The Health Impact of Alcohol Taxes

December 4, 2017

Recently, a blog post at The Washington Post questioned the portion of the Senate’s Tax Cuts and Jobs Act that reduces the excise taxes on spirits, beer, and wine. The author argues that a reduction in the excise taxes on alcohol would be tantamount to killing Americans. His argument is that lowering the taxes on alcohol would lower the market price, which would cause Americans to increase consumption to the point they endanger their health, either through direct consumption or related fatalities.

This argument is puzzling. How can taxes affect the consumption of a relatively inelastic good such as alcohol? In addition, is this research accounting for all of society?

The argument in The Post blog hinges on the research of Professor Frank J. Chaloupka at University of Illinois. Professor Chaloupka, an economist, has been a proponent of excise taxes of tobacco, alcohol, sugar, and even fatty snacks. His application of similar tools across different markets has yielded a common conclusion: unhealthy behavior is reduced by tax increases. Some in the media have taken his cautious conclusions and exaggerated them to morbid predictions.

Moreover, Chaloupka’s studies are single-market studies, which means that he does not look at the interaction effects or substitution effects from other markets. For example, an increase in alcohol prices may put a high burden on lower income individuals, who may substitute alcohol for more dangerous chemicals. Low-income individuals may decide to seek opioids or inhalants instead of drinking alcohol, considerably more dangerous behaviors. Such a scenario would mean deaths from alcohol might shift to deaths from opioid overdose or inhalation. In this case, death from alcohol would fall statistically as taxes on alcohol increase, but deaths in all of society would increase. This partial, rather than general, analysis of the economy could lead decision-makers to implement policies with unintended and dangerous consequences.

In general, economists around the world have found that the consumption of alcohol is relatively inelastic, which means consumption does not change much as the price changes. The reason consumption of alcohol does not change as price or income shifts is that individuals simply change the mixture of alcohol consumed rather than scaling up or down the total alcohol consumed.

The Craft Beverage Modernization provisions in the Senate’s Tax Cuts and Jobs Act do not comprise perfect legislation, but do help to alleviate some of the economic distortions from excise taxes. Excise taxes on alcohol tend to be highly regressive and could cause the most economically vulnerable in our society to resort to dangerous alternatives. As such, tax policy should be informed by comprehensive scientific analysis and not fall prey to scare tactics.

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