Raise a Glass to a Fair Tax Hike

George A. Hacker and Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

November 7, 2005

Multiple factors, including war, tax cuts, a struggling economy, and the imminent bill for the pension and health costs of retiring baby-boomers have converged to threaten large, increasing, and endless budget deficits. Now, faced with the prospect of additional huge outlays for Katrina cleanup and reconstruction, some members of Congress have been searching madly for ways to cut spending. But only some spending. Bridges to nowhere and other shameless pork-barrel outlays get a pass, but politically weaker targets — programs to help low-income Americans, such as food stamps, Medicaid benefits, and the recently-enacted and not-yet-implemented drug benefits for the elderly and disabled — are on the chopping block.

Those programs need not be sacrificed to the deficit hawks. Instead of going after the weak, concerned Democrats and moderate Republicans should consider a sensible option that will help stanch the flow of red ink and improve the bottom line. That option is long-overdue, popular, and fair: raise the tax rates on alcoholic beverages.

In the last 25 years, taxes on alcoholic beverages have fallen dramatically with inflation. For example, had the beer tax merely kept up with inflation, it would be 20 percent higher today; the liquor tax would be nearly double its current rate of $13.50 per proof gallon. Effective tax rates have dwindled because those taxes are typically not a constant percentage of price, but a flat amount. As prices rise, the relative importance of the taxes falls, unless Congress raises them. In fact, beer and wine taxes have been raised only once in the past 55 years, liquor taxes only twice. As a result, tax revenues that accounted for 12 percent of the sales of alcohol in 1980 now amount to only 7 percent of total sales.

Those stealth tax cuts have deprived the Treasury of tens of billions of dollars and helped reduce the relative price of alcohol, a particular break for price-sensitive underage drinkers. According to a 2005 report of the Congressional Budget Office, modestly increasing and reforming alcohol taxes would raise almost $27 billion between 2006 and 2010. Recognizing that cheap booze puts it in easier reach of kids, the National Academy of Sciences recommended alcohol tax increases, especially on beer. That call was echoed last spring in a petition to Congress from 60 of America’s most prominent economists, including 4 Nobel Prize winners, who agreed that an alcohol tax increase is overdue and well-justified.

Alcohol producers, wholesalers, and retailers will no doubt protest. But raising alcohol taxes is justified because the $18 billion in current alcohol-tax revenues don’t come close to offsetting the staggering public health and safety costs of alcohol consumption – estimated at $185 billion per year, including $53 billion for the costs of underage drinking alone.

No one really likes tax increases, but alcohol taxes are among the most acceptable. Most Americans would barely notice higher alcoholic-beverage taxes because more than one-third of adults don’t drink and among those who do, about eight in ten drink at most one per day. The 20 percent of drinkers who consume 85 percent of all the alcohol would have to dig deeper into their pockets of course, but that might even cause some to forego that last round, a decidedly healthy outcome.

Americans know that taxing alcohol is not like taxing bread, and they would choose tax hikes over the wholesale evisceration of social and health programs. A nationwide poll on state alcohol taxes conducted last year by the American Medical Association (AMA) found that 65 percent of Americans prefer tax hikes on alcohol over cuts in spending on education, healthcare, and law-enforcement as a means of reducing state budget deficits.

Raising taxes on alcohol is fair because alcohol consumption of all kinds rises sharply with income. According to industry data, more than 52 percent of beer and liquor drinkers have incomes over $60,000, compared to some 20 percent who have incomes less than $30,000. Greater percentages of upper-income persons drink than do those in lower income categories. For that reason, per capita tax payments on alcohol rise with income. Conversely, per capita use of Medicaid and Food Stamps falls with income.

Deficits damage us all by reducing U.S. wealth and eroding future income growth. Why pass up an opportunity to marry deficit cutting and progressive public health and social policy? Can anyone seriously doubt that an increase in alcohol taxes will be more effective in fulfilling President Bush’s one-time promise to promote compassionate conservatism than would cuts in Medicaid, Medicare, and Food Stamps? Only political cowardice and shortsightedness would allow Congress to gut health and income support for the poorest Americans when a source of revenue is at hand that would reduce the deficit and also discourage consumption that severely compromises public health and safety. Raising alcohol taxes to preserve critical social safety net programs is something we could all in good conscience celebrate.