The Minnesota Medical Association apparently understands that taxing harmful products can pay off for society. The physicians group recently called for a 10-cent per drink increase in excise taxes on alcohol, with one member arguing it will “lead to a reduction in the levels and the frequency of drinking and heavy drinking among our youth.”
A tax increase would be a step in the right direction toward making our economy more efficient, but the proposed increase might not cut drinking all that much.
Societies taxed alcoholic beverages centuries before economic theories were formed about increasing efficiency. Excise taxes on fermented and distilled alcohol were rooted in pragmatism. Alcohol, particularly distilled kinds, was administratively easy to tax.
Moreover, demand for alcohol was inelastic — taxes did not kill the goose that laid the golden egg.
Contrary to popular opinion, such taxes weren’t an attempt to punish sin. Yes, some medieval thinkers favored taxing luxuries rather than necessities, but salt was taxed nearly as widely in Europe as alcohol and usually at stiffer rates.
Only in the 20th century did economists argue that taxing goods that had external costs increased resource efficiency. Alcohol certainly has external costs in damage to health, property and families. Booze taxes introduce corrective incentives that result in greater satisfaction of society’s needs for the same use of resources.
Basic economics says that people usually buy less when prices are higher. Raising taxes is a way of raising prices. Higher prices discourage consumption of a good like alcohol that causes social harm.
Most economists probably would think the medical association’s call to increase alcohol taxes here is a good idea. (The group’s idea to earmark the proceeds for prevention and treatment is a bad idea, but that’s a topic for another column.)
Ten cents would represent a substantial increase in excise tax rates. Minnesota taxes are about 1.4 cents per 12-ounce beer and 4 cents per ounce of distilled spirits. In addition to this excise tax, sales taxes on alcohol are 9 percent rather than the general 6.5 percent rate.
Our beer and wine taxes are lower than most other states’ – Minnesota ranked 33rd for beer taxes and 40th for wine taxes, according to a 2003 Legislative Audit Commission report. I am not aware of any study tabulating the external costs to society of alcohol abuse in Minnesota, but it probably is well above the tax imposed. Thus, our economy would be more efficient if we raised taxes on alcohol.
While 10 cents more per drink would boost tax revenue, it would not cut drinking much. For economists, the term “elasticity” relates to the percentage drop in purchases for a 1 percent increase in price. Using the Minnesota Department of Revenue’s elasticity coefficients, a 10-cent per bottle tax on a $15 case of beer would reduce consumption by about 4 percent. That is better than nothing, but it is no quick solution to problem drinking.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.