Congress Lowering Alcohol Taxes: Should We Drink to That?

It looks like the Republicans finally passed the Tax Cuts and Jobs Act (TCJA) and made it into law. It has been a topic of much controversy over the past few weeks I did cover the House's initial draft of the Tax Cuts and Jobs Act last month, and I hope to cover the implications of the final version of the TCJA in a future blog entry. However, there is a provision in the TCJA that I would like to discuss right now: lowering the federal excise tax on alcohol. The current excise tax varies by type of alcoholic drink, but the taxes are going to be lowered across the board, which makes the alcohol production industry very happy with the news. The estimated annual savings for brewers is $130 million. There are those who are against the provision because of the public health ramifications behind lowering the alcohol tax. Should we celebrate this tax reduction with a drink or not?

A bit of background on the tax. An excise tax is an indirect tax charged on the sale of a particular good, in this case, alcohol. The argument against lowering the tax is that by lowering the overall price vis-à-vis the excise tax would encourage more alcohol consumption. This increased consumption would endanger the health and wellbeing of the consumer and potentially through related fatalities.  The Brookings Institution estimated that the Senate's tax could result in up to an additional 1,500 alcohol-related deaths per annum (Looney, 2017), although their is skepticism for these figures. One study estimates the social cost of excessive alcohol consumption at $250 billion per annum (Naimi et al., 2017), or $2.10 per drink. This sounds like a slam-dunk case for increasing the alcohol excise tax, but here are a few reasons to remain skeptical:

• Price elasticity. This is the fancy economic term to describe how people respond to the change of a price of a good or service. If the price changes and there is not a huge change in consumption, that is called an inelastic good. If the reverse is the case, then it is elastic. In the case of the demand for alcohol, it is considered a relatively inelastic good. Looking at a meta-analysis from Health Economics Review, the average price elasticity is -0.5 (Nelson, 2013). Another meta-analysis confirms these findings (Gallet, 2007). The elasticity in the United States is slightly more inelastic than in other developed countries, but the point is that in comparison to other goods, peoples' consumption patterns are not as responsive to an alcohol tax than it would be on other goods.  
• Seemingly a poorly targeted tax. Another issue is that if an alcohol tax is supposed to function like a sin tax, it is a poorly targeted tax. How so? The purpose of using the alcohol tax as a public health measure is that it is supposed to deter those with a drinking problem from purchasing more alcohol. The issue comes into play because it is impossible to differentiate between abusers of alcohol and moderate drinkers at the point of sale. Yes, making it more difficult for heavy drinkers to purchase alcohol comes with a benefit. However, making it more difficult for moderate drinkers to purchase alcohol comes at a cost. I say this because there is some evidence showing that moderate drinkers derive benefit from drinking. Moderate drinkers have an edge in emotional health, according to Gallup. Moderate drinking also has the potential to reduce the risk of stroke, diabetes, and heart attacks (e.g., Xi et al., 2017). As I will point out below, I have reason to be skeptical about this point of skepticism. 
• Questionable effects on drunk driving rates. The Urban Institute and Brookings Institution recently released a study through their left-of-center Tax Policy Center, and found that alcohol excise taxes do not have a long-term effect on drunk-driving accidents (McClelland and Iselin, 2017). On the other hand, one study shows that since the federal government increased the alcohol tax in 1991, it lowered injury deaths by 4.7 percent, or 7,000 people (Cook and Durrance, 2012). 

Closing Thoughts: Even though I have some skepticism about the advantages of an alcohol tax, they do not necessarily withstand scrutiny. For one, the health benefits for moderate drinkers are not as conclusive as other health findings (e.g., smoking is bad for your health). One could argue that the elasticity is not so low that a higher tax could have some positive effects. Plus, it might be less of an issue since the regressivity of the alcohol tax is going to primarily affect the heaviest of drinkers. (Vandenberg and Sharma, 2016; Naimi et al., 2016; Daley et al., 2012). Another way of framing it is that if the alcohol tax increases, the heavy drinkers would feel the brunt of the tax increase, not moderate drinkers.

With that being said, I am convinced that given what I have seen, a federal alcohol excise tax should exist. Sometimes, we have to look at public policy through the lens of "the least worst option." As the libertarian Cato Institute points out in a 2009 article on alcohol taxes, alcohol taxes are more economically efficient than directly regulating or fining drunk drivers or those who abuse alcohol. In addition to the efficiency, I would argue that an alcohol tax is preferable because an excise tax is an indirect tax, as opposed to a direct tax or a more intrusive regulation. The benefit of a federal alcohol tax (as opposed to a state-level excise tax) is that it would be more difficult for consumers to buy across national borders than state borders.

What will the health effects of the latest tax cut be? I don't think that it will be as large as opponents think. When looking at the TCJA itself and viewing the cost of alcohol taxes on a retail level, alcohol taxes would only decrease 1¢ per beer and less than $2 per fifth of liquor. I don't need a PhD in Economics to remain skeptical of the magnitude of additional health costs of an alcohol tax cut. Even so, that does not negate my assertion that an excise tax on alcohol should exist. The trickier part is determining what that amount should be in order to balance the health concerns with the economic ones. This should not be the end of the alcohol tax debate, but I don't think the tax cut is going to be cause of a major uptick in alcohol-related deaths.