Alcohol and Public Policy Beyond the Shadow of Prohibition (1981) / Chapter Skim
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The Effect of Liquor Taxes on Drinking, Cirrhosis, and Auto Accidents
The Effect of Liquor Taxes on Drinking, Cirrhosis, and Auto Accidents
Pages 255-285
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From page 255... ...
Federal and state alcohol tax policies during this period have thus had the effect of providing an economic incentive for increased drinking. Since alcohol consumption is a contributing factor in the etiology of highway accidents, violent crime, suicide, cirrhosis, and a number of other causes of injury and death, it is possible that the downward trend in the relative price of alcoholic beverages has had the effect of reducing Americans' life expectancies and increasing morbidity.
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From page 256... ...
In this paper, I review available evidence on the price elasticity of demand for alcohol and present a new statistical analysis that tends to support the view that liquor consumption is moderately responsive to price in the United States. More important, I am able to demonstrate with a high degree of certainty that increases in the tax rate on spirits reduce both the auto fatality rate and the cirrhosis mortality rate.
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From page 257... ...
These figures for the number of pints of beverage per pint of alcohol were multiplied by the average prices per pint of beverage to obtain the 1976 figures in the first three columns. Prices in other years were derived from these 1976 prices by use of the Bureau of Labor Statistics price indexes for beer, wine, and spirits (unpublished)
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From page 258... ...
Part of the answer, particularly in the case of distilled spirits, is that excise tax rates have not kept up with inflation. The last three columns of Table 1 were derived from the first three columns, converted to "1980 dollars" by the consumer price index.
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From page 259... ...
ALCOHOL BEVERAGE TAXATION Alcoholic beverages are subjected to a complex array of taxes and other controls that affect retail prices. Distilled spirits are taxed more heavily than beer and wine; taxes on distilled spirits include a federal excise tax of $10.50 per proof gallon and state and local taxes and fees that averaged $5.55 per gallon in 1975 (DISCUS 1977a)
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From page 260... ...
, P= a price index, such as the consumer price index, Y= the consumer's income. Adjusting prices and income for the overall price level P in this fashion is justified because only relative prices and income matter in determining demand.
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From page 261... ...
However, economic theory predicts that consumers will be alike in their qualitative response to a price change; an increase in price will reduce the quantity demanded.3 It would be surprising if alcoholic beverages proved to be exceptions to this basic principle of economics. Economics offers some useful terminology for characterizing the shape of a demand function: (1)
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From page 262... ...
For example, an increase in the average price of liquor may induce consumers to substitute cheaper for more expensive brands, thereby perhaps maintaining their volume of liquor consumption despite the general increase in prices. Equation (1)
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From page 263... ...
They estimated separate demand equations for beer, wine, and spirits, using panel data for 10 Canadian provinces for 15 years (1956-1970~. Each of their demand equations includes the following independent variables: prices for beer, wine, and spirits relative to the consumer price index; real income per adult; the dependent variable (consumption)
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From page 264... ...
(5) The inclusion of lagged consumption in the specification is justified by the possibility that alcohol consumption behavior exhibits some degree of habit formation, and hence the full, long-run response to a change in price or income does not emerge immediately.
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From page 265... ...
Their results imply a price elasticity of -0.9 and an income elasticity of 0.4. They also experimented with including a spirits price variable in their equation but rejected it because the result implied that beer and spirits are complements a result that they thought highly unlikely.
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From page 266... ...
If a state raises its tax on liquor, the resulting reduction in reported sales may thus exaggerate the true reduction in consumption by state residents due to either an increase in moonshining, an increased propensity of wholesalers to conceal sales from tax authorities, or increased purchases in adjacent states (the "border effected. These problems may also be present for beer and wine sales, of course.
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From page 267... ...
Another econometric analysis of spirits consumption based on time series data for the United States, by Houthakker and Taylor (1966) , is cited for the opposite reason: their estimate of price elasticity was slightly positive, though not significantly different from zero in a statistical sense.
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From page 268... ...
For each such case, he calculated the apparent price elasticity of demand, using the following procedure: (1) Calculate the following formula as a measure of the proportional change in the state per-capita liquor consumption resulting from the .
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From page 269... ...
The resulting sample contains 39 observations. The formula I used to calculate the proportional change in liquor consumption induced by these tax changes differs in a number of minor respects from that used by Simon: (1)
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From page 270... ...
This nonparametric "sign" test is a strong indication that the null hypothesis should be rejected in favor of the alternative that an increase in price reduces consumption. An estimate of the apparent price elasticity of demand can be developed by converting each of the statistics in Table 3 ("net change in liquor consumption")
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From page 271... ...
h The changes in consumption, auto fatality rate, and cirrhosis death rate are proportional changes net of the corresponding change for the median state in that year. c Based on a ranking of the 30 license states (excluding Alaska and Hawaii)
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From page 272... ...
For the procedure outlined above to give a valid, unbiased measure of the effect of tax changes on liquor sales, it is necessary that state tax changes not be systematically related to historical trends in consumption in the state. It is possible that the decisions of state legislatures to change liquor taxes are systematically related to trends in state sales (or tax revenue collections)
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From page 273... ...
Nevertheless, there are a number of reasonable doubts about this conjecture, which are summarized here in three questions. While the evidence presented in the previous section convincingly demonstrates that an increase in the liquor tax rate reduces reported liquor sales, the effect on actual consumption of liquor may be smaller or nonexistent: the differences between reported sales and actual consumption, as discussed above, are the result of moonshining, underreporting by wholesalers, and the "border effect." Is average liquor consumption responsive to changes in the price of liquor?
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From page 274... ...
There is no need to respond to these questions directly. The quasiexperimental method of measuring the price elasticity of liquor consumption, developed in the previous section, can also be used to measure the effect of tax increases on cirrhosis and auto accident fatality rates.
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From page 275... ...
To the extent that cirrhosis mortality rates do serve as an indicator of the incidence of heavy drinking, they are of considerable value in alcohol research. A number of social and medical problems besides cirrhosis are related to heavy drinking.
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From page 276... ...
Previous research has provided some evidence to the effect that an increase in the price of alcohol will reduce the incidence of heavy drinking and the cirrhosis death rate, although this evidence is by no means decisive or compelling. RESULTS OF A QUASI-EXPERIMENTAL STUDY The nature of and justification for the quasi-experimental approach to studying the price elasticity of demand for liquor was explained above in the section on demand for alcoholic beverages.
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From page 277... ...
~=~ i- 3 A (6) where D'+i= the cirrhosis death rate in the "trial" state i years after the tax change, |5 Mortality rates for cirrhosis and auto accidents were calculated from frequency counts published in National Center for Health Statistics (1975, Table 1-13)
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From page 278... ...
It seems entirely reasonable that these elasticity estimates turn out to be less than the price elasticity of demand for distilled spirits. EVALUATING ALCOHOLIC BEVERAGE TAXATION Alcoholic beverage prices have a direct effect on the prevalence of chronic excess consumption and the prevalence of the various problems caused by chronic excess consumption.
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From page 279... ...
Since the prices of alcoholic beverages are currently and historically controlled to a considerable extent by government policy, it is appropriate to view alcoholic beverage prices as public health policy instruments. This conclusion is empirical, rather than normative—it is by no means equivalent to concluding, for example, that it would be a good thing to raise the federal excise tax on alcohol or that higher prices are better than lower prices.
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From page 280... ...
Households with equal incomes pay vastly disparate alcohol taxes, depending on their alcohol consumption levels. How much of a burden does alcohol taxation impose on members of poor households?
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From page 281... ...
It is clear, then, that there is fairly close positive association between the amount of an individual's alcohol tax contribution and the expected value of government services consumed by the individual for alcohol-related problems. We view alcohol taxes as analogous to insurance premiums that are calibrated to one determinant of risk the average rate of alcohol consumption just as health and life insurance premiums are adjusted for age.
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From page 282... ...
individuals at the same consumption level differ widely with respect to the external harm caused by their drinking, due perhaps to differences in personality, metabolism, drinking patterns, and so on. A tax that is proportional to the ethanol content of alcoholic beverages will then result in light drinkers, and the "safer" heavy drinkers, paying more than "their share" of the total bill for alcoholic-related social costs.
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From page 283... ...
The marginal social benefit of a tax increase is equal to the value of the reduction in negative externalities that will result from reduced consumption, plus the additional tax revenue obtained. The marginal social cost of a tax increase is equal to the value of "consumers' surplus"20 lost as a result of the tax.
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From page 284... ...
If correct, these findings suggest that legislators should view alcohol taxation as a policy instrument for combating alcohol-related problems and not just a source of revenue. I am not advocating that taxes be raised there are costs as well as benefits to raising taxes and the evidence presented above is far short of a complete cost-benefit analysis of a tax change.
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From page 285... ...
(1975) Cost of alcoholic beverages as a determinant of alcohol consumption.
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