Perspectives on Alcohol Taxation

The issue of alcohol taxation can be viewed from several angles: public health, revenue generation, economic efficiency, fairness, and effects on employment. Conclusions about when an alcohol tax increase is appropriate or effective-or by how much a tax should be increased-differ widely, however, depending on which of these perspectives is taken. Policymakers trying to find a balance among the different perspectives must weigh the multiple trade-offs involved when a tax increase is proposed. Considerations include how different drinking populations respond to tax-induced higher alcohol prices, the equity of a tax for all members of society, and the effects of displacement for workers in alcohol-related industries. KEY WORDS: sales and excise tax; public policy on AOD; AOD consumption; AOD price; public health; economic cost of AODU (alcohol and other drug use); social cost of AODU; socioeconomic status; employment Except during Prohibition, the taxation of alcohol has been an enduring part of U.S. fiscal policy. Early in the Nation's history, Alexander Hamilton, the first Secretary of the Treasury, proposed a whiskey tax to help pay off debts from the Revolutionary War. In support of Hamilton's proposal, the Philadelphia College of Physicians proffered a combined professional opinion that "a great proportion of the most obstinate, painful, and mortal disorders which affect the human body are produced by distilled spirits" (Slaughter 1986). Congress was persuaded to enact a Federal alcohol tax in 1791, but enforcement met with some resistance. In what became known as the Whiskey Rebellion of 1794, about 500 armed farmers in the back country of western Pennsylvania attacked Federal tax collectors in opposition to the tax on the plentiful amounts of whiskey they distilled from their corn crops. The farmers' rebellion against the tax fizzled when President George Washington ordered troops into the area, however, and the tax stood. Alcohol taxation remains controversial today, although not to the extent of armed rebellion. Many people arrive at different conclusions about whether and to what extent alcohol taxation is appropriate, depending on which of the following perspectives they take on the issue: Public health. Contemporary medical science confirms that alcohol abuse' is a significant public health problem, even if current warnings are not quite as dire as that given by the Philadelphia College of Physicians. Revenue generation. Hamilton's argument that taxes on alcoholic beverages are an attractive source of revenue continues to echo in many State legislatures and congressional hearings. Economic efficiency. Because problem drinkers2 impose costs on others, alcohol taxation may be required to achieve an efficient allocation of resources in society. Equity. Many people question the fairness of alcohol taxation that falls more heavily on one population group (e.g., the poor) than on another. Employment. The desirability of alcohol taxation also comes into question because it imposes costs on the workers who produce, distribute, and sell alcoholic beverages. Recent research by economists interested in alcohol policy can inform each of these diverse perspectives on alcohol taxation. A fundamental question economists examine is how patterns of alcohol consumption and alcohol problems respond to changes in beverage prices and tax rates. The answer to this question clarifies the potential of alcohol taxation as a measure to improve public health and has important implications for tax-revenue generation as well. A smaller, but growing, body of research uses economic theory and available empirical estimates to analyze alcohol taxes from the efficiency and equity perspectives. Other economics research sheds light on the impact taxation has on employment both in alcoholrelated industries and on a national level. After discussing how alcohol consumption responds to taxation and price changes, this article reviews research related to each perspective on alcohol taxes. …