Alcohol Excise Taxes in California

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California's Budget Deficit and Alcohol Excise Taxes

 

California faces a deficit that will exceed $30 billion in fiscal year 2004.  The state Constitution requires that California's budget be balanced.  To do so, the state government can cut vital services, increase taxes, or use a combination of both.  Raising alcohol excise taxes is a viable option to raise revenue.

 

California's excise taxes on wine are among the lowest in the United States ($0.20 per gallon for wine).  Only New York ($0.19 per gallon) and Louisiana ($0.11 per gallon) have lower wine tax rates.1   The state's excise taxes on beer and liquor ($0.20 per gallon for beer, and $3.30 per gallon for spirits) fall below the current national averages for those products.* 

 

The Effects of Inflation on Tax Rates and Revenues

 

Alcohol excise tax rates, because they are set at a fixed value per volume of beverage, have steadily been eroded by inflation.  As a result, "real" tax rates have declined over most of the postwar period and this erosion of real tax rates has contributed to overall declines in real beverage prices over time.2

 

Inflation has greatly diminished the value of California alcohol excise tax rates even since the last, minimal increases in 1991.**  The 1991 beer tax rate of $0.20 per gallon is now worth about $0.15 per gallon; the $0.20 per gallon tax for wine is now worth $0.15 per gallon; and the tax rate of $3.30 per gallon on liquor is now worth only $2.50 per gallon.

 

Indexing for inflation since the last tax rate increase, the current tax on beer ($0.20 per gallon) would be $0.26 per gallon today; the current tax on wine ($0.20 per gallon), $0.26 per gallon; and the current tax on distilled spirits ($3.30 per gallon), $4.36 per gallon today. 

 

In 2001, the State of California collected $288 million in alcohol excise taxes.  Because of inflation since 1991, that amount was worth only about $218 million.  Conversely, had the excise taxes been indexed for inflation since 1991, the state would have collected as much as $380 million in 2001 revenue from alcoholic beverages, an increase of 25 percent (see Table).

 

* Beer, $0.25 per gallon; wine, $0.77; liquor, $3.84.
** Prior to 1991, the tax rates had languished for more than 30 years.

 

California's Alcohol Tax Rates and Revenues Have Eroded, Due to Inflation

Product

Current Tax Rate

Current Revenues

Current Tax Rate (in 1991 Dollars) Current Revenues (in 1991 Dollars) Current Revenues, Indexed for Inflation

Beer

$0.20 per gallon $130 million $0.15 per gallon $98 million $171 million

Wine

$0.20 per gallon $19 million $0.15 per gallon $14 million $25 million

Spirits

$3.30 per gallon $138 million $2.50 per gallon $104 million $182 million
Total Revenue   $288 million   $218 million $380 million

 

Bold Tax-Increase Options for a Cash-Strapped State

 

Following are two, of many, options for increasing alcohol excise taxes in California.  Each of these options presents a bold opportunity to provide the state with a large increase in revenues.  Revenues collected at those levels can provide substantial resources for alcohol treatment and prevention services and community education services about addiction.  Both options involve the equalization of tax rates across beverage types.

 

"A Dime-A-Drink"

Current taxes: beer, $0.02 per drink; wine, $0.01; and liquor, $0.04.  Were the tax rates increased to the equivalent of a dime per drink, state revenue would rise to approximately $1.5 billion, or an estimated increase of $1.2 billion. 

 

In this option, the current beer tax would increase from $0.20 to $1.27 per gallon; wine from $0.20 to $2.92; and liquor from $3.30 to $11.83.  These amounts would exceed the national averages ($0.25 per gallon for beer, $0.77 for wine, and $3.84 for liquor) and the inflation-adjusted rates discussed above.

 

"A Quarter-A-Drink"

Current taxes: beer, $0.02 per drink; wine, $0.01; and liquor, $0.04.  If the tax increased to $0.25 per drink, state revenue would rise to approximately $3.2 billion, or an estimated increase of $3.0 billion.

 

In this option, the current beer tax would increase from $0.20 to $2.87 per gallon; wine from $0.20 to $7.01; and liquor from $3.30 to $24.63.  We estimate that consumption overall would decline by nine percent.

 

Higher Alcohol Taxes Would Increase Prices and Reduce Alcohol Problems

 

According to research reported by the National Institute on Alcohol Abuse and Alcoholism, increases in the monetary price of alcohol (e.g., through tax increases) would be expected to lower alcohol consumption and its adverse consequences.  Studies find that alcohol prices are a factor influencing alcohol consumption among youth and young adults.3  Other studies show that increases in the total price of alcohol can reduce drinking and driving and its consequences among all age groups: lower the frequency of diseases, injuries, and deaths related to alcohol use and abuse; and reduce alcohol-related violence and other crime.4  Additionally, increasing beer prices is an effective means of reducing alcohol problems, particularly among young people.

 

Higher beer taxes would likely lead to higher prices,5 reductions in the levels and frequency of drinking, and decreases in heavy drinking among youth,6 who are among the most price-sensitive consumers.  Also, higher beer taxes would reduce traffic-crash fatality rates, especially among young drivers,7,8 and result in lower rates of violent crime.9  For every one percent increase in the price of beer, the traffic fatality rate declines by 0.9 percent.10  According to researchers at the Centers for Disease Control, a beer-tax increase of $0.20 per six-pack would reduce gonorrhea rates by 8.9 percent and syphilis rates by 32.7 percent.11

 

Public Opinion, Public Costs

 

In a national survey, nearly 73 percent of adults support an increase in the tax on beer to pay for substance abuse prevention programs.12  In state surveys on alcohol excise taxes, 80 percent of Montana residents believe increasing alcohol taxes is "good" or "acceptable."13  In California's neighboring state, Oregon, 78 percent of residents supported an increase in the state's alcohol excise taxes.14

 

In 1998, the estimated economic cost of alcohol abuse in the United States exceeded $184 billion.  This cost is equivalent to roughly $683 for every man, woman and child living in the United States.15  The cost in California, calculated by population, was approximately $22 billion.  The cost to Americans of underage drinking alone totals nearly $53 billion.16  States and their tax-payers, including those in California, bear a substantial portion of these costs.

 

Each year, the federal government spends nearly $1 billion on alcohol prevention services for people of all ages, less than two percent of the annual cost of alcohol use by youth alone.16

 

According to the Bureau of Alcohol, Tobacco and Firearms, federal excise tax collections for alcoholic beverages totaled more than $8 billion in 2000.  Put into perspective, this amounts to just over four percent of the $184 billion in alcohol-related costs experienced by the American public.  State and local taxes, approximately $288 million in 2001, fail to correct this imbalance.

 

Notes

 

The following equation was used to calculate the projected volume consumed if the California excise tax for beer were raised to a dime or a quarter per drink:

 

V1 = Vo (1 + PE (PI/CP))

 

Where:  V1 = projected volume consumed

Vo = 2001 volume consumed

PE = price elasticity17

PI = price increase (including a 7.5 percent mark-up)

CP = current price

 

The price increase assumes a 7.5 percent mark-up (a conservative estimate18) on the tax increase.  The current price (CP) of beer was obtained by calculating that an average six-pack of beer costs $4.86 or $8.65 per gallon.  These numbers represent total dollars of retail sales of beer divided by the total volume of beer sold in the United States.  This same method was used to calculate the average price of wine and distilled spirits.  It can be localized using California data, if available.

 

References

 

1.  Federation of State Administrators.

2.  National Institute on Alcohol Abuse and Alcoholism. (2000).  10th Special Report to the U.S. Congress on Alcohol and Health.  NIH Publication No. 00-1583.  Rockville, MD: U.S. Department of Health and Human Services, ch. 6.

3.  Rogers, J. D. & Greenfield. T. K. (1999).  Beer drinking accounts for most of the hazardous alcohol consumption reported in the United States.  Journal of Studies on Alcohol.  60(6):732-739.

4.  Chaloupka, Frank J., Grossman, M. & Saffer, H. (2002).  The effects of price on alcohol consumption and alcohol related problems.  National Institute on Alcohol Abuse and Alcoholism Research paper.

5.  Young, D.J. & Bielinska-Kwapisz, A. (2002).  Alcohol Taxes and Beverage Prices.  National Tax Journal.  LV(1):57-74.

6.  Coate, D. & Grossman, M. (1988). The effects of alcoholic beverage prices and legal drinking ages on youth alcohol use.  Journal of Law and Economics.  31(1):145.

7.  Ruhm, C.J. (1996).  Alcohol policies and highway vehicle fatalities.  Journal of Health Economics.  15(4):435-454.

8.  Saffer, H., & Grossman, M. (1987).  Beer taxes, the legal drinking age, and youth motor vehicle fatalities.  Journal of Legal Studies. 16(2):351-374.

9.  Cook, P. J. & Moore, M. J. (1993).  Economic perspectives on reducing alcohol-related violence.  In: Martin, S. E., ed. Alcohol and Interpersonal Violence: Fostering Multidisciplinary Perspectives.  National Institute on Alcohol Abuse and Alcoholism Research Monograph No. 24.  NIH Pub. No. 93-3496.  Rockville, MD: The Institute, p. 193-212.

10.  Markowitz, S. & Grossman, M. (1998).  Alcohol regulation and domestic violence towards children.  Contemporary Economic Policy.  16(3):309-320.

11.  Chesson, H., Harrison, P. & Kassler, W. J. (2000).  Sex under the influence: The effect of alcohol policy on sexually transmitted disease rates in the United States.  Journal of Law and Economics.  XLIII:215-238.

12.  Penn, Schoen & Berland Associates (2001).  National Alcohol Tax Study: Center for Science in the Public Interest, Alcohol Policies Project, MADD.

13.  Montana Statewide Survey, MEA-MFT, Billings, Montana.  December 2001.

14.  The Robert Wood Johnson National Alcohol Opinion Poll (The Oregon Coalition to Reduce Underage Drinking).  February 2002.

15.  National Institute on Alcohol Abuse and Alcoholism. (2000).  10th Special Report to the U.S. Congress on Alcohol and Health.  NIH Publication No. 00-1583.  Rockville, MD: U.S. Department of Health and Human Services, ch. 6.

16.  Levy, D. T., Miller, T. R., & Cox, K. C. (1999).  Costs of Underage Drinking. Prepared by the Pacific Institute for Research and Evaluation in support of the Office of Juvenile Justice and Delinquency Prevention, Enforcing the Underage Drinking Laws Program.

17.  Leung, S.-F. & Phelps, C.E. (1993).  My kingdom for a drinků? A review of estimates of the price sensitivity of demand for alcoholic beverages.  In: Hilton, M.E. & Bloss, G., eds. Economics and the Prevention of Alcohol-Related Problems: Proceedings of a Workshop on Economic and Socioeconomic Issues in the Prevention of Alcohol-Related Problems, October 10-11, 1991, Bethesda, MD.  NIAAA Research Monograph No. 25. Rockville, MD: NIAAA, pp. 1-31.  Note:  A price elasticity of -0.16 for beer, -0.58 for wine, and -0.39 for liquor may also be used to calculate new revenue and consumption values [Nelson, J.P. (1997).  Economic and demographic factors in U.S. alcohol demand: A grown-accounting analysis.  Empirical Economics.  22(1):83-102].  Using the Leung and Phelps elasticity measure will provide a conservative estimate -- a smaller revenue increase and a larger drop in alcohol consumption -- than the Nelson estimate.

18.  Young, D.J. & Bielinska-Kwapisz, A. (2002).  Alcohol Taxes and Beverage Prices. National Tax Journal. LV(1):57-74.

 

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