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Alcohol and Tobacco

Alcohol taxes raise government revenue, of course, but are typically justified as a means to address externalities from alcohol abuse, such as the costs of drunk driving, reduced workplace productivity, and medical burdens on third parties from alcohol-related illness.

Empirical studies suggest that each 1 percent increase in price might reduce nationwide alcohol consumption and drunk driving by about 0.4 to 0.7 percent. Thus, tripling alcohol taxes from 10 to 30 percent would reduce consumption by about 8 to 15 percent. This would raise about $20 billion a year in new government revenue and, according to CDDEP estimates, generate annual net economic benefits of at least $10 billion if the revenue displaced other taxes, such as income taxes, that have distortional effects on the economy.

Researchers used the analytical framework developed in the study, titled “Fiscal and Externality Rationales for Alcohol Taxes,” to estimate the optimal levels and welfare effects of alcohol taxes and drunk driver penalties and to account for the interaction of these policies with existing tax distortions in the labor market. A similar type of analysis might be usefully applied to other substance abuse policies, like tobacco taxes and, possibly, taxes on sugary sodas or fast food.


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