Here’s a recommendation for state legislators, grounded in years of research: Raise taxes on alcohol. The advice holds whether your state faces big budget deficits, as does Minnesota, or not.
While the most recent study was conducted by a University of Florida epidemiologist, virtually all economists, Republicans and Democrats alike, agree with him. But elected officials, also of both parties, are loath to follow through. Therein lies a national tragedy.
Medical school professors come at this issue from a different perspective than economists. They want to improve public health. Economists want to use a market-friendly way to repair an economic inefficiency that, coincidentally, involves much damage to public health. But both agree that current alcohol taxes are too low and that society could be made better off by increasing them.
After an exhaustive review of decades of research, epidemiologist Alexander Wagenaar and two collaborators recently confirmed what others had reported: “Beverage alcohol prices and taxes are related inversely to drinking. Effects are large compared to other prevention policies and programs. Public policies that raise prices of alcohol are an effective means to reduce drinking.”
The social costs of alcohol use are enormous. One-third of all fatal vehicle accidents involve alcohol. And alcohol contributes to crime, violence and physical or mental trauma for affected family members. Ask any cop, EMT, psychotherapist or 12-Step veteran for details. The social harm from alcohol is far greater than that from any illegal drug.
Economists see these costs — other than those borne by drinkers themselves — as classic external costs, ones that are not paid by either the producer-seller nor the consumer-buyer. External costs are a case where free markets fail and thus resources are used inefficiently. Properly structured government action may remedy this inefficiency.
Ninety years ago, British economist Arthur Pigou demonstrated that the best way to restore efficient resource use is to impose a tax on the product causing the externality.
This is not some sort of social engineering, or a “nanny state” trying to regulate moral behavior. It is simply the most market-friendly way of correcting a situation in which free markets fail to produce an optimal social outcome.
Given high social harm, taxes on booze should be high. They are not. Minnesota’s tax on beer is about 1.5 cents per bottle, wine about 8 cents per bottle and distilled liquor about $1 per bottle. There has been no increase for 23 years and it would take a 90 percent jump to adjust for inflation since 1987.
Wagenaar, who spent 14 years at the University of Minnesota before moving on to Florida, finds that a 10 percent increase in the price of alcohol results in a 4 percent to 8 percent decrease in consumption.
Given how small a percentage of what consumers pay for alcohol goes for taxes, increases would have to be large to achieve big reductions in drinking. But every bit helps.
As a starting point, we might raise Minnesota taxes to match those of Alaska, the politically conservative state that elected Sarah Palin governor. That would mean distilled spirits taxes 2.5 times as high, wine taxes six times as high and beer taxes nine times as high as they are currently.
Antitax fundamentalists will protest any tax increase, no matter how much it improves the well-being of society or makes markets work better. Populists will point out (correctly) that alcohol taxes are regressive since the poor spend a higher proportion of their income on booze than the rich. If those are important concerns, make alcohol taxes revenue-neutral by increasing the zero-bracket exemption on the income tax by an aggregate amount equal to increased revenue from higher booze taxes.
The liquor industry will predict economic apocalypse. Don’t believe it. It also will argue that sharply higher taxes in Minnesota would motivate consumers to buy alcohol in Wisconsin or the Dakotas. They are right. If you think that is important, urge your elected officials in Washington to make the increase federal. But if you think better public health and a more efficient economy are important, support higher alcohol taxes by some level of government.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.