alcohol-related traffic accidents that are borne by inno- cent victims and by anyone purchasing auto insurance. But for nongovernmental costs, the fairness argument is somewhat weakened by the fact that the rev-

enues are not used to who bear the costs.

compensate those

Willard Manning and his associates (199 1) developed a comprehensive estimate of the external costs of alcohol abuse. They concluded that the present value (using a five percent discount rate) of external costs per ounce of ethanol consumed was about $0.48, double the average state and federal tax per ounce at the time they did the study. More recent estimates suggest that the true cost may be higher still. A careful study of alcohol-involved crashes by Miller and Blincoe (1994) estimates that “the rest of society collectrvely pays $0.63 in crash costs each time someone takes a drink.” Equivalently, for each ounce of ethanol the external cost is $1.38. This figure was calculated by converting to a dollar metric the 8,500 deaths, 2 1,000 perma- nent disabilities, and 605,000 less- serious injuries that resulted from accidents involving a drunk driver, excluding injuries to the drunk drivers themselves.

Efficiency

The argument that the drinker should pay as a matter of fairness holds some appeal, but economists are more com- fortable with the efficiency argument for raising taxes. Given negative externalities in consumption, some people will drink more than is efficient, in the sense that at the margin their drinks have less value (to them) than they cost the public. The Pigovian “corrective” tax has the effect of raising the price to the level that reflects the social costs of an additional drink. The total revenue generated by a Pigovian tax may well be greater than the total external cost, because it should reflect the external cost of the marginal drink rather than of the average (inframarginal) drink.

The application of the corrective tax principle to drinking has an obvious dif- ficulty: unlike the tax rate, the external

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cost of a drink varies depending on the characteristrcs of the drinker, the time and place of consumption, and how many drinks he has consumed already. Peter Diamond (1974) demonstrated that when social costs differ with circumstances of consumptron, then the value of that uniform tax which maximizes social welfare (under certain assurnptions), is equal to a weighted average of the marginal external costs. Pogue and Sgontz (1989) have applied this theory to the case of alcoholic beverages. They estimated that in 1983 the actual excise taxes were about half of the optimal level.’

Another sort of efficiency argument for higher taxes rests on the presurnption that alcohol is a complement to leisure, and that leisure tends to be underpriced as a result of income taxes and government income maintenance programs. Hence, there may be distortion in such choices as how much to work, how much effort to expend while working, and how much to invest in education and training (Rosen, 1980). One ap- proach to correcting for the disincentive effects of income taxation is to impose special taxes on c:ommodities that are complements to leisure and substitutes for investment in human capital (Corlett and Hague, 1953; Slemrod, 1990, p. 159). Clearly, alcohol is one such com- modity. Indeed, ii has long been be- lieved that the ready availability of alcohol reduces effective labor supply in various ways--many business leaders supported Prohibition for just that rea- son (Fisher, 1926; Cook, 1991). So, special alcohol taxes can be justified as a corrective device for incentive problems caused by other taxes, as well as a correction for costly externalities.6

The magnitude of the social losses engendered by underpricing alcoholic beverages depends on the degree to which alcohol abuse is responsive to price. The

Pigovian correction is Iefficiency enhanc- ing only to the extent that increasing the price reduces highway fatalities and other social costs. In this respect, the fairness and efficiency bases for making the drinker pay lead to somewhat different conclusions: the f irness argument for higher taxes is ba $ ed on the principle that the drinker should compensate society for the external damage his drinking does, whereas the efficiency argument is concerrled with limiting the amount of that damage.

Outside of the realm of economics, the central normative issue is whether the negative consequenceb of alcohol abuse can be curtailed by hibher prices. In the public health tradition; the objective of intervention is to redulce mortality and morbidity (Cook, 1991). To the extent that alcohol beverage ,taxes are effective in this regard, no further justification is needed ’

Both with respect to efficiency and to public health, then, t ‘e case for excise

1 taxes on alcoholic bev rages is stronger if we can demonstrate that they reduce alcohol abuse rather than simply chang. ing the incidence of a(cohol-related costs. The accumulating evidence speaks quite strongly on this matter.

EFFECTS OF TAX ON YOUTHFUL DRIN

The argument that alcohol taxes are important instruments for controlling alcohol abuse begins withy the evidence demonstrating that the quantity of ethanol consumed is i

f fluenced by alco-

holic beverage prices. Support for this result requires more than simply show- ing that the demand ‘urve for alcoholic beverages slopes dow

1 Faced with a

tax-induced increase i prices, the com- mitted drinker could maintain her ethanol consumption by switching to cheaper brands of her’ favorite beverage

562

I TAXING UNHEALTHY BEHAVIOR

(Budweiser for Samuel Adams), or substituting other types of alcoholic beverage that offer more ethanol per dollar (malt liquor for beer), or by substituting consumption at home for drinking in bars and restaurants. But a variety of econometric studies demonstrate that the quantity of ethanol consumed is responsive to beverage prices. Others have reviewed this literature (Leung and Phelps, 1993). Our interest here focuses on drinking by youths, the group that has the highest rate of alcohol abuse and is most at risk for the negative consequences of abuse, including traffic accidents, violent crime, and reduced accumulation of human capital.

Several published studies have made use of microdata to estimate the effects of alcohol control measures on youthful drinking. These provide consistent evidence that whether youths drink, and how much they consume if they do drink, are influenced by both alcohol beverage prices and the minimum drinking age. Here we report a new set of estimates based on the National Longitu- dinal Survey of Youth (NLSY) for 1984. One advantage of these data relative to those employed in the previous studies is that the drinking items are more de- tailed.’ Our results are qualitatively similar to those in the earlier studies.

The NLSY is a national probability sample of young people age 14 to 2 1 as of January 1, 1979. This survey is managed by the Center for Human Resources Re- search of The Ohio State University, and conducted by the National Opinion Re- search Center. First interviews were conducted in early 1979, and reinterviews have occurred annually since then. The core questions in these interviews concern the youths’ income and assets, human capital, and family formation. De- tailed questions about drinking have been asked in a number of years. In this report we make use of the items listed

in Table 1: whether the respondent consumed any alcohol during the 30 days prior to the interview (DRINKER); the number of drinks of alcohol consumed in the 30 days prior to the interview (DRINKS PER MONTH, or DPM); and whether the respondent consumed six or more drinks on at least four occasions in the previous month (BINGE).’

The unit of account for the DPM variable is the “drink.” The NLSY item does not define a drink for respondents, but there is a reasonable presumption that they will be guided by the definitions that are standard for our culture: a “drink” of beer is 12 ounces, for wine about four ounces, and for liquor one ounce. Combining these three types of alcoholic beverage into a single total makes sense because each of the three standard drinks contains approximately the same quantity of ethanol, half an ounce.”

Self reports of alcohol consumption tend to understate actual consumption. Com- parisons of self-reported drinking with sales data suggest that such surveys cap- ture roughly 40 to 60 percent of actual consumption (Midanik, 1982; Gieseman, 1987). Respondents underreport their drinking, and supposedly representative samples may in fact tend to underrepre- sent the heaviest drinkers (Polich and Orvis, 1979). However, we and other in- vestigators have found a remarkable degree of internal consistency in respondents’ answers in the NLSY. Furthermore, the NLSY estimates are in line with estimates from the well-known annual survey of high school seniors conducted by the University of Michigan, Monitoring the Future (Cook, Moore, and Pacula, 1993). We proceed on the implicit assumption that the errors in measurement are not correlated with the beer tax or the minimum drinking age.

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TABLE 1 DESCRIPTIVE STATISTICS FOR VARIABLES IN ALCOHOL DEMAND EQUATION

Variable Sample Males Females Combined Definition

Drinker YO”W 0.74 0.59 (0.44 (0.49)

0.66 (0.47)

drinking d.v.: 1 if youth re- ports1 having consumed alcohol at any time in the past month; 0 otherwise

old

young

old

young

0.79 0.60 0.69 (0.40) (0.49) (0.46)

20.53 (36.73)

18.15 (32.49)

0.15 (0.36)

30.13 11.32 (44.08) (24.64)

numberi of drinks of beer, wine,1 and liquor consumed in prdvious 30 days

DPM

28.29 10.17 (40.12) (21.79)

Frequent drunk

0.23 0.07 (0.42) (0.26)

d.v.: 1 if youth re-

old 0.20 0.05 (0.40) (0.22)

0.12 (0.32 I

0.52 (0.55)

Beer tax, 1984

0.49 0.51 (0.54) (0.54)

state e 4 cise tax per case of 24 12-02 cans of beer (Source: Brew&s Almanac)

d.v.: 1 if youth was legal to drinkibeer at time of 1984 intediew, 0 otherwise

0.77 0.79 (0.42) (0.40)

Legal status

young 0.78 (0.41)

Sample Size 2444 2547 Young N= 4991

N= 1151 1462 2613

NLSY co ort age 19-22 at time of 19 t 4 interview

Old

Note: d.v. refers to dummy variables.

We regressed each of the three drinking variables on a set of variables that are predetermined or exogenous relative to the youths’ drinking choices. These include dummy variables indicating the respondents’ ethnic background, race, sex, parents’ education, and childhood reli- gion, as well as a covariate for the number of siblings. There are two alcohol control variables--legal drinking status (a dummy variable indicating whether the respondent is old enough to be sold beer legally) and state beer tax (for 24 12-ounce containers). Table 1 provides

summary information on the samples and key variables.

The beer tax serves as an indicator of in-

terstate differences in Ialcoholic beverage prices that is particula$y relevant to youths. In 1984, 63 percent of all drinks consumlzd by youths qged 19 to 22 were in the form of b?er.” Translation of state beer taxes into state alcoholic beverage prices is mediated by market conditions, and by then excise tax rates on wine and liquor.”

Table 2 reports the re$ression estimates of coefficients for the ~beer tax and minimum age. There are three sets of results, one tor each deqendent variable. We estirnate the DPM equations for just that subsample of respondents who report consuming at lea$t one drink in the previous month. The dRlNKER and


TABLE 2 ALCOHOL DEMAND EQUATIONS, 1984

NLSY EXTRACT OF COEFFICIENT ESTIMATES FOR ALCOHOL CONTROL VARIABLES

SHORT AND LONG FORMS

Coefficients for In DPMIDPM > 0 Beer Tax

Men Women Combined

Young-short long

Old-short long

-0.14ga -0.140b -0.14sa -0.192” -0.128 -0.156”

-0.140a -0.221 b -0.177b -0.171 -0.18gb -0.120

Legal Status

Men Women Combined

Young-short long

0.145 0.090 0.157 0.083

Coefficients for PR (DPM > 0) Logits Beer Tax

0.12Sb 0.12gb

Men Women Combined

Young-short long

Old-short long

-0.140 -0.253a -0.195” -0.161 -0.330a -0.24ga

-0.151 -0.319” -0.238b -0.014 -0.304b -0.250b

Legal Status

Men Women Combined

Young-short long

0.019 0.070 0.109 0.075

Coefficients for PR (Drunk) Logits Beer Tax

0.040 0.094

Men Women Combined

Young-short long

Old-short long

-0.178 -0.102 -0.156 -0.25Sb -0.115 -0.178

-0.112 - 1 .08Sa -0.388b -0.319 -0.95sb

Legal Status

Men Women Combined

Young-short 0.170 0.011 0.130 long 0.183 -0.016 0.124

%tatistically bStatistically

significant, 0.01 confidence significant, 0.05 confidence

level, one-tailed test. level, two-tailed test.

BINGE equations are estimated by logit analysis using the complete sample. The table reports separate sets of results for a younger cohort (aged 19 to 22 in 1984) and an older cohort (aged 25 to 26 in that year).

The results can be briefly summarized. All coefficients are of the expected sign,

and with a few exceptions, are significantly different from zero at the five percent level. The respondent’s legal status appears to have little effect on whether they drink, but a significant effect on how much they drink if they do. A higher beer tax is associated with lower participation rates and a reduction in monthly drinking by those who drink.

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In particular, a tax increase of $0.01 per 12-ounce can13 is associated with a reduction in consumption by drinkers of 3.4 percent, and with a reduction in the probability of drinking by 2.6 percent. I4

With respect to the BINGE variable, the results are somewhat erratic. The beer tax appears to have a strong effect on the likelihood that women in the older cohort will participate in binges, whereas for other groups the effect is modest and of marginal statistical significance.“’

This analysis of the NL.SY data confirms the general conclusion of other studies of youthful drinking. Raising the tax on beer causes some youths to abstain and others to cut back on their ethanol consumption. Therefore, it is plausible that the beer tax is an effective instrument in reducing the negative consequences of youthful alcohol abuse.16 The next section reviews the clirect evidence on this matter.

TAXES AND CONSEQUENCES

A number of studies in recent years have reported direct evidence that alcohol prices and tax rates matter in controlling abuse. In this section, we briefly review findings with respect to highway fatalities, violence rates, and schooling, with focus on youths.

High way Fatalities

Beginning with Cook (1981), there has been a serves of studies analyzing state- level data on traffic fatality rates to de- termine the effect of changes in state alcohol tax rates. Saffer and Grossman (1987), Evans, Neville, and Graham (1991), and Chaloupka, Saffer, and Grossman (1993) each used a multi-year panel of state cross sections to this purpose, and each found that the tax on beer had a significant influence on fatality rates. Based on these studies it appears that the tax elasttcity of the fatal-

Ity rate is about -0.10 overall, and -0 20 for youths aged 18 to 20.” Cha- loupka and his colleagues simulate the effect of the doubling in the federal tax on beer enacted in 1 that it would save “,

90; they predict 17 4 lives per year

overall (about three percent of the total), including 611 youths $ged 18 to 20.

These and other authors have also analyzed the effects of changes in ,the minimum drinking age, finding that it also has some Influence on youth fatality rates. It should be not~ed that the quality of the evidence on these two control measures IS similar; thee results for the beer tax are every bit as persuasive to analysts as the results for the minimum drinking age. Furthermore,, the reduction in fatalities that stateslachreved by raising their minimum age from 18 to 21 could have been accomplished by a fairly modest increase in the beer tax (Kenkel, 1993a; Chaloupka, Saffer, and Gross- man, 1993).

As discussed previous1

Y

, economists have argued that the overall fatality rate IS not as relevant to the tissue of establish ing the appropriate tax rate as is the death rate for “innocents’‘--people who are killed by drunk drivers. The estimates reported above do not distinguish between drunk and sober victims. One- third of the victims of drunk drivers are in the Istter category. As a first approxi mation, this factor could be applied to the simulation results cited above.

Crime

Alcohol abuse, particularly by youths, is as closely linked to viollent crime as It is to highvvay accidents (~Rolzen, 1993), although the two subjects have been treated (quite differentlb/ in the social sci. ence literature. There is consensus that drunk driving causes traffic accidents, so that interventions that are effective In reducing DUI will also ireduce the highway fatality rate. In the case of violent


crime, however, a number of social sci- entists have attempted to explain the close statistical connection between drinking and violence in ways that deny the direct causal importance of the drinking (Collins, 1989). Nonetheless, recent evidence lends support to the “na- ive” explanation-heavy drinking causes some people in some circumstances to provoke or commit or be exceptionally vulnerable to violent acts. The pharma- cological data on alcohol is consistent with this view (Reiss and Roth, 1993). At the aggregate level, changes in per capita alcohol consumption are positively linked to the violent crime rate. And our recent work on this subject provides some indication that the beer tax is an effective policy instrument in controlling some types of violent crime (Cook and Moore, 1993b).

Our empirical work used the same ap- proach as the studies of highway fatalities reviewed above. A panel of annual state cross sections for the period 1979- 87 was constructed, and used to estimate fixed-effect models.‘8 We first regressed violent crime rates on per capita alcohol consumption, and found a significant relationship for every crime but homicide, with elasticities of 0.6 for assault, 0.7 for rape, and 0.9 for robbery. Since we know that per capita alcohol consumption falls with an increase in alcohol taxes, it is then reasonable to pre- sume that these crime rates would also fall in response to a tax increase. To test this proposition directly, we regressed crime rates on the beer tax, again using the fixed effects procedure. The results can be summarized in terms of an increase by ten percent in the real value of the state beer tax: such an increase would reduce murder and assault by 0.3 percent, rapes by 1.3 percent, and robbery by 0.9 percent. (The latter two are significantly different from zero.)

Schooling

Alcohol-related crime and traffic accidents are probabilistic consequences of intoxication. Public concern with youthful drinking has focused on such consequences. But over the longer term, the cumulated effects of chronic heavy drinking may also have important consequences. Because alcohol can be addic- tive, a person who drinks heavily as a teenager may establish a habit that is in- compatible with adult responsibilities. In addition, youthful drinking may lead to failure in school and distort the process of social maturation, and so the legacy of youthful alcohol abuse may be reduced accumulation of human capital (Mullahy and Sindelar, 1989, 1993). Our recent work on schooling (Cook and Moore, 1993a) suggests that this mech- anism may be quite important, and provides another justification for restrictive alcohol control policies.

Although an occasional drinking bout will make little difference for school success (unless it happens to result in injury, pregnancy, or arrest), a long-term pattern of drinking and partying may inter- fere with schoolwork by leading to my- opic decisionmaking and encouraging a taste for leisure over self-investment and work. We analyzed the NLSY data to ex- plore how drinking relates to schooling. We found that heavy drinking in high school reduces the average number of years of schooling completed following high school. More surprising, perhaps, is that students who spend their high school years in states with relatively high taxes and minimum age are more likely to graduate from college, other things (including parents’ education and indi- vidual aptitude) equal.

The magnitudes here are sufficiently large to make them important as well as statistically significant. In 1982, an increase in the beer tax from $0.10 to

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$1 .OO per case increased the probability by 6.3 percent that an average respondent would attend a four-year college and graduate. An increase in the minr- mum purchase age from 18 to 21 increased the probability of college gradu- ation by 4.2 perc:ent.

To place the findings discussed above on a comparable basis, we calculated the percentage changes in the various out- come measures resulting from an increase in the beer tax of $0.58 per case (1991 dollars)-the actual increase enacted by Congress for that year. Table 3 presents the results of this exercise. Av- erage consumption by youths is reduced both at the intensive (6.3 percent) and extensive (3.4 percent) margins, for an overall reduction of nearly ten percent. The predicted consequences include a 19.8 percent increase In college gradua- tion rates (from ‘15.4 percent of the cohort to 18.4 perc:ent), a 12.0 percent reduction in robbery, and an 11.8 percent reduction in youthful highway fatalities. All of these point estimates are significantly different from zero in a statistical sense.

RESERVATIONS

As we have seen, increasing the tax on beer and other alcoholic beverages can be justified by the potential benefits associated with reduced violent crime and traffic accidents, and improved school performance. Further, and as a quite dif-

ferent matter, it seems fair that heavy drinkers should pay more of the cost that they Impose on the rest of society, and in the absence of more finely tar- geted policies to achieve that end, the excise tax is an attractive option.

What are the arguments on the other side of this issue? Two are most important. The first is that for people in middle age, moderate drinking may actually have some health benefit, so there is a risk that higher taxes will induce some to (drink less than they should. The second is the traditional objection concern- ing the fairness of excise taxes, that they tend to be regressive. We find neither of these very compelling given the currently available evidence.

The argument for a health benefit is based on epidemiological studies of middle-aged subjects. ‘Several such studies have found that drinkers tend to have relatively low risk of coronary artery disease,: a recent proslpective study of health-care professionals found that the relative risk declined throughout the ob- served range of alcohol consumption (Rimm et al., 1991). CDne hypothesis to explain this result is that drinking tends to elevate high-density lipoprotein cho- lesterol in the blood, which appears to have a protective effect against heart at- tacks caused by arteriosclerosis. But the epidemrological evidence is not entirely persuasive, since there may be some “third cause” that influences both the

TABLE 3 ESTIMATED CHANGES IN DRINKING AND CONSEQUENCES FROM THE 1990 INCREASE IN BEER TAX

Percent Consequence Change Source ~------ Drinks/month by youths age 19-22 -6.3 text 30-day drinking prevalence, youths age 19-22 -3.4 text Traffic fatalities, age 18-20 -11.8 Chaloupka et al., 1993 Robbery rate -3.3 Cook and Moore, 1993b College graduatron rates 19.8 Cook and Moore, 1993a

-- Note: See text for discussion The estimated reductions given here are based on a $0.58 increase per case in the beer tax (1991 dollars).


amount people choose to drink and their risk of heart disease. Further, the epidemiological evidence does not demonstrate that moderate drinking increases life expectancy, even for those in their middle age. Also, there is no question that heavy drinkers shorten their lives through organ damage and ele- vated risk of traumatic death. It would be telling to analyze the direct effects of alcohol taxes on coronary deaths and overall death rates in middle age, but such studies have not been attempted yet. In the meantime, the argument that higher taxes will discourage healthy drinking is not compelling.

Are alcohol taxes “regressive,” paid dis- proportionately by the “Joe Sixpack” blue collar workers and others of lesser means? The first question in investigat- ing the incidence of alcohol taxes is whether they are passed along to consumers in the form of higher prices. Sev- eral studies suggest that consumers may pay more than 100 percent of alcohol excise taxes-that they are passed along with some markup (Cook, 1981; Cook and Moore, 1993~). The tax incidence among consumers is highly concen- trated; half of all alcohol consumption is accounted for by just 6.5 percent of adults (Malin et a/., 1982), whereas one- third of adults pay no tax at all because they are abstainers.

There is no definitive study yet of whether excise tax payments increase more or less in proportion to household income. If we take the average dollar sales of alcoholic beverages at each income level, we see a nearly proportional relationship. Based on the Consumer Ex- penditure Survey for 1984-85, Sammar- tino (1990) found that the fraction of after-tax income spent by households on alcoholic beverages was about the same in the second, third, and fourth quintiles; this fraction is somewhat higher for the lowest quintile, and somewhat

lower for the top quintile, but the pattern is close to proportional in the broad middle range. Relative to total expenditures, alcohol expenditures increase across the five quintiles.lg Hence an ad valorem tax on alcohol would not be regressive. However, the alcohol excises are unit taxes, so that consumer expenditure data are not a reliable guide to tax incidence. If increasing income is associated with selection of greater quality rather than quantity of alcohol, then alcohol taxes would indeed be regressive.

The NLSY is one of the few national samples that provides useful items on both income and on quantity of alcohol consumed. We analyzed the income- consumption pattern for 1988, when NLSY sample members were aged 23 to 31. The rather remarkable result is shown in Figure 1. Average alcohol consumption is essentially uniform across income deciles, for both single individuals and married couples in this age range. Given that low- and high-income individuals are drinking the same amount on the average, they are also paying the same amount of excise tax on the average. The implication is that high-income youths are spending a much smaller percentage of their income on excise taxes than low-income youths.

Even though alcohol excises are regressive by the normal definition, they may benefit lower-income households and neighborhoods on balance. To the extent that they reduce negative externalities, the poorer communities enjoy benefits as well as costs. Within the family of a heavy drinker, a higher tax may benefit the dependents if the drinker is induced to cut back on consumption, even if his expenditure on alcohol increases.

Conclusion

In the search for effective policy instruments to reduce the social cost of alcohol abuse, excise taxes represent an at-

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FIGURE 1. Drinking and Income, 1988 NLSY

0 L- -t--+---t ---.,-- t--+--t+

1 2 3 4 5 6

Income Decile

7 8 9 10

tractive option that is currently underutilized. State and federal taxes on alcoholic beverages are substantially lower than warranted by the negative external costs of consumption. Further, there is compelling evidence that raising taxes would not just redistribute wealth from heavy drinkers to others, but also promote moderation and reduce these negative external c:osts. While alcohol taxes appear to be regressive by the usual definition, they are not obviously harmful to poor households and in any event are “fair” if our basis for judging fairness is that drinkers should pay the full costs ol’ their c:onsumption on the average. The implicit policy of Congress and most state legislatures has been to allow inflation to erode the real value of alcohol taxes, and both taxes and prices are substantially lower now than in the 1970s and earlier. This policy encourages alcohol abuse and aggravates the burden imposed on nondrinkers. It is not surprising that a large majority of the public favors increasing alcohol taxes if additional public revenues are needed.*”

1 - Married

- - - - - - - - Single

ENDNOTES

The authors’ research is supported by a grant from the National Institute on Alcohol Abuse and Alcoholism. Gary Koenig provided able research assistance. A “proof gallon” is equal to the volume of IiqlJid that contains 64 OZ. of pure alcohol. In Title XI of the Omnibus Budget Reconcilia- tion Aci of 1990, Congress Increased the tax on still ‘wine (unfortified) from $0.17 to $1.07 per gallon, the tax on beer trom $9 to $18 per barrel, and the tax oh dlstilled spirits from $12.50 to $13.50 per prOof gallon. Currently the federal tax on liquor is proportional to the ethanol content, but that is not true for beer and table vvine. If equalization were adopted as a guiding principle for federal excuses, then the current basis for taxing beer and wine--volume pf liquid---should be replaced by a Inew stand.$rd where the tax rate was keyed to the ethanol content. Of course, the amount someone drinks is at best a crude index of thq social costs engendered by their drinking. Ihe woman who drinks a glass of wine with dinner every night pays the same tax as the man who abstains during ihe week but driryks an entire bottle of wine on Saturday night. A tnumber of authors ha principle of corrective ta I

e suggested that the ation be extended to

Incorporate biases In con!umer estimates of the internal costs of their drinking. If consumers tend to underestit-nate the personal costs of their drinking ouit of ignorance or

TAXING UNHEALTHY BEHAVIOR

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psychic myopia, then it is possible that a tax increase would bring their drinking closer into line with their “true” preferences (Atkinson and Meade, 1974; Godfrey and Harrison 1990). Bruce Davie pointed out to us that the same argument may also be used to justify an excise tax on beds, movies, and a long list of other complements to leisure. One problem with this perspective is that it offers no guidance on how high taxes should be raised, since there is no framework for commensurating the loss to drinkers with the gain to the rest of society. Grossman, Coate, and Arluck (1987) and Coate and Grossman (1988) used data from the National Health and Nutrition Examination Surveys. Laixuthai and Chaloupka (1993) and Grossman, Chaloupka and Sirtalan (1994) used data from Monitoring the Future. These measures are defined and characterized in greater detail in Cook, Moore, and Pacula (1993). Beer is typically 3 to 5 percent ethanol, wine is 10 to 13 percent, and liquor, 40 to 50 percent. Calculated from NLSY for the four youngest cohorts, using population weights. Other researchers have used alternative indi- cators of alcoholic beverage prices. Coate and Grossman (1988) used state-level estimates of average prices of a well-known brand of beer. Laixuthai and Chaloupka (1993) employed the sum of state and federal excise tax deflated by a local cost-of-living index. Grossman, Cha- loupka, and Sirtalan (1994) used regional average prices of beer from the American Chamber of Commerce Researchers Associa- tion’s “Inter-City Cost of Living Index.” Each of these is a somewhat noisy indicator of average price. Note that the regression is based on 1984 data and reflects the value of money in that year. A $0.01 increase in 1984 is equivalent to a $0.014 increase in 1993. The implied price elasticity of demand depends on the average markup on the state beer excise tax. For a six-pack costing $2.50 In 1984 and a 100 percent markup of tax, the youthful price elasticity of demand for drinks is about - 1.35. In their study of Monitoring the Future data on high school seniors in 1982, Laixuthai and Chaloupka (1993) find that the beer tax has a highly significant deterrent effect on the likelihood of consuming five drinks or more on a single occasion within the past two weeks. Their analysis of seniors in the class of 1989

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THIS TAX'S FOR YOU: THE CASE FOR HIGHER BEER TAXES