The Effects of Excise Tax on Beer Consumption

The Effects of Excise Tax on Beer Consumption

By: Matt Zuzic

Economics 226

University of Akron

October 16, 2007

Abstract:

My paper discusses the effect of an excise tax on the consumption of beer. My thesis is that with an increase excise tax the consumption of beer will decrease. Many of the studies that I have found prove this thesis to be true. Many of these studies also have shown that beer consumption is a lot higher for younger people than older people. With this sort of knowledge social laws can be formed to discourage underage drinking. I found most of my resources through the website “Google Scholar”. My conclusion is that with an increase in the excise tax for beer, there will be a decrease in beer consumption. I also believe that the higher the excise tax, the greater the decrease in beer consumption will be. My conclusion is reinforced by the research papers and articles displayed in my references section of my paper.

I. Introduction

There are many governmental policies to curb the use of alcohol. One policy is keeping the legal drinking age at 21, another is making alcohol physically harder to get a hold of by making stores that sell alcohol more and more scarce, and a last policy is increasing the excise tax upon alcohol. All three of these policies have been used by different states at different times; the most well known of these policies is the legal drinking age of 21, but the policy I am most interested in is the use of an excise tax to curb alcohol consumption. How great of an effect does increases in the excise tax have upon beer consumption? Is an increase in the excise tax most effective at curbing alcohol use compared to the other policies listed above? Lastly, what is the effect of an increase in the excise tax upon society?

Much of the literature I found ran time-series regression to try and identify what an increase in the excise tax would do to alcohol consumption. These studies set different levels of alcohol usage, and looked at the effects of different levels of tax upon them. Other studies compared the effect of an excise tax on beer, distilled spirits, and wines. These studies also looked at how these different alcohols were taxed differently. Other studies took a look at the effects of alcohol abuse upon society, such as drunken driving, alcohol induced violence, and the long term effects of alcohol abuse upon the individual like higher medical bills that, in the end, society sometimes has to cover. These studies looked at what an increase in the excise tax would do to these detrimental occurrences in society. Finally, some studies were all encompassing and looked at all alcohol abuse policies to see which ones worked the best at decreasing alcohol consumption.

II. Economic Model

I expect that with an increase in an excise tax, there will be a decrease in the amount of beer consumed. I also expect that the greater the excise tax, the greater the decrease in the amount of beer consumed will be. There will be diminishing returns from each additional tax, but the overall consumption levels will continue to decrease.(Chaloupka et. al.) Diminishing returns mean that as the tax keeps on increasing, the amount of alcohol consumed will keep decreasing but at a less and less rate. After a certain amount of taxation, the decrease in alcohol consumption will not lower that greatly no matter how great the tax.

A study done by Douglas Coate and Michael Grossman showed the effects of four different policies on youth beer consumption. The first policy was a legal drinking age of 21, the second policy indexes the federal excise tax on a six-pack of beer[1] which had been fixed at $0.16 in nominal terms since 1951 to the rate of inflation since 1951[2], the third policy raises the excise tax on a six-pack of beer from $.16 to $.52 to equalize the rates at which the alcohol in beer and liquor are taxed[3], and the fourth policy combines the first and second excise tax policies to set the tax on beer at $.52 and keep adjusting it yearly for inflation making a real excise tax of $.52 on beer[4]. The amount of consumption was broken off into four different parts: people who consume beer four to seven times a week, people who consume beer one to three times a week, people who consumer beer less than once a week, and people who do not consume beer at all. The effects of these policies are shown in the graphs below.

Figure 1

Source: Coate and Grossman

Figure 2

Source: Coate and Grossman

In these graphs the actual percentage distribution stands for the percentage of youth who drank at the different levels before the policies were implemented. The effects of each policy can be seen in the graph, but the policy that I note as most effective is the combined tax policy. This policy lowered the 4-7 times a week, the 1-3 times a week, and the less than once a week drinkers the most. By doing this it also increased the percentage of youths surveyed who never drink. This study shows that by increasing the excise tax to $.52 and adjusting it yearly with inflation, one can curb alcohol consumption levels most effectively compared to just using a legal drinking age or using less strict excise tax policies.

The Coate and Grossman article discussed above looked at beer consumption only as it relates to youth. They focused only on youth for the beer consumption portion of their article, because youth are more likely to drink beer than any other age group. (Cook and Moore) The next article that I am going to cite is Philip Cook and George Tauchen’s paper The effect of liquor taxes on heavy drinking. While most of the other articles I am citing focus mainly on youth when it comes to beer consumption rates, this article does not set an age group for its study. But since this article uses cirrhosis rates as an indicator of alcohol abuse, it can be assumed that they are looking at older adults instead of youth. These cirrhosis rates can also be looked at as the overall effect of heavy alcohol consumption upon society, because society is adversely affected by the poor health of its citizens. This article focuses on the effects of an excise tax on alcohol as a whole, but I am going to use this article anyway because beer is included in the general term alcohol.

The researchers Cook and Tauchen took a look at alcohol tax per proof gallon and compared it to cirrhosis rates in the population between the years 1962-1977. They wanted to see if there was a relationship between tax rates, alcohol usage, and cirrhosis rates in their sample data. Their regression results are shown in the tablebelow in Figure3. From the data results, one can see that as the state tax for alcohol decreased, the amount of alcohol consumed increased. One can also see that as the amount of alcohol consumed increased, the percentage of people dying of cirrhosis increased as well. The relationship between alcohol tax and cirrhosis mortality rates is negative, meaning that as alcohol taxes decrease cirrhosis mortality rates increase. This can also mean that if alcohol taxes increased cirrhosis mortality rates would decrease.

Figure 3[5]

Consumption of Alcohol between 1962-1977 Compared to Excise Tax
Year / State Liquor Tax $ 1967 per Proof Gallon / Liquor Consumption Gallons of Ethanol per Person / Cirrhosis Mortality Rates per 100,000
1962 / 2 / 1.42 / 22
1965 / 2.06 / 1.56 / 23.6
1968 / 1.99 / 1.8 / 27.3
1971 / 1.96 / 1.96 / 28.2
1974 / 1.74 / 2.14 / 29.5
1977 / 1.46 / 2.17 / 26.7

Source: Cook and Tauchen

Cirrhosis mortality rates were calculated for people of age 30+, because cirrhosis death before this age is most likely not caused by drinking.“The mortality rates from cirrhosis data was compiled by the NationalCenter for Health Statistics. Population estimates were based on interpolations of the 1960 and 1970 Censuses and the Census projections for 1975 and 1977. The amount of deaths was the number dead from cirrhosis out of 100,000 people from the 30+ age group.” (Cook and Tauchen)

This data is very important when looking at the effect of alcohol upon society. As alcohol consumption increases, the number of people who are sick or dying from cirrhosis increases. This has a serious negative effect upon society. Also with an added cirrhosis rate, there is more of a social burden to pay for the healthcare benefits of these people who are sick. By increasing the excise tax on alcohol, cirrhosis rates can be decreased and thereby making a healthier more productive society.

The next study done by Frank Chaloupka, Michael Grossman, and Henry Saffer discusses the many effects that alcohol consumption has upon society, and what alcohol-control policies can do to curb these effects. One of the effects of alcohol consumption upon society that they discuss quite thoroughly is youth motor vehicle fatalities due to alcohol abuse. Their research brought them to the conclusion that an increase in beer taxes or minimum legal drinking ages (MLDAs) would significantly reduce youth motor vehicle fatalities. Other studies they have found site a fifteen percent reduction in 18- to 20-year-old youth motor vehicle fatalities due to increases in an excise tax. Another study they cite done by Chaloupka and colleagues concluded that higher beer excise taxes are among the most effective means for reducing drinking and driving in all parts of the population. “For example, between 1982 and 1988, a policy adjusting the Federal beer tax for the inflation rate since 1951 would have reduced total fatalities by 11.5 percent and fatalities among 18- to 20-year-olds by 32.1 percent.” (Chaloupka et. al.) Chaloupka, Grossman, and Saffer’s paper shows the importance of alcohol abuse policies upon youth motor vehicle fatalities.The most effective of these policies is the increase of an excise tax on alcohol.

An article by Philip Cook and Michael Moore discusses how the excise tax on alcohol should be set. These researchers make a good point that “alcohol-control measures are effective only to the extent that they affect consumers’ decisions about drinking.” (Cook and Moore) One standard way of setting the excise tax is making the excise tax high enough to pay for the external costs of someone drinking. These costs are the ones not borne by the drinker. The argument for this standard is that for one, drinkers should compensate the public for the external costs of their choices such as a loss of public order, health, and safety. For second, “if alcohol prices do not reflect the full social costs of consumption, then consumers will drink too much; in the technical sense that at the margin their drinks will be worth less to them than they cost.” (Cook and Moore)

The conclusion this article comes to is that excise taxes are an effective alcohol-control measure that can be used to promote public health. They else hit upon the point that current excise tax levels come no where near where they should be to cover the external costs of alcohol consumption. Even though this level of excise tax is either vague or hard to calculate, their study proves that it should be raised to cover the detrimental effects that alcohol consumption has upon society.

In this article Cook and Moore take an inverse relationship between price and alcohol consumption as a given. They reflect upon other economists’ research, and conclude “that alcohol is no exceptionto the economic law of downward-sloping demand.” (Cook and Moore) They are saying that as price increases, the amount of alcohol consumed decreases.

III. Data Description

The data I described above has many interesting applications. From the first study done by Douglas Coate and Michael Grossman we can see that only increasing the excise tax rate to what it was in real dollars in 1951, the last time it was increased according to the study, is still not as effective in lowering alcohol usage among youth as a legal drinking age of 21 is. Increasing the excise tax for beer to the levels liquor is taxed, $.52, is also not as effective as the legal drinking age of 21, but raising the excise tax to the levels liquor is taxed and adjusting it for inflation every year is more effective than a legal drinking age of 21.

We can compare this data to that of Cook and Moore’s article. Both suggest raising the excise tax would decrease alcohol consumption, but the question that Cook and Moore’s article leave open is how high should the excise tax be? Obviously an increase of the tax to $.52 would cover more of the external costs talked about in their article, but would it be enough?More research would have to be done to see what the actual external cost of alcohol usage is upon society.

The study done by Frank Chaloupka, Michael Grossman, and Henry Saffer shows some of the effects that an increase in the excise tax has upon society. The study shows that with an increase in the excise tax, there is a very large decrease in the number of youth motor vehicle fatalities. The reasoning for why there is a decrease in youth motor vehicle fatalities because of an increase in an excise tax goes as follows: there is an increase in the price of beer or alcohol in general, less youth are abusing alcohol because it is too expensive to purchase, therefore there is a decrease in the amount of youths who are drinking and driving, which decreases the number of motor vehicle fatalities. By trying to keep alcohol out of the hands of young adults, policy formers are making it much harder for youths to make that horrible decision of drinking and driving.

The last study I cited by Philip Cook and George Tauchen discussed the effects of an excise tax upon heavy alcohol abuse. The effects of heavy alcohol abuse are simple: you can become addicted, you can have far reaching social problems, and you can have many health problems associated with heavy alcohol abuse; the health effect discussed was cirrhosis. The study showed that with a decrease in the excise tax, there was an increase in alcohol consumption and cirrhosis fatalities. Cirrhosis fatalities is yet another effect alcohol abuse has upon society. By increasing the excise tax the reverse is possible, alcohol consumption will decrease and, therefore, cirrhosis fatalities would decrease as well.

IV. Conclusion

The overall conclusion from almost all of the papers that I have researched is that with an increase in the excise tax, there is a decrease in the amount of beer consumed. The general idea is that beer or alcohol consumption faces a downward sloping demand curve, or in laymen’s terms the more one has to pay for alcohol the less of it they are whiling to buy.

The effects of this research are more far reaching than just this simple conclusion. A study conducted by Stanley Ornstein and Dominique Hanssensconcluded that youth are more prone to using beer instead of other alcohols. After running a regression this is their result, “the importance of youth is reinforced in the minimum-age variable, which shows that the lower the minimum age, the higher the beer consumption.” (Ornstein and Hanssens) Because beer usage is especially prevalent in youth populations, an excise tax could have a great effect upon alcoholism, drunken driving, and many other problems that society faces because of alcohol abuse. The great effect that an increase in the excise tax would have upon society is a decrease in these problems society faces. Two of the studies discussed above proved that an increase in an excise tax would lower cirrhosis fatality levels and youth motor vehicle fatalities. Other studies I have researched talk about decreases in violent crimes induced by alcohol, and a decrease in sexually transmitted diseases. The study conducted by Chaloupka, Grossman, and Saffer cover each of these topics extensively.

Since the relationship between excise tax and beer consumption is inversely related, more should be done to increase the excise tax so we can experience less of the external effects alcohol abuse has upon society. With an increase in the excise tax, beer consumption will decrease, and the externalities of beer consumption will decrease as well. That is what I believe policy makers are trying to accomplish when they make alcohol-control laws. It appearsthat a large increase in the excise tax is the best alcohol-control policy available to deter beer consumption.

Works Cited

Chaloupka, F. J., Grossman, M., & Saffer, H. (2002). The effects of price on alcohol consumption and alcohol-related problems. [Electronic version]. Alcohol Research & Health, 26(1), 22-35.

Coate, D., & Grossman, M. (1988). Effects of alcoholic beverage prices and legal drinking ages on youth alcohol use. [Electronic version]. Journal of Law and Economics, 31(1), 145-171. from