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Proposal to Increase West Virginia Beer Tax Misses the Target

By: Mark Robyn

A bill in introduced in the West Virginia House of Representatives would quadruple the state’s excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on beer from $5.50 per barrel to $22 per barrel (this translates into an increase from about 1.7 cents per 12 ounce bottle to 6.7 cents per 12 ounce bottle), with the increased revenue going to fund alcohol and drug abuse treatment programs. One justification for targeting beer is that increasing the price of beer will reduce consumption of alcohol, thereby reducing alcohol abuse and keeping new individuals from becoming alcoholics. Plus, the argument goes, since alcohol leads to increased public expenditure on treatment programs, it makes sense to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. beer and earmark the funds for substance abuse programs.

A few thoughts. At first glance this proposal seems to follow the model of a type of tax known as a Pigouvian taxA Pigouvian tax, named after 1920 British economist Arthur C. Pigou, is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes. . Some activities that an individual can engage in have costs that are not born by the individual but by society as a whole. A Pigouvian tax is designed to reduce these activities by increasing the price the individual pays to reflect the social cost, or negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. .

While a beer tax may appear on the suface to reduce the negative externalities associated with alcoholism, it may not be as good of a Pigouvian tax as lawmakers might hope. This is because a beer tax targets the wrong activity. The presumed externality results from alcoholism, not all consumption of beer. This has a couple of important implications. First, most beer drinkers consume at a healthy level and never require treatment. Their activity has no externality, and they bear all the costs of their drinking. But a beer excise tax taxes all drinkers, regardless of whether they impose a cost on society.

More importantly, research shows that while a Pigouvian tax on beer will reduce consumption, the reduction likely will not be from the desired group, that is, the heavy drinkers and alcoholics. The National Bureau of Economic Research, a nonprofit, nonpartisan research organization, sums up some of their research findings in a paper on “sin taxes”:

Importantly, the unresponsive group drinks more heavily, suggesting that a higher price could fail to curb drinking by those most likely to cause negative externalities. In contrast, those least likely to impose costs on others are more responsive, thus suffering greater deadweight loss yet with less prevention of negative externalities.

Some might try to justify the beer tax increase using the benefit principle of taxation, which says that those who benefit from a government service should pay for it. The argument is that drinkers are the ones who benefit from the treatment programs and so should be the ones to pay for them. But again, most beer drinkers never require treatment for addiction, so this argument is weak.

What is more, while it may be impossible to determine exactly who benefits from a government service and to what extent they benefit, it could plausibly be argued that addiction treatment is a public good that benefits all of society by keeping people with destructive behavior from harming society and shepherding them back to a socially productive lifestyle. In this case the benefit principle would suggest that all of society should pay for the treatments, not just beer drinkers, just as everyone pays for police services. Or maybe only those receiving treatment actually see a benefit, in which case they should foot the bill. Either way, it would be hard to argue that the group that benefits from the treatment programs includes all beer drinkers but no one else.