In FY2023, US federal revenues from alcohol taxes were $11 billion or 0.25% of total tax revenues. Distilled spirits accounted for 60% followed by beer at 30% and wine at 10% of revenues. An estimate for state governments in 2021 was $8 billion or 0.20% of general revenues. States with the highest share of general revenue from alcohol taxes are Tennessee (0.7%), Alabama (0.6%), and North Carolina (0.6%). In addition, state and local governments collected $12.7 billion from government-owned
liquor stores and $0.9 billion in the form of license taxes. Although these are large dollar amounts, alcohol's share of total revenue is small and declining. A common concern is that alcohol taxes have not kept pace with inflation causing a decline in real beverage prices. This is also referred to as increased alcohol "affordability." There also are social costs from excessive use of alcohol that have resulted in political pressures for federal, state, and local tax increases. This section examines economic underpinnings of alcohol excise taxes for revenue and corrective purposes. An increase in an alcohol tax has several effects. First, the tax is passed-through to retail prices and
pass-through rates can be greater or less than 100%. Estimates for pass-through rates are available by beverage for selected countries. Second, the increase in price causes a change in consumer demand for legal products where price elasticities determine reductions in quantity relative to increases in price, with resulting effects on revenues and
excess tax burdens. Excess burden is the
deadweight loss in
consumer surplus over and above increased tax payments that are a transfer to the governmental body. An increase in price will also lead to substitution among brands and beverages due to
cross elasticity of demand effects. If long-run demands are more elastic, ear-marking of taxes can lead to revenue shortfalls. Third, the price increase is expected to affect consumer behaviors so that adverse effects of alcohol consumption are altered or reduced. The nature and extent of reduction is an evidence issue, which is examined here for heavy drinking prevalence, binge drinking, and
liver cirrhosis mortality.
Cost-effectiveness studies reverse the analysis by first calculating a social cost estimate for alcohol consumption and then determining how a given tax increase might reduce these costs. Components of cost estimates are an important issue as public health analyses combine external costs of alcohol abuse and private productivity (
internal) costs of alcohol use. Private costs are measured by the value of lost wages. Fourth, alcohol taxes raise several political issues, including tax regressivity, tax neutrality, and
unintended consequences.
Pass-through to retail prices Excise taxation is expected to have some impact on retail prices of alcohol beverages. A standard exercise in economics is to analyze "who actually pays the tax." Is it consumers, producers, or both?
Tax incidence analysis is the study of how a
tax burden is shared between consumers and producers, regardless of statutory legal obligations to collect the tax. In simple terms, this is an issue of whether an excise tax is fully
passed-through to final consumers or not. Pass-through rates of less than 100% imply that some portion of a tax is shifted forward to consumers and the remaining portion is shifted backwards to producers. Tax pass-throughs to retail prices depend on the elasticity of demand relative to the
elasticity of supply. In competitive markets, increases in retail prices will be greater (smaller) as elasticity of demand decreases (increases) and elasticity of supply increases (decreases). These same principles apply in the long-run, except the expectation for many industries is that
long-run supply is perfectly elastic (constant cost industry), and an excise tax will be fully shifted to retail prices. The pass-through rate in this case is 1.0 or 100%. Some empirical studies report a pass-through of more than 100%. There are several reasons why this might occur. First, there are
menu costs of price changes that lead to
sticky prices, so producers and retailers recognize that less frequent price changes might be optimal over the longer-run. Second, the market might be
non-competitive and rival producers strategize on pass-throughs, which depend generally on complex features of demand functions. Third, price structures across brands and beverages are complex reflecting substitution possibilities, and some products may have pass-throughs of less than unity while others more than unity. In addition to direct effects on price, a tax based on alcohol content can result in producer substitution toward non-taxed features (Barzel effect) while a simple unit tax on gallonage can result in consumer substitution toward higher quality, higher-priced brands and beverages (
Alchian-Allen effect). Other substitutions, such as trading-down to lower-priced brands and beverages, is an important detail for revenue collections and corrective policies. Cross-border purchases and counterfeit or unrecorded alcohol purchases also are important as unintended consequences. A
systematic review of 30 studies of alcohol excise pass-through rates for a variety of countries found evidence that beer taxes are over-shifted, and wine and spirits taxes are fully-shifted. Results of past studies can be summarized using a narrative review or quantitative meta-analysis. In a properly conducted meta-analysis, similar primary results are summarized using weighted means based on precision weights (inverse variances) applied to point estimates. Controls should also be included for non-independent estimates and
publication bias. Publication bias is the general problem that primary investigators select results according to statistical significance (
data dredging or positive-results bias) or journal editors and reviewers select articles for publication according to strongly-held beliefs about expected outcomes (
confirmation bias or file drawer problem). In the first case, meta-analysis estimates should be corrected for publication bias. The second case is managed generally by a thorough literature search for both published and unpublished results. Four meta-analyses have been conducted by economists. Beer price elasticities in their study are less elastic at lower incomes and higher prices. Overall, the demand for alcohol beverages is price inelastic, which implies that excise taxes on alcohol are effective to generate tax revenues. Beer is the least elastic and beer is the preferred beverage by binge drinkers and heavy drinkers, accounting for a sizable percentage of all alcohol consumed. There also can be substitution among beverages, with most studies finding that each beverage is a positive substitute for others. An increase in taxes on wine will induce a shift in legal consumption toward beer or spirits as relative prices change. An accounting of the change in consumption of wine alone might miss some of the shift toward other alcohol beverages.
Effects on heavy drinking A substantial literature exists in public health and
economics on statistical effects of alcohol prices (or taxes) on drinking behaviors and a variety of alcohol-related harms. This section provides a brief review for selected harms: heavy drinking, binge drinking, and liver cirrhosis mortality. In many cases, only a small number of empirical studies exist for a given harm or group of harms. Although quantitative summaries of empirical estimates are sometimes reported, these tend to use
small samples,
combine estimates from diverse studies, and ignore
statistical significance. A qualitative or narrative summary provides structured results without claims of quantitative precision. An alternative empirical method is to examine drinking outcomes on a before-after basis ‒ a
natural experiment ‒ based on a given change in alcohol policy. Numerous studies along these lines have been conducted, especially for alcohol policy changes in Scandinavia. A summary is presented for empirical studies that examine alcohol-related harms on a before-after basis following important policy changes. Two systematic surveys provide broad-based analysis of economic and public health studies of prices and excessive drinking by adults and youth. First, 19 primary studies of alcohol prices and heavy drinking by adults were examined and only two studies showed that adults drinkers were significantly and negatively responsive to changes in alcohol prices or taxes. Second, nine primary studies were examined for alcohol prices and liver cirrhosis mortality, with only two reporting significant results. Third, 56 primary studies were examined for alcohol prices and binge drinking ‒ only 3 of 18 studies of youth reported a significant negative effect of prices on measures of binge drinking; only 8 of 19 studies of young adults reported significant results for one or more genders; and only 5 of 19 studies of adults reported significant results for one or more genders. Fourth, a review of eleven primary studies of binge drinking using natural experiments and field methods found only three that reported significant results. At best, these two surveys found mixed results, raising important issues of effectiveness of alcohol tax increases for heavy drinking and binge drinking among
youth, young adults, and adult populations. The price elasticity for heavy-drinking adults approaches zero in many past empirical studies by economists. In a key study of heavy drinking, Ayyagari et al. (2013) examined two groups of US drinkers: the first group is completely unresponsive to price, drinks more heavily on average, and is more likely to binge drink; and the second groups is highly responsive to price but drinks lightly or moderately. The authors conclude that drinker heterogeneity is crucial to economic welfare analysis since higher taxes will fall on both groups and could fail to reduce alcohol-related externalities. Results in Kenkel (1996) suggest that better health information is an effective policy to reduce health costs of heavy drinking. He finds the least-informed drinkers had a perfectly inelastic demand for alcohol, but better-informed heavy drinkers had demands that were more elastic than moderate drinkers. Further, Dee (1999) argues that many binge drinking studies lack a credible identification strategy. After controlling for state-level "drinking sentiment," he reports insignificant results for beer taxes and binge drinking by youth and adults. Lastly, an alternative approach to empirical research is to use evidence from natural experiments. For example, in 2008, taxes on
alcopops in
Australia were increased by 70%. In the same year,
Finland increased taxes on spirits by 15% and beer and wine by 10%. Before-after studies examine the impact of policy changes on drinking behaviors and alcohol-related harms, such as drink-driving, violent crime, and liver cirrhosis. Particular attention has been paid to the Nordic countries due to changes in alcohol policies following tax harmonization in the
European Union in 2003-2004. A survey by Nelson and McNall (2016) summarizes the substantial literature that uses natural experiments, including 45 primary studies covering nine countries (Australia, Denmark, Finland, Hong Kong, Iceland, Russia, Sweden, Switzerland, United States). A variety of alcohol-related harms were examined, with a general conclusion that natural experiments in alcohol policy have selective effects on various harms and subpopulations. This conclusion is reinforced in a second review by Nelson and McNall (2017) of additional results from 29 primary studies covering five countries (Denmark, Finland, Hong Kong, Sweden, Switzerland). Only 4 of 18 studies reported positive effects of reduced alcohol prices on binge drinking for all age groups; only 4 of 18 studies reported positive results for prices and alcohol consumption by youth and young adults; and the policy changes examined had little effect on heavy drinking by adults. Alcohol tax interventions have selective, rather than broad impacts on populations, drinking patterns, and alcohol-related harms. Studies of economic costs and benefits of increased alcohol taxes fail to properly account for these differences as well as the economic costs imposed on responsible drinkers. ==Political aspects==