March 1, 2004

A Critique of the National Research Council and Institute of Medicine’s Recommendation to Raise Alcohol Excises to Curb Underage Drinking

Download Background Paper No. 43

Background Paper No. 43

Executive Summary In September of 2003 the National Research Council and Institute of Medicine (NRC/IM) released a report titled Reducing Underage Drinking:A Collective Responsibility. It called for a comprehensive national strategy to combat the underage consumption of alcohol and, among other recommendations, called for large increases in excise taxes on alcoholic beverages.

Without specifying exactly how high alcohol taxes should be, the NRC/IM report said they should be raised “substantially” and cited the findings of studies that argue for taxes as high as five times their current level. If this were to occur, a family with two adults who consume average amounts of alcohol could expect their tax bill to rise by more than $500 annually, even after accounting for a dampening effect the tax hike would have on consumption.

The NRC/IM makes two assertions in defense of its recommendation:“Underage drinking imposes particularly high average social costs,” and secondly,“ Raising excise tax rates, and hence prices, is a strategy that has strong and well documented prevention effects on underage drinking.”

This paper examines the economic issues surrounding the recommended tax hike and finds that neither assertion is well supported. On the issue of social costs, the evidence cited by the NRC/IM in its report simply does not support its claim that underage drinking imposes particularly high average social costs. Similarly, the idea that taxes markedly reduce teenage consumption of alcohol isn’t supported by the empirical literature.

Increased alcohol excises would, however, place significant burdens on legal consumers of alcohol and worsen existing inequities in the tax system. Moreover, alcohol taxes have been found to be one of the most economically inefficient ways of raising government revenue. Regulatory approaches tailored to the underage population, such as increased enforcement of minimum age and drunk driving laws, offer much more promise of reducing underage drinking and related problems without such undesirable side effects.

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