Looking for Revenue? Tax Booze

The topic of the day, both in Washington, D.C. and in the states, is how to cut the deficits. One of the best ways to proceed, which has so far received scant attention, is for the federal government and most states to change the peculiar way they tax liquor, wine and beer. With the exception of those 18 states that sell alcohol themselves, all the other states and the federal government impose a specific fee on each bottle or barrel of alcohol rather than collect a percentage of the take. As a result, as the price of booze rises, as that of most products does over time, the amount the government collects stays the same. Moreover, the effect of the tax on deterring alcohol abuse is diluted.

The federal tax on beer was set at $9 a barrel in 1951. As the price of beer increased, the federal tax remained the same. It was finally increased to $18 in 1991, and that is where it stayed. David Jernigan and Hugh Waters, two researchers at the Johns Hopkins Bloomberg School of Public Health, figured out that just to keep with inflation, by 2007 the tax should have been $71 per barrel. They showed the same for hard liquor. It was $10.50 per gallon in 1951 and $12.50 in 1991, and it should have been $82.87 by 2007, just to keep up with the rising prices. As a report by the Center for Public Interest notes:

Any way you look at it, revenues from federal excise taxes on beer and other alcoholic beverages have declined dramatically: as a percentage of retail sales, as a percentage of federal revenues, and as a percentage of Gross Domestic Product. As a result, beer is far cheaper today, relative to other consumer products, than it was twenty and thirty years ago.

A review of 72 studies and reports published in The Journal of Preventive Medicine found "strong evidence that raising alcohol taxes is an effective strategy for reducing excessive alcohol consumption and related harms." The authors noted that "increased alcohol taxes are associated with decreased overall consumption, decreased youth consumption, decreased youth binge drinking, reduced alcohol-related motor-vehicle crashes, reduced mortality from liver cirrhosis, and reduced violence."

There are strong arguments to raising taxes on alcohol more rapidly than its costs rise to discourage people, especially the price-sensitive youth, from buying it. Excessive consumption -- alcohol abuse -- is strongly associated with a whole plethora of ills, including car crashes, gun violence, loss of productivity at work and illness. According to the CDC, there are more than 97,000 alcohol-attributable deaths in the U.S. each year. And alcohol abuse costs the U.S. about $185 billion each year. Some critics who oppose such so-called "sin taxes" argue that consumers should be allowed to determine for themselves if the benefits of drinking outweigh the costs. Others may add that if it is truly harmful, it should be banned altogether rather than merely taxed. But consuming alcohol in moderation is reported to have medical benefits.

Moreover, one should not allow the unattainable best to block the way to the good. The U.S. tried to ban the consumption of alcohol during Prohibition, which had well-known disastrous results. Discouraging excessive boozing by at least updating the taxes is the best that can be done. For starters, the tax on alcohol should be based on a percentage of the price at which the product is sold, not on a fixed fee that lags behind rising prices. In this way, those who insist on gulping it down will contribute more to cutting the deficit and will stop benefiting from the fact that as most costs rise, booze costs can be kept down, as the government taxes become less burdensome over time.

Amitai Etzioni is a University Professor at The George Washington University and the author of "New Common Ground" (Potomac Books, 2009).