Alcohol Tax Revenues, Social and Health Costs, & Government Expenditures

What are the types of alcohol taxes?

There are two principal types of taxes specific to alcohol: specific excise taxes (referred to here as excise taxes) and ad valorem taxes. Excise taxes are most common and are imposed on a volume basis (e.g., $1.00 per gallon).2,33 By contrast, ad valorem taxes are based on the value of the beverage — they are imposed as a percentage of the price (e.g., 10 percent of retail price, or $.10 per $1.00), in the same way that sales taxes are calculated.2,33 In fact, ad valorem taxes are a form of sales tax that are imposed on a specific product, rather than on products generally. Ad valorem taxes are sometimes imposed based on wholesale price (and collected from wholesalers). More commonly, however, they are imposed at the retail level and based on retail price.33

Alcoholic beverages may be subject to other taxes as well, including general sales taxes and corporate taxes. Federal, state, and local governments may also impose various fees on alcohol industry members.

NIAAA’s Alcohol Policy Information System has posted a document titled Improving the Measurement of State Alcohol Taxes, which provides information on the interaction of excise, ad valorem, and sales taxes as they apply to alcoholic beverages.34 Combining all the different kinds of taxes on alcohol – including ad valorem and sales as well as excise taxes – strengthens the relationship between higher taxes on alcohol and reduced binge drinking.35

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How have alcohol taxes changed over time at the state and federal level?

Alcohol tax rates have largely remained stagnant over the last several decades. Federal alcohol taxes have not increased since 1991, and most states have maintained their excise tax rates for a decade or more.18,28 In fact, only six states have raised their alcohol excise taxes since 2008.28 Figure 1 illustrates the decade of last beer tax increase in each state, and shows that many have not increased in several decades, with some remaining the same since the 1950s and 60s.36

Even with these few increases, the inflation-adjusted rates for both federal and state alcohol taxes have fallen steadily over the last several decades.18 This is because most alcohol excise taxes are imposed on a volume basis (e.g., $1.00 per gallon or barrel).18,29 In effect, inflation provides a tax cut every year that these taxes are not increased: a $1.00 per gallon tax collected in 2014 is worth much less than the $1.00 per gallon tax collected in 2000.18,29 Real revenues from the taxes have thus fallen steadily as well.35

The federal government’s excise taxes — the only alcohol-specific taxes it levies — have not increased since 1991.18 Alcohol taxes have also declined as a percentage of total federal tax revenues over the same time period.18

State alcohol excise taxes have experienced similar declines. Average state beer excise taxes (indexed for inflation) declined approximately 50 percent between 1975 and 2011.29 Similar declines have occurred for state excise taxes on distilled spirits and wine.29

By contrast, ad valorem alcohol taxes have not declined in real value because they are tied to the price rather than the volume of the beverage (e.g., a 5 percent tax on a $10 bottle of wine is equal to $.50).29 As the price of the bottle of wine increases due to inflation, the amount of the tax rises with it.

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What are the federal excise taxes on alcoholic beverages (as of 2015)?

  • Beer (5 percent alcohol): $0.58/gallon ($0.05/drink)
  • Wine (12 percent alcohol): $1.07/gallon ($0.04/drink)
  • Distilled spirits (40 percent alcohol): $10.80/gallon ($0.13/drink)28,29

Per-drink tax rates were calculated based on the standard beverage sizes of 12 ounces for beer, 5 ounces for wine, and 1.5 ounces for distilled spirits.

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What are the median state excise tax rates for beer, wine, and distilled spirits (as of 2015)?

  • Beer: $0.20/gallon ($0.02/drink) (range: $0.02-$1.15/gallon)
  • Wine: $0.72/gallon ($.03/drink) (range: $0.11-$2.50/gallon)
  • Distilled spirits: $3.75/gallon ($0.04/drink) (range: $1.50-$14.27/gallon)37

Per-drink tax rates were calculated based on the standard beverage sizes of 12 ounces for beer, 5 ounces for wine, and 1.5 ounces for distilled spirits.

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Can local governments enact alcohol taxes?

While many states do not allow local alcohol taxes, some do — albeit sometimes within certain parameters (e.g., limits on the amount of the tax, on which local jurisdictions can enact the tax, on types of alcohol retailers that can be taxed, etc.). Chicago, for example, has enacted a substantial alcohol tax, as Illinois does not limit local alcohol taxing authority.38,39 The PSRs are focused on state-level policies and practices and therefore do not include these local taxes.

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What are the economic costs of excessive alcohol consumption and how much of the total are costs to government?

Total economic costs of excessive drinking (e.g., costs to government, lost productivity, property losses, health care) were estimated to be $249 billion, or approximately $2.05 per drink, in 2010 (the most recent year for which an estimate is available).40 Annual, direct governmental costs (e.g., to pay for medical care, law enforcement, and emergency response services) were estimated to be $100.7 billion ($0.83 per drink) in 2010, or 40.4 percent of the total costs.40

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How much revenue do alcohol taxes generate for federal, state, and local governments, and how do revenues compare to the economic costs of excessive alcohol consumption?

Alcohol taxes (not including sales taxes) generated $7.6 billion and $6.24 billion for the federal government and state/local governments respectively in 2011, for a total of $13.84 billion.41,42 The economic costs of excessive alcohol consumption to government (in 2010 dollars) are almost seven times greater, and total economic costs are about sixteen times greater, than the revenue generated by alcohol taxes (in 2011 dollars).40

How do the economic costs of drinking affect society more generally?

Externalities are costs that affect someone who did not choose to incur those costs. In the context of alcohol taxes, economists refer to the estimated annual costs of excessive alcohol consumption of $249 billion as externalities because these costs are not paid directly by the drinker.

Federal, state, and local taxes would need to be approximately seven times higher than they are today to fully reimburse federal, state, and local governments for the costs of excessive drinking (see Table 1).

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Can I calculate the costs of excessive drinking in my state and compare these costs to my state’s tax revenues?

Yes. According a study conducted by the Centers for Disease Control and Prevention, excessive alcohol use cost states a median of $3.5 billion in 2010, or about $2.05 per drink; state costs ranged from $488 million in North Dakota to $35 billion in California.40,43 For more information on the excessive drinking costs in your state, visit the CDC’s web page. The Tax Policy Center provides data on alcohol tax revenues by state, and the Alcohol Policy Information System provides a state-by-state listing of alcohol excise tax rates by beverage.

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Can revenues from alcohol taxes be earmarked for public health programs?

Some states have been able to earmark revenues from alcohol taxes for public health programs. Alaska, for example, earmarks 50 percent of its alcohol excise tax revenues for prevention and treatment of alcohol and drug abuse.44 Every year, New Jersey deposits $11 million collected from alcohol taxes into a special fund for alcohol rehabilitation (75 percent), enforcement (15 percent), and education (10 percent).45

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Are alcohol taxes unfair to moderate drinkers, insofar as they could be seen as penalizing them for the problems caused by heavy drinkers?

Most alcohol is consumed by excessive drinkers, particularly binge drinkers, who also cause and experience most of the problems associated with alcohol.5 Cook estimated that the heaviest drinking 10 percent of the population (averaging 316.5 drinks in the last month) accounts for more than half of all the alcohol consumed.5 The majority of the population averages one drink or less per month, and accounts for a small percentage of all alcohol consumed.5

Excessive drinkers pay most of the alcohol taxes. Abstainers, of course, pay no alcohol taxes at all; in about a dozen states, half or more of the population pays nothing for an alcohol tax increase because they have not consumed alcohol in the past year.46 This online tool shows how much more excessive drinkers pay than non-excessive drinkers by state.46 This is why alcohol taxes are sometimes referred to as “user fees” — a drinker’s tax liability increases as their drinking level, and potential for generating problems and economic costs, rises. This term is most appropriate when the tax revenues are earmarked for public health and safety programs to address the social, health, and economic costs generated by these drinkers.

Are alcohol taxes regressive, that is, does their burden fall disproportionately on low-income people?

Taxes are regressive when they place a higher burden on low-income people than on middle- and high-income people. Alcohol consumption47 as well as excessive alcohol use48 tends to rise with income. Excessive users will consistently pay the lion’s share of the tax,46 and since they are more likely to have higher incomes, the tax burden will fall more heavily on higher than on lower-income persons.

At the same time, the benefits of a tax increase will likely be greater for people with lower incomes. Low-income drinkers experience more negative consequences at any level of consumption because they lack many of the supports and access to services enjoyed by people with more economic resources.49,50 Because individuals in lower income groups may be more price sensitive than wealthier drinkers, they may also reduce their consumption more in response to a tax increase, so the public health benefit of a tax increase is progressive — that is, it benefits those in lower income brackets to a greater degree than those in higher income brackets.

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How does increasing alcohol taxes affect the economy? How will increasing alcohol taxes affect jobs in my state?

Alcohol taxes are more likely to boost rather than diminish overall economic productivity, consumer spending, and job creation.49,51,52 According to a recent study, more than 70 percent of the costs associated with excessive drinking come from productivity losses.40 Because a substantial number of U.S. workers are under the influence of alcohol on any given day,52,53,54 an alcohol tax increase may reduce excessive drinking in the workplace, increase productivity, reduce absenteeism, and increase work quality.52,55 These improvements may also reduce employer health insurance costs, thereby increasing business profitability.

When economists have modeled the effects of these taxes across the entire economy, they have found that alcohol taxes actually lead to a net increase in jobs.49,51 Alcohol taxes shift revenues previously gained through the sale of alcohol to other sectors of the economy through government spending of the increased tax revenues. This online tool calculates how many jobs would be created in each state under four different possible alcohol tax increase scenarios.

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How will increasing alcohol taxes in my state affect purchases if bordering states have lower taxes?

Based on studies conducted in the U.S., the effects of alcohol tax increases on cross-border shopping showed only modest or insignificant impacts on state revenue from alcohol and alcohol sales.55,56,57,58,59 A modest increase in price due to a tax increase is unlikely to prompt large numbers of consumers to spend the time and money (e.g., on gasoline) to drive even modest distances to a bordering state to avoid the tax payment.

Cross-border alcohol purchases may be a pre-existing issue in some states. Research suggests that a number of factors will encourage this behavior, including tourism and the presence of gaming establishments, as well as universities. Widely differential pricing or price discounting may also encourage consumers to travel to a neighboring state, particularly when population centers are close to the border.56,60,61 A proportion of Massachusetts residents, for example, travel to New Hampshire to take advantage of New Hampshire’s low prices.56 An alcohol tax increase may augment these pre-existing purchasing patterns, but overall, the research literature suggests that the impact will be modest, particularly if the rate of increase is modest as well.

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