Congress Blog

Raise the federal excise tax on alcohol

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To help pay for a proposed $3.5 trillion spending package, some congressional Democrats have suggested raising the current tax on cigarettes and other nicotine-containing products. It's promising to see a willingness to use necessary revenue measures to reduce demand for products that generate enormous social costs. For that same reason, Congress should consider raising the federal excise tax on alcohol.

Decades of high-profile anti-smoking campaigns have made common knowledge the grim fact that cigarettes kill 480,000 Americans and drain society hundreds of billions in medical costs and lost productivity annually. Far more surprising is that the costs of excessive alcohol use rival those of smoking. Alcohol may kill fewer people directly, but it creates more deadly externalities in the form of violence, impaired driving, and family instability. 

Raising the alcohol tax might make as much or more sense than raising cigarette taxes for four key reasons. The first is alcohol's social cost. The direct health problems experienced by excessive drinkers are significant. As little as a 10 percent increase in the price of alcohol could reduce the alcohol-related mortality rate by as much as 25 percent. The indirect costs borne by families and communities in which excessive drinking is prevalent are even more staggering: alcohol is responsible for at least 4.6 percent of the global burden from injury and mental illness.  

Moreover, alcohol poses a threat to public safety in a way cigarettes never have. Excessive alcohol use is a significant cause of crime and disorder. In 2010, the National Center on Addiction and Substance Abuse found alcohol was a factor in crimes that led to the incarceration of more than half of all of America's prisoners. It's estimated that doubling the tax on alcohol, which would amount to pennies on the dollar, would reduce drunk driving deaths by 11 percent, incidents of violence by two percent, and overall crime by 1.4 percent. The cost to society per drink consumed is estimated to be more than twice the cost per drink to the average consumer. 

The second reason raising the alcohol tax makes sense is the current rate is historically low and low relative to tobacco. Alcohol taxes were once relatively high - the federal government derived about a third of its revenue from them before Prohibition - but lawmakers have since allowed inflation to dilute the effect of taxes. On average, real alcohol tax rates were about 67 percent lower in 2015 than in 1933 across all states. Measured in proportion to average disposable income, a shot of liquor in 1950 cost over 15 times more than it did in 2011. The Bureau of Labor Statistics estimates American households spent 80 percent more on alcohol than tobacco in 2019. But alcohol taxes generated 20 percent less revenue than cigarette taxes the same year. 

The last reason is economic. Smokers tend to be poorer than average, but their demand tends to be less responsive to price. That is, as the cost of a pack rises, consumption among low-income smokers stays the same. That means they shoulder the cost of taxes but don't reap the benefits of better health. Drinkers are different. Alcohol consumption rises with income, and a relatively small group accounts for a huge share of demand. These excessive drinkers would bear five times the costs borne by moderate drinkers for a given tax increase, and costs would be concentrated among people who, on average, are employed, make more money, and are non-Hispanic whites. From that perspective, an alcohol tax is actually a progressive tax.  

Finally, a progressive tax on alcohol could complement efforts to reduce the social costs of smoking. Higher alcohol prices seem correlated with reduced smoking. As such, a higher alcohol tax could reduce both smoking and problematic drinking. 

Opponents might argue a bump in alcohol taxes could create new black markets. Cigarette smuggling indeed leads to nearly $7 billion in lost tax revenue annually, but alcohol taxes are less susceptible to noncompliance. Alcohol is harder to transport at scale. Its price is also less dependent on state tax rates, so there is less money to be made per unit. Finally, alcohol is generally sold in businesses subject to frequent inspections and strict licensure requirements. 

If Congress is interested in using consumption taxes to help internalize the social costs of bad habits, they should look not only to cigarettes but alcohol, too. A progressive tax on alcohol will raise revenue, but more importantly, it will improve public health and promote public safety.

Richard Hahn is a senior fellow at the Niskanen Center.