State Budgets

Good Tax Policy Doesn’t Need 12 Steps

Seldom has a year gone by without the release of some new study waxing wide on the public health costs associated with alcohol abuse, often with recommendations for significant tax increases or sales restrictions on alcohol. Alcohol abuse is a very real problem: it is associated with health issues, myriad risky behaviors, increased violence and motor vehicle crashes. To the detriment of all, policymakers often engage only the surface of economic reasoning, adopting shortsighted laws. Basic economic theory teaches the quantity demanded of a particular good will fall as the price of that good rises. From this, lawmakers argue that higher alcohol taxes will reduce excessive alcohol consumption without burdening the average moderate consumer. Seemingly logical, this argument fails to consider the elasticity of demand – that is, the degree to which consumers are sensitive to changes in price.

Average consumers who may choose to enjoy a glass of wine, or not, are likely to be far more sensitive to small shifts in cost compared to those consumers who chronically abuse alcohol (or believe they absolutely have to drink). By its very nature, alcohol abuse is an addiction, which drives its sufferers to believe they need alcohol, no matter the cost. Thus, changes in the price of alcohol are unlikely to have much impact on purchase behavior of heavy drinkers. Studies by the National Institute on Alcohol Abuse and Alcoholism (NIAAA) repeatedly find that while alcohol taxes have a significant and large negative effect on the buying behavior of light drinkers, their impact on heavy drinkers is quite small. The NIAAA has additionally found that price increases do not reduce alcohol consumption at all among the top 5 percent of drinkers.

Increasing taxes on alcohol is a fundamentally flawed approach to reducing alcohol abuse. It neither reduces consumption among the abusers nor provides a structure for addressing the problem at its core. Throwing money at something does not always produce the desired results (consider, for example, the federal Department of Education or Veterans Affairs). At worst, the extra money might be used to pave over budget gaps caused by irresponsible spending, rather than enacting real reform.

Raising taxes on alcohol will affect the average, moderate consumer the most, which does little or nothing to address the very real public health costs associated with abusive drinking. Worse still, these policies might even harm the health of those consumers. A growing body of research points to some health benefits of drinking in moderation. Lawmakers often attempt to justify these tax increases by maintaining that they will affect abusive drinkers most, seldom seeing the irony in their own claims. Implicitly, this means the tax is not reducing alcohol abuse, and is nothing more than a discriminatory tax increase.

When lawmakers adopt these wrongheaded policies, which target responsible drinkers, not only do they harm local economies, they hurt the financial situations of those struggling with addiction most. States and localities are likely to end up with less money, an unhealthier population and a still-present alcohol abuse crisis. Despite the repeated failure of so-called “sin-taxes,” they continue to enjoy popularity. Lawmakers in Louisiana recently voted for substantial tax increases on nearly every form of alcohol. Various groups in New Mexico and Michigan are currently proposing alcohol tax hikes. It is no mystery that, in each of these cases, budget shortfalls and the perceived need for more revenue are motivating lawmakers more than any heartfelt concern for the health of alcohol abusers. Raising taxes on alcohol, or any other “sin” product for that matter, is worn-out, failed policy – both for addressing budget shortfalls and mitigating the public health costs of abusive consumption.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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