District of Columbia: Taxes and Other Strategies to Reduce Alcohol Abuse
Released: 1998-05-19T00:00:00

Letter

Background

Although about 60 percent of the U.S. population drinks alcoholic beverages without serious consequences, the misuse of alcohol by another 10 percent of the population has significant negative effects on the social, economic, and health status of both those who abuse it and society at large. According to the National Institute on Alcoholism and Alcohol Abuse (NIAAA), about 14 million Americans meet the medical diagnostic criteria for alcohol abuse or alcoholism, and an estimated 100,000 alcohol-related deaths occur each year. About half of the nation’s high school students report current alcohol use, a significant minority drink heavily, and few have difficulty obtaining alcohol. The younger the age of drinking onset, the greater the chance that an individual will develop a clinically defined alcohol disorder at some point in life.

All states heavily regulate the sale of alcoholic beverages. Some states take a more direct approach to controlling sales than others. Eighteen states, including Virginia, are generally referred to as “control” states, because the final sale to consumers of, typically, liquor and in some cases wine and beer as well can occur only in state-operated stores at prices established by state beverage control boards. State-operated stores are the exclusive retailers of all legal liquor sold for off-premises consumption throughout Virginia. Final prices are set by Virginia’s Department of Alcohol Beverage Control (ABC).

The District of Columbia and the remaining 32 states, including Maryland, are referred to as “license” states, because the distribution and sale of alcoholic beverages is carried out by private license holders. Maryland, however, is not completely a license state, because 1 of its 22 counties—Montgomery County, which borders the District—is a control jurisdiction. The county Department of Liquor Control is the exclusive wholesaler of all alcoholic beverages sold within its boundaries. The Department is also the exclusive retailer of liquor sold for off-premises consumption.

To raise revenue and to help prevent alcohol misuse, most states and the District of Columbia levy both excise taxes and retail sales taxes on alcoholic beverages. Some county and city governments also impose their own alcohol taxes. In order to determine whether the District’s taxes on alcohol are greater or less than those in surrounding jurisdictions and other states, one needs to compare the District’s combined—sales and excise—tax structure with the tax structures in the other jurisdictions. Such a comparison is complicated by the fact that alcohol excise tax rates are generally stated as fixed amounts per unit of volume, but sales tax rates are almost always ad valorem (stated as percentages of product prices). The combined tax burden within a given jurisdiction will vary by type, size, and value of beverage and, in some cases, by type of retail establishment.

It is also difficult to compare the alcohol tax systems in license jurisdictions with those in control jurisdictions. In a license state, private sector wholesalers determine wholesale prices, taking into account their costs, including the excise taxes that they pay to the state. Private sector retailers charge their own mark-ups on top of those wholesale prices. For these states, one can readily determine what share of the final price of the alcoholic beverage is attributable to the excise tax.

In a control state such as Virginia, where the government acts as a monopoly wholesaler and retailer of liquor, the government collects revenue from the sale of alcohol in two ways: (1) by earning the profits that private sector wholesalers and retailers would otherwise have earned and (2) by imposing an excise tax on the alcohol. One cannot easily determine how much of the combined revenue that the state collects should be considered the profits of the state’s alcohol sales operations and how much should be considered an excise tax. The state may make a distinction between the price mark-up that it charges and the excise tax that it levies, but this distinction has little meaning to consumers or taxpayers. There is a wide range of mark-up/excise tax rate combinations that the state could have set to yield the same amount of revenue and impose the same costs on consumers.

One way to define an “effective” excise tax rate on alcohol in a control state is to say that it equals the statutory excise tax rate, plus any cost that the state control system imposes on consumers above what those consumers would have borne if that system were not in place. For example, if a state-run store imposes a higher mark-up than a private dealer would have, then this additional cost to consumers can be considered part of the effective tax. The effective tax rate defined in this manner provides a better basis for comparison with the excise tax rates imposed in license states.

Objectives, Scope, and Methodology

To meet our first two objectives of (1) comparing the District’s taxes on alcoholic beverages with those of surrounding jurisdictions and other states and (2) determining whether the District’s tax structure can be brought into closer conformity with the tax structures in surrounding jurisdictions, we reviewed the relevant laws and regulations of the various jurisdictions. We also interviewed officials from the District’s Office of Tax and Revenue and from the alcohol beverage control commissions in the District; Montgomery County, Maryland; and Virginia. We also obtained alcohol tax information for the 50 states from the Federation of Tax Administrators and the Distilled Spirits Council of the United States (DISCUS). In an effort to determine whether the pricing policies of Montgomery County and Virginia result in effective tax rates that are higher than the statutory tax rates for certain alcoholic beverages, we obtained lists of the wholesale prices that Montgomery County charges on all of the alcoholic beverages that it sells to retailers in the county and lists of the wholesale prices for wine and liquor that private sector wholesalers charge retailers in the remainder of Maryland. The latter prices are published in the Maryland Beverage Journal. We compared Montgomery County’s prices (effective during January 1998) to those of the private wholesalers for (1) 14 liquor items identified by the Virginia ABC Commission or DISCUS as top sellers, (2) a random sample of an additional 28 liquor items from Montgomery County’s price list, and (3) a random sample of 29 wine items from the county’s price list. We could not make a comparison of beer wholesale prices, because the state of Maryland requires publication of only liquor and wine wholesale prices, not beer prices.

As one possible way to determine whether Virginia’s controlled prices for liquor are, on average, higher than the competitive market prices in the same region, we considered doing a survey comparing prices in Virginia with those in the District and its Maryland suburbs for the top-selling liquor items. However, representatives of the District’s Alcohol Retailers Association told us that a common retail pricing practice is to sell selected popular items at a large discount, possibly even at a loss, in order to attract customers who will then also buy items that have higher price mark-ups. For this reason, a survey limited to just the best-selling items would probably be misleading. The retailers’ representatives also indicated that it would be very difficult to obtain good estimates of the average prices in each jurisdiction, because there are so many different brands and bottle sizes, and the prices for each item are likely to vary considerably across different types of retail outlets in each jurisdiction. It was beyond the scope of this study to undertake the extensive retail price survey and analysis needed to make such estimates.

To determine how much higher the District’s alcohol excise tax rates would be if they had been indexed for inflation, we raised these rates by the same percentage increase as the average increase in alcoholic beverage prices since the last time each rate was changed. To compute the average price increases, we used the U.S. Department of Labor’s quarterly Consumer Price Index alcoholic beverage component for the Washington metropolitan area. We also compared the combined—excise and sales—tax burdens on typical alcoholic beverages over time.

To determine whether existing empirical research indicates that raising the District’s alcohol taxes is likely to reduce alcohol abuse, particularly among youths, and related health problems, we reviewed and summarized several surveys of the relevant academic literature that have been published in recent years. We then obtained comments on our summary from five academic and government experts in this field of research and modified our summary to reflect those comments.

To identify which states earmarked their alcoholic taxes for specific purposes, we used the latest summarization of state tax earmarking prepared by the National Conference of State Legislatures. The latest available earmarking information is for fiscal year 1993. We did not independently verify the accuracy of this information.

To describe the characteristics of alcohol prevention programs and legal and regulatory strategies that researchers have deemed effective, we identified and reviewed selected literature on alcohol prevention research and evaluated syntheses of research literature. Given the vast literature on this subject and the time available to us, we relied heavily on information presented in NIAAA’s 1997 publication, Alcohol and Health. We also interviewed key officials responsible for overseeing alcohol prevention research for youth and other populations at NIAAA. To obtain information on the District of Columbia’s alcohol laws and regulations, we interviewed the Executive Director of the D.C. Alcoholic Beverages Control Board, reviewed relevant provisions of the District of Columbia’s codes and municipal regulations, and examined reports provided by the Board. To obtain information on how the District’s alcohol laws are being enforced, we interviewed responsible officials of the D.C. Metropolitan Police Department. We obtained similar information from officials responsible for managing and enforcing alcoholic beverage programs in Montgomery and Prince George’s Counties in Maryland and the City of Alexandria and Arlington County in Virginia. To obtain information on the District’s health and education prevention programs, we interviewed officials at the Department of Health’s Addiction Prevention and Recovery Administration and the District of Columbia Public Schools and reviewed key agency documents.

We conducted our review in Washington, D.C.; Virginia; and Maryland between December 1997 and April 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the District of Columbia’s Office of Tax and Revenue, Department of Consumer and Regulatory Affairs, and Department of Health; the District of Columbia Financial Responsibility and Management Assistance Authority; the Virginia Department of Alcohol Beverage Control; NIAAA; the Substance Abuse and Mental Health Services Administration (SAMHSA); and the Prevention Research Center (PRC). These comments are summarized and discussed near the end of this letter. We also requested comments from the Montgomery County Department of Liquor Control but did not receive any in time to include them in this report.

The District’s Combined Tax Rates Are Higher Than Its Neighbors’ Rates for Some Beverages but Not for Others

The interaction of the sales taxes and the excise taxes within each jurisdiction results in combined tax burdens that vary by type, size, and value of beverage and, in some cases, by type of retail establishment. We computed the combined statutory taxes paid in each jurisdiction on a range of different beverage items. In comparison to the taxes levied in all but one Maryland county, the District’s combined statutory tax rates are higher for all types of alcoholic beverages. In comparison to the taxes levied in adjacent Virginia jurisdictions, the District’s combined statutory tax rates are higher for almost all beers and for relatively high-priced wines, but the opposite is true for relatively low-priced wines. The effective tax rates on liquor in Virginia and on all alcoholic beverages in Montgomery County may differ from the statutory tax rates as a result of government controls over prices. Consequently, precise comparisons of the taxes on those controlled items cannot be made.

The District’s Combined Statutory Tax Rates on Beer and Some Wines Are the Highest in the Area

The statutory alcohol excise tax rates levied by the District and the state of Maryland are very similar, as shown in table 1. Virginia’s excise taxes on beer and wine are significantly higher than those in the District and Maryland. Virginia’s liquor tax is not directly comparable to taxes in the other two jurisdictions—both because it has an ad valorem rate and because the state sets the price upon which the tax is computed. There are no local government alcohol excise taxes in either Maryland or Virginia.

The District imposes an 8 percent sales tax on alcoholic beverages sold for off-premises consumption; it levies a 10-percent tax on alcoholic beverages and food sold for on-premises consumption. These rates are higher than the 5.75-percent rate the District imposes on the sales of most goods. They are also significantly higher than Maryland’s and Virginia’s sales taxes.

The interaction of the sales taxes and the excise taxes within each jurisdiction results in combined tax burdens that vary by type, size, and value of beverage and, in some cases, by type of retail establishment. In order to compare the combined statutory tax burdens on alcohol across jurisdictions, we have computed the taxes that would be paid on three beverage items sold for off-premises consumption and on three items sold for on-premises consumption. In order to demonstrate the importance of prices in the calculation of combined tax burdens, we used a wide range of prices for each beverage item. (See tables 2 and 3.)

The District’s combined taxes on beer are also higher than those in adjacent Virginia jurisdictions. In contrast, Virginia’s combined statutory taxes on liquor are higher than those in the District across the full range of prices we examined. For wine, Virginia’s combined taxes are higher than the District’s, except at the high end of the price range.

Government Price Mark-Ups May Alter the “Effective” Tax Rates on Alcohol

The monopoly power that the governments of Virginia and Montgomery County have over the sale of some alcoholic beverages within their boundaries provides them with an opportunity to set prices for those beverages to achieve objectives, such as discouraging alcohol consumption or maximizing the government’s monopoly profits, that either would not be considered by private sector businesses, or would not be achievable in a competitive market. If the government’s pricing policy results in final prices to consumers that are higher than those that private sector businesses would charge, then the effective tax rates on those beverage items exceed the statutory tax rates. Conversely, if the government’s pricing policy results in lower final prices, then the effective tax rates are lower than the statutory tax rates.

The explanations of Virginia’s and Montgomery County’s pricing practices given to us by government officials did not provide a sufficient basis to allow us to say whether the controlled prices in those jurisdictions are likely to be higher or lower than those that would have existed without government controls. Officials from the Virginia Department of Alcohol Beverage Control told us that the goal of their pricing policy is to generate a reasonable rate of return for the state. The prices for liquor items sold in state stores are standard across the state. The officials told us that these statewide prices are not greatly influenced by price competition from the District. An official from Montgomery County’s Department of Liquor Control told us that it was his understanding that the county’s wholesale price mark-ups for alcoholic beverages are intended to reflect the prevailing mark-up practices in the industry.

Information provided by Virginia and Montgomery County officials and by representatives of the District’s Alcohol Retailers Association, whom we interviewed, suggests that the relationship between controlled and free market prices is likely to vary across beverage items. Our limited comparison of liquor and wine wholesale prices in Montgomery County and the remainder of Maryland supports this idea. We do not have sufficient data to determine whether the controlled prices in Virginia and Montgomery County are, on average, higher or lower than those that would have existed without the controls. Consequently, we are not able to say whether Virginia’s effective tax rates on liquor are higher or lower than the statutory rates, or whether the effective tax rates on all alcoholic beverages in Montgomery County are higher or lower than the statutory rates.

The District’s Combined Taxes on Beer and Wine Are Higher Than Those in Most States

Although the District’s excise taxes on alcoholic beverages are lower than those in most of the 50 states, the District’s combined tax rates on beer and wine are higher than those in most states because its sales tax is among the highest. The District’s combined taxes on liquor are higher, for at least some items, than in most of the states for which we could readily make comparisons.

Our analysis of data published by the Federation of Tax Administrators indicates that the District’s excise tax rate on beer is lower than the rates in 40 states; its excise tax rate on liquor is tied with that of Maryland as the lowest among the 32 states that do not control the sale of liquor; and its excise tax rate on wine is lower than the rates in 38 out of the 46 states that do not control the sale of wine (see app. II). It was beyond the scope of this study to estimate effective excise tax rates for those states that control the sales of liquor and/or wine.

In contrast to the excise taxes, the District’s sales taxes on alcoholic beverages are higher than those in 45 states and equal to those in another state. For the remaining four states, the comparison is mixed—depending on whether the sales are for on-premises or off-premises consumption. The tax rates shown in appendix II do not include any taxes that may be levied by governments below the state level.

We computed combined alcohol tax burdens for most of the states in a manner similar to our computations for the District, Maryland, and Virginia in tables 2 and 3. We did not have sufficient time to incorporate all of the complexities of the alcohol taxes of some states into our computations, so we left those states out of our comparison. Consequently, although we can say that the District’s combined taxes on beer and wine are higher than those in most states (for the price ranges we examined), we cannot say exactly where the District ranks. We could not make adequate comparisons with enough states to say whether or not the District’s combined taxes on liquor are higher than those in most states. However, for the states with which we could make comparisons, the District’s combined taxes on liquor were higher than most of them, for at least part of the price range we examined.

The District Would Have Some Difficutly Conforming Its Alcohol Taxes to Those in Maryland or Virginia

There are significant differences among the alcohol tax structures of the various jurisdictions surrounding the District. The District cannot conform to all of those tax structures at the same time. Moreover, the District would not be able to impose exactly the same effective tax rates that exist in either Virginia or Montgomery County, because those effective rates are difficult to estimate precisely; might change frequently; and are likely to vary by beverage type, brand, and container size. In order to conform its combined statutory tax rates to those in Maryland, the District would have to lower its taxes on all alcoholic beverages. The only way for the District to make its statutory taxes similar to those in Virginia, across the entire range of alcoholic beverages, would be to adopt a single sales tax rate for alcoholic beverages that is close to Virginia’s and to adopt excise tax rates that are all very close to Virginia’s. This change would lower taxes on beer and high-priced wine in the District while raising the tax on liquor and low-priced wine.

The District would face a difficult enforcement task if it adopted the ad valorem excise tax rate on liquor that Virginia currently levies. Virginia’s liquor excise tax is computed as 20 percent of the liquor price after the state has taken its combined wholesale and retail price mark-up. To levy an equivalent tax, the District would have to impose the 20-percent rate on the final prices that retail stores charge their customers before applying the sales tax. This tax would be more difficult to enforce than the District’s current liquor excise tax, because (1) it would have to be collected from a much greater number of taxpayers; (2) taxpayers would have more of an incentive to understate their liquor sales, because the tax rate paid by each taxpayer would be higher than it currently is; and (3) to verify compliance, District auditors would have to examine a taxpayer’s detailed sales receipts. Virginia does not face these enforcement difficulties, because it collects the tax from its own stores. No license state levies an ad valorem alcohol excise tax.

It would be difficult for the District to devise an ad valorem liquor tax that closely approximates the tax that Virginia imposes on liquor sold for on-premises consumption. Restaurants and bars in Virginia buy their liquor from state-run stores at retail prices that already reflect the 20 percent excise tax. Those prices are not equivalent to either the wholesale prices that restaurants and bars in the District pay for their liquor or to the prices that District restaurants and bars charge their final customers. Consequently, the District could not replicate Virginia’s tax simply by imposing a tax rate on either the wholesale or final prices. The District would have to define a new tax base that approximates the state-determined prices on which Virginia’s excise tax is imposed.

We are unable to say whether average alcohol prices and revenues from alcohol taxes would increase or decrease if the District conformed its statutory alcohol tax rates to those in Virginia. In order to estimate the effects on average prices and revenues, we would need to know the distribution of alcohol sales in the District, by beverage type and by price range. However, this information does not exist. The total value of alcohol sales in the District each year is unknown. Without knowing how average prices would be affected, it is not possible to predict how total alcohol consumption in the District would be affected by this specific change in the District’s tax structure. The decrease in the combined tax on beer likely would cause beer consumption to increase, and the increase in the combined tax on liquor likely would cause liquor consumption to decline. In order to determine whether such a trade-off would be desirable, we would have to be able to estimate the relative sizes of the changes in beer and liquor consumption. The data needed to make such estimates do not exist. National surveys indicate that beer is the alcoholic beverage of choice among youths who drink alcoholic beverages. There is also some evidence that beer is disproportionately preferred by those who drink a lot during a typical session and that drinkers who prefer beer are more likely to drive while intoxicated than those who prefer wine or liquor.

Sales Tax Increases Have More Than Offset the Effect of Inflation on Excise Tax Rates for Most Alcoholic Beverages

All of the District’s per-unit excise tax rates have declined in inflation-adjusted terms since they were last changed. During this time, however, the District increased its ad valorem special sales tax rates on all alcoholic beverages. For most of the beverage items we examined, the increases in the sales tax rates have, to date, more than compensated for the lack of indexation of the excise tax rates.

The District’s excise tax rates for beer, wine, and liquor were last changed in 1989, 1990, and 1978, respectively. Each has declined in inflation-adjusted terms since those last changes. Table 4 shows what the rates would have been at the time we did our review if they had been increased to keep pace with inflation. The differences between the current tax rates and the inflation-adjusted rates for beer and wine are relatively small, because the last changes were relatively recent and price inflation has been very moderate. In contrast, the inflation-adjusted excise tax rate on liquor would be more than twice as high as the current rate.

Since the time that all of these excise tax rates were last increased, two changes have been made to the special sales tax rates for alcoholic beverages. In 1992 the sales tax rate for alcoholic beverages sold for off-premises consumption was increased from 6 percent to 8 percent. In 1994 the rate for on-premises consumption was increased from 9 to 10 percent. There was one additional change in the on-premises sales tax rate—from 8 to 9 percent in 1989—since 1978, when the liquor excise tax rate was last changed.

The increases in the sales tax rates have more than compensated for the lack of indexation of the excise tax rates for most of the beverage items we examined. For each alcoholic beverage item included in tables 2 and 3, we computed the tax burdens at two points in time—now and the date at which the excise tax on that item was last changed. We also computed each tax burden as a percentage of the final price of the item. (See table 5.) Only for the lowest-priced liquor item sold for off-premises consumption has the tax burden declined noticeably since the earlier date. Currently, the District’s combined taxes on liquor account for 13.0 percent of the final price that consumers pay for an $8.00, 1-liter bottle of liquor. In 1978, the District’s combined taxes on that same bottle accounted for 15.7 percent of its final price.

The District’s alcohol excise taxes will continue to decline gradually in inflation-adjusted terms. In order to keep the real value of its combined tax rates on alcohol close to what they are currently, the District would have to increase its excise tax rates periodically, in step with inflation.

An Increase in the District’s Alcohol Taxes Would Likely Reduce Alcohol Consumption and Some Related Problems

Taxes on alcohol are a means of reducing alcohol misuse while at the same time raising revenue. Economic theory and empirical evidence indicate that higher alcohol taxes increase the prices for alcoholic beverages, and higher prices affect alcohol consumption. However, there is some uncertainty regarding the extent to which the taxes are passed through to consumers as higher prices, and empirical research estimates vary on the degree to which changes in prices affect alcohol consumption.

Researchers have found that changes in alcohol prices affect most categories of drinkers, but to different degrees. Youths and young adults appear to be more sensitive to price than older adults. Some recent studies have found that higher alcohol taxes and prices are associated with declines in drunken driving, motor vehicle fatalities, rapes, and robberies. The special geographic circumstances of the District—where all of its suburbs are in other jurisdictions—may serve to weaken the effect that an increase in the District’s taxes would have on local alcohol consumption.

Alcohol Taxes Increase Alcohol Prices, but the Relationship Varies With Circumstances

Economists have suggested that the extent to which any excise tax increase is passed along to consumers varies, depending on the characteristics of the markets where consumers purchase their beverages. Such characteristics would include how much competition among sellers exists in the markets. There is a clear presumption in the economic literature that in the long run, under perfectly competitive market conditions, tax increases on consumer goods are completely passed along by producers, wholesalers, and retailers to the final consumers in the form of higher prices for the taxed goods. The alcohol industry, however, does not operate under purely competitive conditions. Researchers have concluded that the alcohol industry is oligopolistic, meaning that it is dominated by a few large suppliers. There is no generally accepted theory of how prices are determined in an oligopolistic industry; therefore, the exact extent to which alcohol excise taxes will affect the prices of alcoholic beverages is uncertain. Nor is there clear empirical evidence to indicate what portion of a tax increase will be passed along to alcoholic beverage consumers in the form of increased prices. Some researchers have estimated that past alcohol excise tax increases have caused prices to increase by more than the full amount of the tax increase. Other economists have suggested that the extent to which excise tax increases are passed along to consumers varies depending on the characteristics of the markets where consumers purchase their beverages. Such characteristics include how responsive market demand is to price changes and how much competition among sellers exists in the markets. In the absence of more conclusive evidence, most researchers trying to model the effects of taxes and prices on alcohol consumption assume that an excise tax increase will cause sellers to raise their prices to consumers by at least the full amount of the tax.

Empirical Estimates Indicate That Prices Affect Alcohol Consumption and Some of Its Harmful Consequences

Numerous empirical studies confirm the conclusion of economic theory that the higher prices that result from tax increases will have a negative effect on alcohol consumption. However, precise estimates of the degree to which consumption is affected are difficult to obtain given the limitations of available data on alcohol prices and consumption.

Researchers have found that light, moderate, and heavy drinkers in the general population cut back on consumption when alcohol prices are increased. However, study results vary concerning the relative price sensitivity of light, moderate, and heavy drinkers. The preponderance of the evidence on youth drinking indicates that youths and young adults are more sensitive to price than older adults, particularly those adults who have developed a long-term lifestyle that includes heavy drinking. Researchers also found that beer is the beverage of choice among youth who drink alcoholic beverages and that youth seem to be more responsive to changes in alcohol prices than the population in general.

Researchers also have found negative relationships between alcohol prices or tax rates and the adverse consequences associated with alcohol misuse, especially between alcohol use and auto crashes and fatalities. For example, a recent study demonstrated that higher state beer excise tax rates had a significant impact on lowering total driver fatalities, night driver fatalities, and alcohol-related fatalities for drivers of all ages and for drivers 18 to 20 years old. Another study found that alcohol prices had a negative effect on binge drinking—a 9-percent reduction in the number of binge episodes per month resulted from a 10-percent increase in price. Other research indicates that higher alcohol taxes (or prices) have a negative and statistically significant effect on suicide rates; possibly on the liver cirrhosis death rate; on mortality rates from other cancers to which alcohol contributes; and on violent crimes, such as rape and robbery. Some authors observe that the bulk of evidence supports the conclusion that increasing alcohol taxes would extend life expectancy.

Competition From Maryland and Virginia May Weaken the Effects of a District Tax Increase

If the District raises its alcohol taxes while Maryland and Virginia do not, then some consumers who currently purchase their alcohol in the District may shift the location of some of their purchases to neighboring jurisdictions. The actual public health benefits of an increase in alcohol taxes would be reduced to the extent that the tax increase merely shifted the location of purchases rather than reducing consumption.

Prior research indicates that the rates of local sales and/or excise taxes across jurisdictions within a region can influence where the consumers of that region shop. The importance of these so-called “border effects” of tax rate differences depends on the specific border situation in question, but several characteristics of the District’s metropolitan area imply that policymakers should not ignore these effects when considering changes in the District’s alcohol taxes. First, most of the District’s residents live within a relatively short distance of alcoholic beverage retail outlets in Maryland or Virginia. Second, every work day the District has a large influx of commuters, who might shop in the District with relative ease if they had a sufficient incentive. Finally, residents in the immediate metropolitan area have a wide range of choices of bars and restaurants in all three jurisdictions. If the District were the only jurisdiction in the region that raised its taxes on alcohol, then the after-tax prices of alcoholic beverages sold in the District would increase relative to prices in the surrounding jurisdictions, and retailers operating in the District could lose some business to competitors in the surrounding jurisdictions.

In comparison to, say, a 10-cents-per-gallon increase in the federal beer tax, a 10-cents-per-gallon increase in the District’s beer tax would have less of an effect on alcohol consumption (and associated problems) of individuals who currently buy alcohol in the District. Those individuals could avoid a District tax increase that was passed on to consumers by making their purchases in Maryland or Virginia. If the cost of shifting the location of their purchases is less than the cost imposed by the District tax increase, then their cost of consumption would not have risen by the full 10 cents per gallon. In contrast, these individuals could not avoid a full increase in the federal excise tax that was passed on to consumers by shifting their purchases. Because the District tax would increase the cost of consumption for some consumers by less than a similar federal tax increase would, it would produce smaller aggregate behavioral changes.In addition to reducing the beneficial behavioral effects of an alcohol tax increase, the shifting of sales would reduce the potential revenue gains for the District. It would be difficult to accurately estimate the size of the shift in sales that would occur from any given increase in the District’s alcohol taxes because of the many factors involved.

Many States Earmark Portions of Their Alcohol Tax Revenues for Specific Purposes

As of 1993, 24 states earmarked at least a portion of their alcohol excise tax revenues for specific purposes. The percentage of the alcohol tax revenue that was earmarked in each of these states ranged from 4.5 percent in Colorado to 100 percent in West Virginia. The purposes for which the alcohol revenue were earmarked also varied substantially across these states—from public schools, to local governments, to convention promotion. Appendix IV shows how much revenue was earmarked for each purpose in each state in fiscal year 1993. In 15 of the states some of the revenue was specifically earmarked for alcohol treatment, substance abuse, and/or mental health programs. Since 1994, the District has earmarked 10 percent of its sales tax on alcoholic beverages sold for on-premises consumption to the Washington Convention Center Authority Fund.

Studies Have Shown That Some Alcohol Prevention Approaches Are Effective, but Many Need More Rigorous Evaluation

Communities have opted to use alcohol prevention approaches that fall into three general categories. The first approach emphasizes education and skill-building programs directed toward individuals in schools, families, colleges, and specific population groups (e.g., women and minorities). The second approach is more population-based, using legal and regulatory strategies to influence the physical and social environments in which drinking occurs or is promoted. For example, state and local governments seek to control the availability of alcohol by regulating the location, hours of operation, and number of establishments that sell alcoholic beverages. A third approach combines these two by creating multiple communitywide strategies, such as using education and skill-building programs to support new laws and regulations. When programs directed toward individuals have shown success, their effects have been small. Many of these programs need to be evaluated more rigorously and over time to determine their effectiveness. Research has shown that several laws and regulations that control the physical availability of alcohol or the social environment in which drinking occurs have resulted in lowered consumption and fewer alcohol-related problems. However, research on other preventive approaches influencing children’s social environment, such as controlling advertising, has been less definitive. Studies have shown that combining the use of individual and population-based legal and regulatory strategies can be successful; additional studies of this approach are still under way.

Approaches That Focus on Education and Skill Building Have Shown Modest Success

Alcohol prevention approaches that are directed toward the individual generally use education, information, and skill-building activities to change attitudes and beliefs that influence drinking behavior and enhance people’s ability to resist underage and abusive drinking. These approaches, although directed toward the individual, are most often presented in group settings, such as schools, families, and colleges and universities; or may focus on specific population groups, such as minorities and women. Table 6 describes different types of education and skill-building programs that are commonly used to combat alcohol abuse and prevent drinking among youth.

Since the 1960s, school-based programs have played a key role in the prevention efforts of many states and communities, primarily because they give easy access to a young audience. Research shows that although these programs are one of the most popular alcohol prevention approaches and continue to target thousands of today’s young drinkers and potential drinkers, experts still debate their effectiveness. The main goals of school-based programs are to decrease the overall prevalence and level of drinking among youth; reduce the progression of alcohol consumption to problem levels; and, ideally, prevent young persons from starting to drink. One of their major strategies is to influence knowledge, beliefs, or attitudes about alcohol and its effects. Participants in one life skills program reported lower alcohol use than nonparticipants after 5 years.The prevention literature suggests, however, that the success of most school-based programs in preventing the onset of drinking and reducing the use of alcohol has been small.

Communities also use education and skill-building programs directed to individuals in family units, colleges, and specific groups, such as women and minorities. Research results have suggested that parent participation in alcohol prevention programs could be effective in reducing alcohol use, but such programs generally have a difficult time getting large numbers of parents to participate on a regular basis. Research has also shown that a prevention program for freshman students at one university succeeded in reducing alcohol consumption and problems associated with excessive drinking. Researchers are exploring whether minorities, women, and other special populations could benefit from prevention programs tailored to their needs.

Approaches That Influence Physical and Social Environments in Which Drinking Occurs

The research literature suggests that certain legal and regulatory strategies that influence the physical and social environments in which alcohol is consumed are effective in reducing consumption and alcohol-related problems. Prevention approaches that use these strategies generally fall into two categories: (1) those intended to influence individual drinking practices, such as enforcement of impaired driving laws; and (2) those aimed at regulating the availability of alcoholic beverages, such as restricting the number and location of establishments selling alcohol. Prevention research has produced evidence demonstrating the effectiveness of several legal and regulatory strategies, such as laws prohibiting the sale of alcohol to minors, server training programs, and various measures to deter drinking and driving. Research has not been conclusive, however, regarding the effectiveness of laws and regulations that, for example, control the hours and days of alcohol sales, restrict or ban alcohol advertisements, or require warning labels on alcoholic beverages. Table 7 shows various types of legal and regulatory strategies and their success in reducing alcohol consumption and problems associated with excessive drinking.

Visible Enforcement of Legal and Regulatory Strategies Can Enhance Their Effectiveness

The literature suggests that visible enforcement programs and education can enhance the beneficial effects of certain legal and regulatory strategies. The deterrent effect of a law depends, at least in part, on the public’s belief that violations are likely to be detected and violators punished. The District of Columbia and the states of Maryland and Virginia use a number of enforcement techniques to ensure compliance with state and local laws covering, among other things, who may serve or be served alcohol, the type of alcohol that can be sold, and the time during which alcohol can be sold. Appendix V describes selected provisions of alcohol control laws, along with related penalties, for the District, Maryland, and Virginia.

Alcohol beverage control (ABC) boards establish conditions for issuing licenses to sell alcohol and rely on a cadre of enforcement officials to monitor compliance with these regulations and impose penalties for violations. Owners of licensed drinking establishments and alcohol servers can be punished by fines and short jail terms if they violate alcohol-related laws and regulations. The District and neighboring jurisdictions in Maryland and Virginia devote different levels of resources to enforcement. For example, the ratio of enforcement officials to licensees in the District is about 1 to 400; the ratio in the City of Alexandria is about 1 to 150. In Virginia, unlike Maryland and the District, ABC enforcement officials have enhanced authority, which, among other things, allows them not only to fine the establishment that sells alcohol to underage purchasers, but also to fine the employee and the youth attempting to purchase alcohol. ABC officials in the District and Maryland would like similar enforcement authority granted to their staff, because they believe that this authority is a highly effective deterrent to underage drinking. Following is a description of several legal and regulatory strategies whose effectiveness has been demonstrated by research.

Studies of server training programs reveal that they can modify servers’ and managers’ knowledge and beliefs about alcohol service and bring about changes in serving practices that help reduce the rate and amount of alcohol consumed by patrons. Such training increased staff intervention with intoxicated patrons and increased servers’ willingness to suggest alternative beverages and forms of transportation. Research also shows that server intervention can be greatly enhanced through increased enforcement of alcohol control laws and server liability laws.

Several researchers have explored the effectiveness of increasing the visibility of enforcement and the rigorousness of prosecution of alcohol control laws. They found declines in both the number of arrests for driving under the influence of alcohol obtained at bars and restaurants and incidents of alcohol service to researchers posing as intoxicated patrons. Research also shows that liability laws have affected the behavior of persons who serve alcohol, which in turn affects the drinking practices of patrons. Server liability laws place the server at risk of committing a violation for serving alcohol to underage drinkers or highly intoxicated patrons. Further, under civil liability, or dram shop laws, an alcohol server has potential legal responsibility for damage that intoxicated patrons and underage drinkers inflict on themselves or others. The financial loss that bar and restaurant servers and managers may incur is expected to deter serving practices that could increase a patron’s risk of a motor vehicle accident and other liabilities.

The minimum legal drinking age (MLDA) policy has been heavily studied, with numerous research findings demonstrating the effectiveness of a higher MLDA in preventing injuries and deaths among youth. For example, the MLDA of 21 is estimated to save more than 1,000 young lives each year. A recent review of 50 studies provided evidence that raising the legal drinking age to 21 reduced youth drinking and related problems, such as traffic crashes. In response to many concerns about people under the age of 21 easily obtaining alcohol, research has also suggested that the MLDA could become even more effective with increased enforcement, including deterrents for adults who might sell or provide alcohol to minors.

Lower legal blood alcohol concentration (BAC) limits for youth and adults have been found to decrease alcohol-related traffic fatalities. Many states have lowered legally allowable BAC limits for young drivers in an effort to reduce their involvement in alcohol-related crashes; for these states, BACs range from .00 to .05. An analysis of the first four states to lower BAC levels found that these states experienced a decline in teenage nighttime fatal crashes 30 percent greater than declines in nearby comparison states that did not lower the BAC limit. A number of states have also lowered the legal BAC for adults from .10 to .08 percent. Studies of a subset of these states project that if all states adopted a .08 percent BAC law for adults, at least 500 to 600 fewer deaths would occur annually.

Efforts Combining Multiple Approaches Are Gaining Popularity, but Evaluations Are Still Under Way

Lately, communitywide prevention efforts that combine multiple strategies have become a more popular response to problems related to alcohol misuse. These communitywide programs incorporate strategies to both regulate the physical and social conditions in which drinking occurs and educate individuals about alcohol use and enhance their ability to reduce or resist drinking. Early research indicated that using multiple approaches produced only temporary changes in drinking behavior and the prevalence of alcohol-related problems. Programs were redesigned in response to these findings, and preliminary data suggest that these newer multifaceted strategies may be more successful in reducing alcohol consumption than either individual or environmental approaches alone. For example, in several states implementation of a strong educational program, along with lowering the legal BAC limit for teen drivers, was reported to significantly reduce nighttime fatal automobile crashes. A 5 year community prevention trial that combined several strategies, including mobilizing the community, increasing enforcement of drinking and driving laws, and enforcing underage sales laws, resulted in a reduction in alcohol-involved traffic crashes of about 10 percent a year and significant reductions in alcohol sales to minors. Evaluations of several major studies of communitywide approaches are still under way and no final outcome data are available. One of the studies, Project Northland-Phase II, focuses on reducing drinking and alcohol-related problems among 15- to 17-year-olds and includes a combination of school and media curricula; youth social action programs; parent involvement and education; and community task forces for numerous policy and social interventions (e.g., enforcing existing laws prohibiting alcohol sales to minors and restricting alcohol sales at sporting, music, and other public events).

Limited Evidence to Determine What Works

Based on the current research literature, only a few alcohol prevention approaches have been adequately evaluated and proven effective. With the exception of several well-designed studies, such as Project Northland and research on the MLDA, most published evaluations of the effectiveness of alcohol prevention programs and strategies were shown to be methodologically weak. Detailed reviews of the alcohol prevention literature by NIAAA, the Institute of Medicine, and other experts found limitations in the study designs that affect the evaluation of outcomes and may compromise conclusions. Common problems include questions about the validity of self-reported data, the selection of inappropriate research designs and statistical analyses, lack of comparable experimental and control groups, and the potential impact of high attrition rates. Evaluations of early school-based programs, for example, relied heavily on self-reported data to measure alcohol use, which raises concerns about possible underreporting or overreporting by program participants. Although recent studies have attempted to address many methodological challenges that commonly face researchers of prevention programs, concerns continue to surface. For example, although research has shown that some legal and regulatory approaches are effective, the inability to control factors beyond the study interventions makes it difficult to determine the exact nature of the relationship between the prevention strategy and changes in drinking behavior.

Enforcement Strategies in District of Columbia Metropolitan Area

The District of Columbia, Maryland, and Virginia support a number of enforcement strategies to enforce laws intended to prevent underage drinking and the misuse of alcohol by adults. Some of these strategies are directed at sales outlets, while others are aimed at preventing underage access to alcohol and promoting responsible drinking. ABC Boards, ABC enforcement officials, and local police departments are responsible for implementing these strategies. Although the following strategies have not been formally evaluated, officials we interviewed cite them as successful.

A reverse sting operation, commonly referred to as cops in shops, was an effort in which police officers, posing as store clerks, apprehended minors using false identification to purchase alcoholic beverages while ABC officials and/or police officers waited outside in cars. Some of the officials we interviewed ranked this program as the most successful enforcement program in their jurisdictions, claiming numerous citations issued to youth and subsequent decreases in underage attempts to purchase alcohol. Officials said that establishment owners welcomed this program, because only underage violators were fined, not the establishment. Additionally, the establishments did not have to pay the police officer, who worked as a clerk for several hours in the liquor outlet. This program, funded through a federal grant with the assistance of the Washington Regional Alcohol Program of Northern Virginia, was implemented for 1 year in the District and several Maryland and Virginia counties.

Maryland requires an alcohol awareness training course for every licensed establishment. Alcohol beverage control officials in the District and Virginia support efforts to offer such training, and the District requires training for establishment owners who have violated liquor laws. Officials we interviewed believe that statewide laws should require that a trained person be on the premises of an establishment at all times, or else the training has little effect on consumption. Although Maryland law does not require this, Montgomery County supplemented Maryland law to require a trained person on the premises at all times.

Beer keg registration, a strategy in use in the District, Maryland, and Virginia, requires that every keg sold must be registered, with information on a label as to who bought it, what kind of identification was shown, and where the keg came from. This is to discourage adults from purchasing kegs for youth; if the label is removed, legal responsibility rests with the person hosting the party. Officials told us this has resulted in a decline in adult beer keg purchases for underage drinkers and has cut down on the number of youth drinking parties.

Montgomery County, Maryland, and Virginia use sting operations involving underage decoys who accompany ABC enforcement officials to establishments to attempt to purchase alcohol. If an establishment sells alcohol to a decoy, it can be penalized. Montgomery County also uses these underage volunteers in a program to monitor hotel and motel room service operations. In this sting operation, the ABC official rents a room and the underage volunteer calls for room service, ordering an alcoholic beverage. The official waits unseen to observe if the youth is illegally allowed to purchase alcohol. According to Montgomery County officials, this program has been highly effective; hotels had 100 percent compliance rates with underage drinking laws following 2 consecutive years in which they had a 66 percent violation rate. Prince George’s County officials disagree with the concept of a sting operation; they believe it inappropriately entraps establishments.

The District of Columbia Funds Various Alcohol Abuse Prevention and Treatment Programs

In addition to its enforcement efforts, the District funds a variety of health and education programs to prevent and treat alcoholism, most of which are components of overall substance abuse programs. In fiscal year 1997, District agencies spent about $66 million providing substance abuse services to its residents. Most of these dollars were used for treatment services. The District Department of Health’s Addiction Prevention and Recovery Administration (APRA) is one of the major providers of substance abuse treatment and prevention services, with total spending of about $24 million in fiscal year 1997. The District of Columbia Public Schools are a source of funding for prevention activities for school-aged youth.

APRA funds alcohol prevention programs and offers counseling and treatment services to residents, either directly or through contractors. Alcohol prevention activities directed to youth who have not begun to use alcohol range from disseminating information and educating targeted populations, such as school-aged and college youth, to helping community groups develop programs. During fiscal year 1997, APRA spent about $1.2 million of its federal block grant on alcohol prevention activities and treatment services, most of it spent on treatment. Major prevention activities included a telephone hotline and neighborhood outreach centers. APRA worked with other government agencies and community groups to provide prevention activities to youth and adults.

The District also offers school children a systemwide drug prevention education program, using funding under the Safe and Drug Free Schools and Communities Act of 1994. Administered by the District of Columbia Public Schools, the Substance Abuse Prevention Education (SAPE) Program spent about $1.7 million during fiscal year 1997, providing a variety of prevention activities to public, parochial, and private school students; teachers and other school staff; parents; and community groups. The SAPE Program provides education, training, program development, and information dissemination to teach its participants about the use and abuse of alcohol and other drugs.

Conclusions

Although the District’s alcohol tax structure differs from the tax structures of most states, its combined taxes on alcohol are generally higher. The District cannot conform its alcohol tax structure to those in all surrounding jurisdictions at the same time, because the tax structures among those neighboring jurisdictions differ significantly. Moreover, the District would not be able to impose exactly the same effective tax rates as those in either Virginia or Montgomery County, because those effective rates are difficult to estimate precisely. The District’s taxes on beer are currently the highest in the region. Increasing taxes on alcoholic beverages has been associated with reductions in alcohol consumption and related health and social problems. The special geographic circumstances of the District—where all of its suburbs are in other jurisdictions—could weaken the effect that an increase in the District’s taxes would have on local alcohol consumption.

Strategies to prevent youth from using alcohol and adults from drinking excessively generally either try to educate individuals and build their resistance skills or use legal and regulatory controls to affect the availability and consumption of alcohol. Although communities across the nation have invested significant resources in these efforts, there is mixed evidence about which prevention approaches are most effective. The best current evidence suggests, however, that some legal and regulatory strategies, when enforced, can help reduce illegal drinking and alcohol-related problems. If District officials are interested in investing in new alcohol prevention initiatives, it appears that greater efforts to enforce existing laws and regulations might produce the best short-term results. At the same time, however, more rigorous evaluations of prevention strategies and programs would be needed in order to provide better information about the effectiveness of the full range of prevention approaches.

Agency Comments and Our Evaluation

We obtained written comments on a draft of this report from NIAAA, PRC, and SAMHSA; and oral comments from the District of Columbia’s Office of Tax and Revenue, Department of Consumer and Regulatory Affairs, and Department of Health; the District of Columbia Financial Responsibility and Management Assistance Authority; and the Virginia Department of Alcohol Beverage Control. NIAAA commented that in general, the report makes a good start in identifying the complex issues involved in designing programs and policies to reduce alcohol abuse in a specific jurisdiction, particularly one with the unique characteristics of the District. It also provided detailed comments and suggestions for improving our presentation, which we incorporated where appropriate. SAMHSA and the Department of Consumer and Regulatory Affairs said they generally agreed with the findings of the report. The other oral comments involved minor wording clarifications, which we made where appropriate.

Officials from PRC suggested several technical changes to the report that we incorporated where appropriate. In response to their comment that our review of the literature did not sufficiently acknowledge the success of prevention strategies that combine educational and environmental interventions, we added the results of a major study that combined several strategies. They also said that our review gave inadequate recognition to some limitations of the economic literature on the effects of alcohol taxes. Their conclusion is that because of these limitations, no evidence exists regarding the effects of local alcohol taxes. Our report makes clear that there is much uncertainty regarding the size of the effect that an increase in the District’s alcohol taxes would have on consumption. However, we believe that economic theory and the weight of the available empirical evidence suggest that a District tax increase likely would have some effect on alcohol consumption. We made changes to address PRC’s other concerns about our presentation of the alcohol prevention literature when the concerns were supported by the evidence we reviewed, including additional studies PRC provided.

We are sending copies of this report to other appropriate congressional committees and other interested parties. Copies will also be made available to others upon request.

Major contributors to this report are listed in appendix VI. If you have any questions, please contact Mr. White on (202) 512-9110 or Ms. Lillie-Blanton on (202) 512-7119.

Alcoholic Beverage Pricing by the Governments of Virginia and Montgomery County

State of Virginia

The Virginia Department of Alcoholic Beverage Control operates state stores that have the exclusive authority to sell liquor both to final consumers for their own off-premises use; and to resellers, such as hotels, restaurants, and taverns, that serve liquor on-premises. The retail “shelf” prices in the state stores are uniform across the state. Private sector resellers pay the same state shelf prices that final consumers do. Final consumers pay the state sales tax on top of the shelf price. Resellers add their own mark-ups on top of the state’s shelf price and then add the sales tax to the prices they charge their customers.

Container size (in liters)

In the mid-1980s the department experimented by lowering prices on popular liquor items in selected northern Virginia stores to be more competitive with the District. The revenues for these stores declined, because the lower prices did not attract enough business away from the District to make up for the revenue that the stores lost from customers who had already been patronizing the stores. The last price survey that the department conducted in the early 1990s showed that prices in the District were generally lower than in Virginia for popular liquor brands in 1.75 liter size bottles. The survey also showed that prices on liquor sold in bottle sizes of 750 ml or less were generally lower in Virginia. Representatives from the District’s Alcohol Retailers Association indicated that this varied relationship between liquor prices in the District and Virginia likely still existed.

Montgomery County, Maryland

Montgomery County’s Department of Liquor Control operates 22 stores that offer the full array of alcoholic beverage types. These are the only stores in the county permitted to sell liquor for off-premises use. Licensed private sector stores may sell beer and wine. Hotels, restaurants, and clubs can serve all types of alcoholic beverages, but only for on-premises consumption. Taverns are licensed to serve beer and wine but not liquor. All of the licensed private sector sellers of alcohol are required to purchase all of their alcoholic beverages from dispensaries operated by the Department of Liquor Control.

Container size (in liters)

For its own stores, the county adds a further mark-up of 18 percent to the wholesale case price to arrive at the retail shelf price. Consumers pay the 5 percent state sale tax on this price. The same procedure is used for wine, except that a different state excise tax rate applies, and the county uses different wholesale and retail mark-ups: 35 percent and 28 percent.

Beer wholesale and retail prices are not established by formal mark-up rules. The county relies on price surveys of wholesale and retail prices in nearby jurisdictions for guidance in setting beer prices.

In the limited time available to us, we could not complete a retail price survey of sufficient quality that would enable us to make a useful comparison of retail liquor prices in Montgomery County with retail prices in the private sector. However, because Maryland requires all wholesalers operating in the state to (1) publish the prices that they charge retailers for liquor and wine and (2) charge the same price to all retailers in the state (excluding Montgomery County), we were able to compare the wholesale prices that the county charges for those beverages with the wholesale prices that would have been charged in the county if the control system did not exist.

Our comparison of prices in effect during January 1998 indicates that Montgomery County’s wholesale prices for some alcoholic beverage items are higher than those of private sector wholesalers operating in the rest of Maryland, but for other items the county’s prices are lower. The county’s prices were higher than those of the private sector wholesalers for 9 of the 14 liquor items that either the Virginia ABC Commission or DISCUS identified as top sellers. The county’s wholesale prices also were higher for 15 out of the 28 liquor items and 15 out of the 29 wine items that we randomly selected from the county’s price lists. In the absence of information on sales volumes for each beverage item, we were not able to determine whether Montgomery County’s average prices for liquor and wine are higher or lower than they would be if the county did not control prices. Consequently, we were not able to determine whether the average effective tax rate on alcohol in the county is above or below the average statutory tax rate applicable in the county. The fact that the relationship between the county’s prices and the private sector prices varies across beverage items means that the relationship between effective and statutory tax rates on alcohol sold in Montgomery County is likely to vary across beverage items also.

State Alcoholic Beverage Excise Tax Rates and State Sales Tax Rates Applied to Alcohol

Excise tax rates ($ per gallon) alcohol (percent) Other tax rates 4.000 Wine: over 14% alcohol content sold Liquor: under 21% alcohol content, $0.85 per gallon 4.625 Beer: under 3.2% alcohol content, $0.16 per gallon; over 3.2% and under 5% alcohol content, $.23 per gallon; $0.008 per gallon enforcement tax; malt liquor, $0.20 per gallon; 10% on-premises gross receipts tax (for clubs).

Wine: under 5% alcohol content, $0.25 per gallon; over 5% alcohol content, $0.75 per gallon; $0.05 per case tax; 3% off-premises and 10% on-premises gross receipts tax (for clubs).

Liquor: under 5% alcohol content, $0.50 per gallon; over 5% but under 21% alcohol content, $1.00 per gallon; 3% off-premises and 14% on-premises gross receipts tax.

Liquor: over 50% alcohol content, $6.60 per gallon Wine: sparkling wine, $0.30 per gallon Liquor: under 7% alcohol content, $2.05 per gallon Wine: over 21% alcohol content and sparkling wine, $1.50 per gallon Liquor: under 25% alcohol content, $2.50 per gallon (continued)

Excise tax rates ($ per gallon)

Liquor: alcohol content under 17.259%, $2.25 per gallon; alcohol content over 55.78%, $9.53 per gallon Liquor: retail tax $0.10 per ounce for on-premises consumption Wine: alcohol content over 17.259%, $3.00 per gallon; sparkling wine, $3.50 per gallon Wine: retail tax $0.10 per 4 ounce on-premises consumption Beer: retail tax $0.04 per 12 ounce on-premises consumption Liquor: $0.83 per gallon local tax Wine: alcohol content over 14%, $2.54 per gallon, $0.83 per gallon local tax Beer: $0.53 per gallon local tax 4.000 Wine: sparkling wine, $2.09 per gallon and wine coolers, $0.84 per gallon Beer: $0.53 per gallon for draft beer 5.000 Beer: alcohol content over 4%-$0.45 per Liquor: alcohol content under 14%, $0.23 per gallon Wine: alcohol content over 14%, $0.60 per gallon Liquor: alcohol content under 15%, $0.47 per gallon Wine: alcohol content over 21%, $2.68 per gallon 5.000 Wine: alcohol content under 5%, $0.19 8.0/10.0Wine: alcohol content over 14%, $0.75 Beer: alcohol content under 3.2%, a sales tax of 4.25% Liquor: alcohol content under 6%, $0.25 per gallon; $0.05 per case Liquor, beer, and wine: 9% wholesale tax (continued)

Excise tax rates ($ per gallon)

Liquor: alcohol content under 6%, $0.32 per gallon Wine: alcohol content from 14% to 24%, $0.23 per gallon, over 24% and sparkling wine, $1.59 per gallon Beer: $0.048 per gallon local sales tax 6.0/7.0Wine: alcohol content over 15.5% , sold through state stores; sparkling wine, $1.25 per gallon Liquor: Sold only through state stores if alcohol content is over 4% Beer: Sold through private outlets Liquor: alcohol content under 15%, $1.10 per gallon, over 50%, $4.05 per proof gallon; 0.57% gross receipts tax on private club sales Wine: sparkling wine, $0.70 per gallon Beer: 0.57% gross receipts tax on private club sales 6.000 Wine: alcohol content over 16%, $0.76 Liquor: $0.01 per bottle (except miniatures)

Wine: alcohol content 14% to 21%, $0.95 per gallon; under 24% and sparkling wine, $1.82 per gallon; $0.01 per bottle (except miniatures)

Beer: alcohol content under 3.2%, $0.077 per gallon None Wine: alcohol content over 16%, sold through state stores; 7% surtax Beer: 7% surtax 5.000 Wine: alcohol content over 14%, $1.35 (continued)

Excise tax rates ($ per gallon)

Liquor: alcohol content under 14%, $0.40 per gallon and under 21%, $0.75 per gallon Wine: alcohol content 14% to 22%, $0.75 per gallon; over 22%-$2.05 per gallon Liquor and wine: all sales are through state stores 5.000 Wine: alcohol content over 14%, $6.06 Liquor: alcohol content under 24%, $2.54 per gallon Liquor: sales tax applies to on-premises consumption only Wine: alcohol content over 17%, $0.91 per gallon 7.000 Wine: alcohol content over 17%, $0.60 per gallon; sparkling wine, $1 per gallon 5.000 Wine: alcohol content over 14%, $1 per gallon; vermouth, $1.10 per gallon; sparkling wine, $1.50 per gallon 4.5/12.0Liquor: $1 per bottle on-premises tax Wine: alcohol content over 14%, $1.44 per gallon; sparkling wine $2.08 per gallon; $1 per bottle on-premises Beer: alcohol content under 3.2%, $0.36 per gallon; $1 per case on-premises None Wine: alcohol content over 14%, $0.77 Liquor and wine: all sold through state stores 7.000 Wine: sparkling wine, $0.75 per gallon Liquor: $5.36 per case charge and 9% surtax on retail “shelf” price Wine: $0.18 per gallon additional tax Liquor: alcohol content under 14%, $0.93 per gallon and 2% wholesale tax Wine: alcohol content 14% to 20%, $1.45 per gallon, over 21% and sparkling wine, $2.07 per gallon and 2% wholesale tax (continued)

Excise tax rates ($ per gallon) alcohol (percent) Other tax rates 6.0/15.0Liquor and wine: $0.15 per case charge; alcohol content under 7%, $1.10 per gallon Beer: 17% wholesale tax 6.25/14.0Wine: alcohol content over 14%, $0.408 Beer: alcohol content under 4%, $0.198 per gallon Liquor and wine: sold through state stores only Beer: alcohol content over 3.2%, sold only in state stores 5.000 Wine: alcohol content over 16%, sold Beer: alcohol content 6% to 8% - $0.55; 10% on-premise sales tax 4.500 Wine: alcohol content under 4%, $0.2565 per gallon and over 14%, sold through state stores 6.500 Wine: alcohol content over 14%, $1.72 Beer: state excise tax plus $4.78 per barrel additional tax 6.000 Wine: alcohol content over 14%, sold 5.000 Wine: alcohol content over 14%, $0.45 Liquor and wine: all sales through state stores 8.0/10.0Wine: alcohol content over 14%, $0.40 per gallon and sparkling wine, $0.45 per gallon In 18 states, the government directly controls the sales of liquor and, in some cases, beer and wine. Revenue in these states is generated from various taxes, fees, and alcohol beverage receipts.

Empirical Evidence Relating to the Effects of Alcohol Tax Increases on Alcohol Consumption and Associated Behavior

Empirical research conducted since the early 1980s generally concludes that increases in the prices of alcoholic beverages reduce drinking; heavy drinking; and related outcomes, such as motor vehicle and other accidents; liver cirrhosis mortality; “crime”; and reduced education, employment, and labor productivity. According to a review of recent research, price-induced reductions in alcohol consumption “are not limited to infrequent, light, or moderate drinkers, but also occur among frequent and heavy drinkers.” The review also finds “youth and young adults, the age groups where alcohol-related problems are disproportionately high, are generally more responsive to increases in price than are adults.”

Researchers Agree That Alcohol Taxes Affect Consumption, but Empirical Estimates Vary

Higher prices for alcoholic beverages could be achieved by higher taxation. There is a clear presumption that higher taxes on alcoholic beverages are correlated with higher prices for those beverages. In general, however, the link between alcohol taxes and alcohol prices requires further study. Economists believe that the extent to which any excise tax increase is passed along to consumers varies depending on the characteristics of the markets in which consumers purchase their beverages. Such characteristics would include how responsive market demand is to price changes and how much competition among sellers exists in the market. Most researchers studying the economics of alcohol consumption assume that the full amount of the excise tax increase is passed along to consumers in the form of higher prices. In the absence of more complete evidence, researchers believe these are the best assumptions that can be made. Many researchers have used the variation in state-level excise tax rates across states as a proxy for the variation of alcohol prices across states.

Researchers have estimated a range of values for the degree to which consumption of beer, wine, or liquor responds to changes in the prices of these beverages. A comprehensive survey of empirical research conducted between 1983 and 1992 on the effect of price increases on alcohol consumption found that in response to a 10 percent beer price increase, beer consumption would decline by between 1.2 percent and 10.7 percent, with most studies estimating that the change in consumption would be less than 5 percent.

Generally, studies have tended to show that liquor and wine consumption is somewhat more responsive to price changes than is beer consumption. Experts estimated that liquor consumption would decline by between 5 percent and 10 percent in response to a 10 percent liquor price increase, but most of the estimates for wine were in the range of 5 to 20 percent.

Other, generally more recent, studies have used data from surveys of individual alcohol consumption. These studies have found higher estimates for the consumption response to an increase in the price of alcohol. NIAAA’s 1997 report to Congress reviewed and summarized the post-1992 studies of the effect of alcohol price increases on consumption. According to this report, there continues to be substantial variation in estimates of the responsiveness of alcohol consumption to changes in alcohol prices.

One reason why the effects of price increases on alcohol consumption remain uncertain is the quality of the data that researchers have to work with. To make more precise estimates of the effects of price increases on alcohol consumption, one would need to use accurate measures of the prices that individual consumers pay for various types of alcohol rather than consumption data aggregated to a state or national level. However, collecting price data for a large sample of consumers is difficult and costly. There may also be problems with the data on alcohol consumption that have been used in the empirical literature—self-reported consumption data—which tend to understate actual consumption. The use of alternatives to self-reported consumption data, such as expenditures on alcoholic beverages, may introduce a different set of errors and biases.

Evidence Indicates That Both Light and Heavy Drinkers Are Responsive to Alcohol Prices, Although Some of the Heaviest Drinkers May Be Less Responsive

Light, moderate, and fairly heavy drinkers respond to alcohol price increases by cutting back on consumption. However, among a relatively small number of the very heaviest drinkers—those often considered to be addicted to alcohol—some researchers have found very little, if any, response to changes in price, while others have found some price responsiveness. One study found that consumers in the middle of the distribution of drinkers were the most sensitive to price changes, and very light and very heavy drinkers were less sensitive. This study also found that the higher the price of alcohol, the less likely consumers were to have any days of heavy drinking. Another study that examined the effects of alcohol prices on the frequency of heavy drinking and drunk driving found that a higher price of alcohol was associated with significant reductions in the frequency of heavy drinking for males of all ages, for females of all ages, and for females aged 21 and younger, but not for males aged 21 and younger.

In another study, the same researcher has found that reported familiarity with the health consequences of drinking was important in determining the extent to which the heaviest drinkers responded to price changes. The least-informed heavy drinkers did not appear to be sensitive to price changes, but the best-informed heavy drinkers appeared to be very sensitive. The author notes that the heaviest-drinking, least-informed consumers might be alcoholics who are in denial over the adverse consequences of drinking. He and a colleague also note that his finding is consistent with results of the Manning et al. study that found that very light and very heavy drinkers were less sensitive to price than others. The least well-informed consumers in his study were, on average, also very heavy drinkers.

Youth and Young Adult Alcohol Consumption May Be More Responsive to Price Than That of Older Drinkers

Most researchers have found that youth and young adults exhibit more responsiveness to changes in alcohol prices than do older drinkers. One explanation of the greater price sensitivity of younger drinkers is that younger drinkers may have less income to spend than their older counterparts. Whatever the reason for the greater price sensitivity of younger drinkers, there may be public policy implications. If older drinkers—those with a long-term lifestyle that includes heavy drinking—are less sensitive to price while younger drinkers are more sensitive to price, higher alcohol taxes may have a two-fold effect. Higher alcohol prices may be an effective policy for reducing youth alcohol consumption and its related problems, as well as in reducing the likelihood of developing a long-term lifestyle that includes heavy drinking.

Most researchers have found that beer is the beverage of choice among youths who drink alcoholic beverages. Some researchers have concluded that beer is disproportionately preferred by higher risk groups—for example, by those who drink a lot during a typical session far more than by those who drink moderately. It also has been noted that beer drinkers are more likely to drive while intoxicated than drinkers of other alcoholic beverages. Additionally (as noted above) researchers believe that the responsiveness of alcohol consumption to changes in its price is greater for youth than for adults. One study estimated that a 10-percent increase in the price of beer could cause youths’ consumption to decline by 23 percent. For those 17 to 29, another study found that on average, a 10-percent increase in the price of beer would lead to about a 7-percent decrease in consumption in the long run. Yet another study found that after the states increased their legal drinking ages to 21 in the late 1980s, the price sensitivity of youth alcohol use fell.

Recent studies show that the drinking behavior of youths who are frequent, heavy, or binge drinkers is especially sensitive to alcohol price changes. One study found that a 10-percent decline in the price of beer would increase the number of youths (aged 16 to 21) who drink beer 4 to 7 times per week by about 10 percent. The same 10-percent decline in price would cause the number of youths (aged 16 to 21) who consumed no beer per week to fall by about 7 percent. Another study by some of the same experts found that the number of youths who drink six or more cans of beer on a typical drinking day would decline by about 31 percent in response to a price increase of 10 percent; the number of youths who drink only 1 to 2 cans of beer on a typical drinking day would decline by about 12 percent in response to a price increase of 10 percent. In contrast, another recent study suggests that prices would have little impact on drinking and binge drinking among male college students. The effects of alcohol taxation on heavy and binge drinking are of special interest because of the high fatality rates from drunken driving that are associated with it. Alcohol involvement in motor vehicle accidents is estimated to be three times higher in the 18- to 20-year-old group than it is in the general population. Results from other studies indicate binge drinking and heavy drinking are inversely related to price among adults as well.

Evidence Suggests That Increasing Taxes May Reduce Some Harmful Consequences of Drinking

A number of studies have examined the relationship between alcohol prices or tax rates and adverse consequences associated with alcohol misuse. According to a summary of the most recent research, it has been clearly demonstrated that increases in alcohol prices “can significantly reduce many of the problems associated with alcohol abuse, as well as improve educational attainment.” Problems associated with alcohol use and abuse include drinking and driving and motor vehicle accidents, liver cirrhosis and other health effects, decreased educational attainment and employment, and violence and other crime.

One of the most studied relationships is the relation between alcohol use and auto accidents and fatalities. There is a consensus in the empirical literature that an increase in the price of alcoholic beverages would reduce the number of lives lost in vehicle fatalities. According to one study, the occurrence of drunk driving declines as its full price increases. The study also found the risk of death or injury from an auto accident rises precipitously with the intensity of drinking; i.e., binge drinking. Another study found that higher state beer excise tax rates were associated with reductions in motor vehicle fatalities for youths aged 15 through 24.Likewise, in another study the state beer excise tax rate exhibited large negative and statistically significant associations with total driver fatalities, night driver fatalities, and alcohol-involved fatalities for both drivers of all ages and drivers 18 to 20 years old. Other researchers found higher state beer tax rates to be weakly associated with a reduced propensity to drive drunk.

A recent study of the relation between beer prices and drunken driving included a relatively comprehensive set of explanatory variables and examined a variety of different model specifications. This study found that a 10-percent increase in the price of beer would result in an almost 10-percent decrease in the fatality rate from drunken driving, a 14-percent decrease in the fatality rate from nighttime drunken driving, and a 14-percent decrease in the fatality rate from drunken driving for those aged 18 to 20. Another recent study estimated that alcohol prices have a negative and significant effect on binge drinking—the behavior that leads to drunken driving—with a 10-percent increase in the price of alcohol leading to a 9-percent decrease in the expected number of binge episodes per month.

Two studies have found that the excise tax rate on liquor has a negative and significant effect on the liver cirrhosis death rate. In contrast, other researchers found higher alcohol prices were not significantly related to lower death rates from liver cirrhosis. These studies did find a significant negative relationship between alcohol prices and suicide rates and mortality rates from other cancers to which alcohol contributes. They also found weak or insignificant effects of alcohol price on death rates from homicide and from falls, fires, and other accidents.

Two recent studies investigated the relationship between alcohol use and crime. These researchers found significant relations between the real tax rate on beer and the incidence of rape and robbery. Other recent studies examined the impact of alcohol use and heavy use on the level of education attained. These researchers note that there is evidence that heavy drinking is associated with reductions in the average number of years of schooling completed and reduction in employment as well as a tendency toward alcohol abuse in later life. They observe that the bulk of evidence supports the conclusion that increasing alcohol taxes would extend life expectancy. Several other experts have suggested that people who misuse alcohol are less likely to be employed and tend to have lower incomes than people who do not.

How States Earmarked Alcoholic Beverage Excise Tax Revenues, as of Fiscal Year 1993

26.2 University of Arkansas Medical Center 1.6 Child and adolescent substance abuse 3.7 Alcoholic beverage and tobacco trust fund Prison construction, enforcement, and administration 21.2 County or city where sold 2.6 Alcoholism treatment and prevention 8.1 Department of Mental Health 24.0 Alcohol treatment and rehabilitation 4.1 Alcohol and drug abuse programs 12.5 Alcohol education, rehabilitation, and 52.0 Community alcoholism and detoxification (continued)

Selected Provisions of Alcohol Control Laws in the District of Columbia, Maryland, and Virginia

Major Contributors to This Report

General Government Division, Washington, D.C.

Health, Education and Human Services Division, Washington, D.C.

Office of General Counsel

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