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OCR for page 255
The Effect of Liquor Taxes
on Dnnking, Cirrhosis,
and Auto Accidents
PHILIP J. COOK
INTRODUCTION
Alcoholic beverages have been taxed at a relatively high rate throughout
the history of the United States. During the last 20 years, however,
taxes on beer, wine, and liquor have increased more slowly than the
overall price level. The result has been a substantial reduction in the
price of alcoholic beverages relative to other commodities. Federal and
state alcohol tax policies during this period have thus had the effect of
providing an economic incentive for increased drinking. Since alcohol
consumption is a contributing factor in the etiology of highway accidents,
violent crime, suicide, cirrhosis, and a number of other causes of injury
and death, it is possible that the downward trend in the relative price
of alcoholic beverages has had the effect of reducing Americans' life
expectancies and increasing morbidity.
Does the rate of alcohol taxation in fact have an important influence
on rates of morbidity and mortality? There is almost no direct evidence
on this question in the social science literature, although the potential
importance of alcohol taxation as a public health policy instrument has
Philip J. Cook, a member of the panel. is at the Insitute for Public Policy Studies, Duke
University.
Research assistance for the project was provided by Kent Auberry. Andrew Pescoe.
R. J. Plummer, and Robert Schmitt. This draft reflects several helpful comments on an
earlier version from Charles Clotfelter and Michael Murray.
255
OCR for page 256
256
COOK
been discussed in several recent scholarly presentations.) The most con-
troversial aspect of this question is whether changes in the price of
alcohol influence the drinking habits of heavy drinkers; this group ac-
counts for the bulk of alcohol-related problems, and it is widely believed
that the drinking habits of this group are insensitive to price.
In this paper, I review available evidence on the price elasticity of
demand for alcohol and present a new statistical analysis that tends to
support the view that liquor consumption is moderately responsive to
price in the United States. More important, I am able to demonstrate
with a high degree of certainty that increases in the tax rate on spirits
reduce both the auto fatality rate and the cirrhosis mortality rate. The
virtually inescapable conclusion is that the demand for alcohol by heavy
drinkers is responsive to price.
The next section is a brief history of alcohol taxation, prices, and
consumption in the United States since 1950. A review of the econo-
metric literature follows on the price elasticity of demand with new
results for the 1960-1975 period using a "quasi-experimental" technique.
The next section reviews available results relating alcohol consumption
levels to mortality from certain causes and then presents new findings
on the impact of alcohol prices on cirrhosis and auto fatalities. The
following section discusses the use of excise taxes on alcoholic beverages
as part of a public health strategy for reducing alcohol abuse, and the
final section presents concluding observations.
PRICES AND TAXES
While the average prices of beer, wine, and distilled spirits have been
increasing during the last two decades, the rates of increase are less than
the overall inflation rate. The statistics in Table 1 demonstrate that the
price of spirits, relative to the average price of all other consumer goods
(as measured by the consumer price index tCPI]), has declined 48 per-
cent since 1960. During the same period, the relative price of beer has
declined by 27 percent and wine by about 20 percent.
We would expect that price reductions of this magnitude, especially
when coupled with the substantial increases in average real disposable
income during this period, would result in increased consumption. In
fact, average consumption of ethanol per person (aged 15 and over)
increased 29 percent between 1960 and 1971; since then average con-
sumption has remained roughly constant at about 2.7 gallons of ethanol
' See Bruun et al. (1975~; Popham et al. (1976 and 1978~; Medicine in the Public Interest
(1979~.
OCR for page 257
Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 257
TABLE 1 Average Prices/Pint of Ethanol, 196(~1980
Current Prices (dollars)
Adjusted Prices (1980 dollars)
Beer and Distilled Beer and Distilled
Year Ale Wine Spirits Ale Wine Spirits
1960 6.48 7.79 17.05 20.50
1961 6.50 - 7.84 16.89 20.39
1962 6.53 7.87 16.78 20.22
1963 6.59 4.02 7.96 16.73 10.21 20.21
1964 6.64 4.01 7.99 16.67 10.07 20.05
1965 6.70 4.03 8.01 16.56 9.96 19.80
1966 6.81 4.05 8.06 16.34 9.73 19.35
1967 6.93 4.10 8.16 16.14 9.56 19.01
1968 7.12 4.26 8.27 15.95 9.54 18.54
1969 7.30 4.44 8.36 15.47 9.41 17.73
1970 7.54 4.79 8.57 15.16 9.63 17.22
1971 7.82 5.02 8.68 15.01 9.64 16.67
1972 7.89 5.21 8.86 14.67 9.69 16.48
1973 8.01 5.55 8.91 14.01 9.71 15.60
1974 8.78 6.04 9.05 13.87 9.55 14.30
1975 9.72 6.32 9.31 14.09 9.16 13.50
1976 9.95 6.46 9.46 13.63 8.85 12.97
1977 10.10 6.64 9.59 12.93 8.51 12.27
1978 10.66 7.29 9.98 12.69 8.67 11.88
1979 11.77 7.95 10.39 12.60 8.50 11.12
1980 (Jan.) 12.40 8.27 10.74 12.40 8.27 10.74
Note: Current prices were calculated as follows. The Liquor Handbook, p. 24 (see Gavin-
Jobson Associates, Inc., 1978), gives data on consumer expenditures and volume purchased
for beer, wine, and spirits in 1976. These data yield estimates of the average price per
pint of each type of beverage ($0.45, 0.94, and 4.06, respectively). In 1976 beer averaged
4.49 percent alcohol, while wine was 14.6 percent and spirits 42.9 percent (calculated from
data in National Institute of Alcohol Abuse and Alcoholism `1978, Table 3 p. 6~.
Therefore, 1 pint of alcohol was contained in 22.3 pints of beer, or 6.ss pints of wine, or
2.33 pints of spirits. These figures for the number of pints of beverage per pint of alcohol
were multiplied by the average prices per pint of beverage to obtain the 1976 figures in
the first three columns. Prices in other years were derived from these 1976 prices by use
of the Bureau of Labor Statistics price indexes for beer, wine, and spirits (unpublished).
per year. Figure 1 depicts the recent history of consumption rates for
beer, wine, and spirits.
Nominal consumer expenditure for alcoholic beverages increased
from $13 billion to $32 billion between 1960 and 1975 (DISCUS Facts
Book 1977, p. 26), but this represents an increase in real terms (con-
trolling for inflation) of only 36 percent. The percentage of total con-
sumer expenditures accounted for by alcoholic beverages declined from
3.7 percent to 3.0 percent during this period. Thus the decline in the
OCR for page 258
258
3.00
2.80
2.60
2.40
2.20
2.00
At
o
u'
UJ
~ 1.60
111
an 1.40
At
o
~ 1.20
1.80
1.00
0.80
0.60
0.40
0.20
COOK
Total
r
Beer
_~~
\
Rear
~~ Distilled
Spirits
,'
__
-
Distilled
Spirits
1 1 1 1 1 1 1
1946 1950 1960 1970 72 74 76
YEAR
FIGURE 1 Trends in per-capita ethanol consumption in U.S. gallons' based on beverage
sales in each major beverage class in the United States, 1946-1976.
real cost of all types of alcoholic beverages in recent years has been
accompanied by increased consumption but a reduced importance in
the typical consumer's budget.
What accounts for the secular decline in the relative prices of alcoholic
beverages? Part of the answer, particularly in the case of distilled spirits,
is that excise tax rates have not kept up with inflation.
The last three columns of Table 1 were derived from the first three
columns, converted to "1980 dollars" by the consumer price index. For
example, according to the CPI, 1960 dollars had 2.63 times as much
OCR for page 259
Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 259
purchasing power as 1980 dollars. Therefore, 1960 prices were converted
to 1980 dollars by multiplying in each case by 2.63.
ALCOHOL BEVERAGE TAXATION
Alcoholic beverages are subjected to a complex array of taxes and other
controls that affect retail prices. Distilled spirits are taxed more heavily
than beer and wine; taxes on distilled spirits include a federal excise tax
of $10.50 per proof gallon and state and local taxes and fees that averaged
$5.55 per gallon in 1975 (DISCUS 1977a) and import duties on foreign
products. Beer and wine are also taxed by all levels of government. As
a result, various direct taxes and fees account for about one-half of retail
expenditures for spirits and about one-fifth of retail expenditures for
both beer and wine (DISCUS 1977a, p. 2~.
The states have legislated a considerable degree of government control
on alcoholic beverage prices and sales. Nineteen states have a legal
monopoly over the wholesale trade in spirits, and all but two of these
also monopolize the retail trade in spirits. Most of these monopoly states
also require that wine be sold only in state stores, and several have
included beer as well.2 In monopoly states, then, prices are set by ad-
ministrative fiat. In the remaining states, retail distributors must be
licensed by the state, and in most of these states the distributors are
subject to fair trade controls on pricing. The decline in real prices of
alcoholic beverages, then, directly reflects choices made by state leg-
islatures and regulatory agencies. More fundamentally, however, it is
clear that these choices have been influenced by costs. A major com-
ponent of the cost of distilled spirits is the federal excise tax; the fact
that it has remained constant at $10.50 per proof gallon for the last 30
years has greatly contributed to the decline in real cost of this type of
beverage. If this excise tax had been "indexed" to keep up with inflation
since 1960, it would now stand at about $28 per proof gallon; assuming
this tax increase had been passed along to the consumer with a 20-
percent markup, the real price of spirits would only have declined by
about 22 percent since 1960, in contrast with the actual decline of 48
percent.
Thus, prices of alcoholic beverages are controlled by legislation and
government agencies to a considerable extent. Tax and regulatory de-
cisions in this area influence patterns of consumption, which in turn
influence the public health. The remaining sections of this paper are
devoted to developing evidence on the magnitudes of such effects and
discussing their implications for pricing policy.
2r)etails on state regulations are given in DISCUS (1977b).
OCR for page 260
260
THE DEMAND FOR ALCOHOLIC BEVERAGES
COOK
The prices of alcoholic beverages have had a downward trend since 1960
(compared with the overall price level), while during much of this period
average consumption increased. Was the decline in price responsible,
at least in part, for the increase in drinking during the 1960s? More
generally, how much do economic variables—prices and income levels
influence drinking habits? This question has motivated a number of
empirical studies, both in North America and Europe. My review of this
literature is limited to a few of the best of these studies based on U.S.
or Canadian data. The new results presented below are based on recent
data on prices, income, and consumption in the United States. I begin
the review with a brief summary of the economic theory and terminology
useful to understanding the empirical studies.
NOTES ON THE ECONOMIC THEORY OF CONSUMPTION
Economic theory demonstrates that an individual's rate of purchase
(quantity demanded) for any commodity that he or she consumes will
be influenced by the price of the commodity, the prices of related com-
modities, and by his or her purchasing power (wealth or income). The
relationship between the consumer's quantity demanded and these eco-
nomic variables can be characterized as a mathematical function of the
follow form:
D (pi
where
Pi,
. ,
Pi
P'
Pn YE
., p, p1,
qi= the quantity demanded of commodity i,
. ,
(1)
IN - prices of the various commodities available, to the con-
sumers, including Pi (the "own price"),
P= a price index, such as the consumer price index,
Y= the consumer's income.
Adjusting prices and income for the overall price level P in this fashion
is justified because only relative prices and income matter in determining
demand. For example, a uniform increase of 10 percent in all prices and
income would have no effect on demand.
Individuals have different tastes, and two consumers facing identical
prices and income may differ considerably in the mix of commodities
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Liquor Taxes and Drinking, Cirrhosis, and A uto A ccidents 261
they buy; the mathematical form of the function (1) differs among in-
dividuals. However, economic theory predicts that consumers will be
alike in their qualitative response to a price change; an increase in price
will reduce the quantity demanded.3 It would be surprising if alcoholic
beverages proved to be exceptions to this basic principle of economics.
Economics offers some useful terminology for characterizing the
shape of a demand function:
(1) If the quantity demanded of a commodity increases with income,
the commodity is termed normal; otherwise it is inferior. Cheap wine
of poor quality may be an example of an inferior commodity.
(2) If two commodities are typically consumed together, one en-
hancing the utility derived from the other, they are termed complements.
More precisely, two commodities are complements if a reduction in the
price of one increases the demand for the other. Beer and whiskey are
complements for people who consume their alcohol in the form of boil-
ermakers. For most people, however, we might expect beer, wine, and
liquor to be substitutes, meaning that a reduction in the price of any one
of these three would increase the demand for the other two.
(3) Economists usually express the responsiveness of demand to
prices and income in terms of elasticities. For example, the "own price
elasticity of demand" is defined as the percentage change in quantity
demanded resulting from a 1-percent change in own price. The "income
elasticity of demand" is defined analogously.
If the own price elasticity is between zero and minus one, demand is
inelastic; if less than minus one, it is elastic. It can be demonstrated
mathematically that if the demand for a commodity is inelastic, then an
increase in its price will result in an increase in expenditure on that
commodity; if demand is elastic, expenditure will fall in response to
. .
price Increase.
THE ECONOMETRIC APPROACH TO ESTIMATING PRICE AND
INCOME EFFECTS
In practice, estimates of price and income effects for alcoholic beverages
have been based on aggregate data rather than data on individual con-
sumption decisions with respect to individual brands of alcoholic bev-
erages:
(1) Adequate data on consumption and income are usually not avail-
3A sufficient, but by no means necessary, condition for this prediction is that the com-
modity is "normal" (i.e., quantity demanded tends to increase with income).
OCR for page 262
262
COO K
able for individuals or households. Most demand estimates have been
based on data for average consumption, income, and price levels for the
entire populations of geographic units states, provinces, or even entire
countries.
(2) Most studies have aggregated the scores of varieties of alcoholic
beverage into three categories: liquor, wine, and beer. Quantity is meas-
ured by volume of liquid within each category and price as some sort
of average or index of the prices of all the brands included in the cat-
egory. This type of aggregation conceals interbrand substitution that
may result from price changes. For example, an increase in the average
price of liquor may induce consumers to substitute cheaper for more
expensive brands, thereby perhaps maintaining their volume of liquor
consumption despite the general increase in prices.
Equation (1) is too general (in a mathematical sense) to be estimated.
In practice, the demand function that has been estimated has a form
similar to the following:
Q = a + bs ( p ) B ( P ) ( P )
where
+ c (Y)
+ do + . .
. + dmXm ~
Q = per-capita consumption of spirits (or beer or wine),
PS' PB, PW= prices of spirts, beer, and wine, respectively,
Y= per-capita disposable income,
P= consumer price index,
Al, ....
Xm = other variables thought to influence consumption.
Some studies have used the logarithm of these variables instead of es-
timating the linear form of the equation. Other mathematical transfor-
mations are also possible. The "correct" mathematical form is not
known; any particular form chosen by the econometrician is at best an
approximation of the correct form.
Given the appropriate data, it is possible to estimate the parameters
of (2) using standard econometric techniques (e.g., regression analysis).
The resulting estimates for be, bB, and bw measure the effect of these
prices on quantity demanded. In a demand equation for spirits? we
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Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 263
would expect bs to be negative, bw and bB to be positive (assuming they
are substitutes for spirits), and c to be positive (assuming spirits is a
normal commodity). The econometric estimates of these parameters
serve as a test of these qualitative hypotheses. These estimates are never
precise; the regression analysis provides a basis for calculating the range
of statistically reasonable values for each parameter (confidence inter-
vals).
There are a variety of statistical problems encountered in attempting
to develop reliable estimates of price and income effects. These problems
are introduced and discussed in the course of the literature review below.
RESULTS FROM ECONOMETRIC STUDIES
Of all published econometric studies of alcoholic beverage demand using
data for the United States or Canada, the most noteworthy is by Johnson
and Oksanen (1977~. They estimated separate demand equations for
beer, wine, and spirits, using panel data for 10 Canadian provinces for
15 years (1956-1970~. Each of their demand equations includes the fol-
lowing independent variables: prices for beer, wine, and spirits relative
to the consumer price index; real income per adult; the dependent
variable (consumption) lagged 1 year; and variables representing eth-
nicity, schooling, religion, and strikes affecting alcoholic beverage sales.
Several estimation techniques were used. Since they yielded virtually
identical results, I will limit my discussion to one of these techniques:
ordinary least squares with separate dummy variables for each province.
The following points should be taken into account in considering their
results:
(1) The authors assume that prices are exogenous, because "In the
Canadian institutional setting, prices are established by government
agencies" (p. 114) The possibility that the price policies of government
agencies may be influenced by demand conditions is not considered.4
4 Presumably retail price decisions are influenced by prices charged by manufacturers and
importers, which will in turn be influenced by demand conditions. Demand should play
a particularly important role in determining the price of aged whiskey and wine, which
are in more or less fixed supply in the short run. If observed prices are influenced by
demand conditions, rather than being an exogenous determinant of quantity demanded
(as Johnson and Oksanen, and most other econometric studies. have assumed). then the
parameter estimates in their demand equations will be biased and inconsistent. This is an
example of a widely recurring problem in statistical analyses of data generated by a
"natural" process characterized by complex causal interactions among the variables.
It should also be noted that Johnson and Oksanen use data on average prices of alcoholic
beverages. It would be preferable to use price index data in this type of study. but alcoholic
beverage price indexes are not available for Canadian provinces.
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264
COO K
(2) The authors avoid the problem of developing a statistical explan-
ation for the large cross-sectional (interprovince) differences in con-
sumption because of the nature of their data. All equations are estimated
in first difference form, which of course is impossible when only cross-
sectional data for 1 year are available.5 This is important because the
large cross-sectional differences in consumption levels are probably
more a reflection of cultural differences than of differences in prices and
income (Simon 1966~. The use of the first difference form reduces the
importance of finding adequate empirical proxies for these cultural dif-
ferences. The same point applies to the problem of cross-sectional dif-
ferences in nonprice regulations of beverage sales. Of course, to the
extent that "culture" and nonprice regulations change over time, it is
still necessary to control for them. But these intertemporal changes are
likely to be small relative to cross-sectional differences, at least for the
15-year period under consideration here.
(3) The authors' specification includes dummy variables for each
province. These variables are meant to capture province-specific trends
in the underlying determinants of consumption behavior not otherwise
specifically accounted for in the demand equation.
(4) The inclusion of all three prices in each demand equation permits
estimation of the cross-price effects on demand, as well as the own price
effect.
(5) The inclusion of lagged consumption in the specification is jus-
tified by the possibility that alcohol consumption behavior exhibits some
degree of habit formation, and hence the full, long-run response to a
change in price or income does not emerge immediately. Including this
variable creates certain econometric problems, which are discussed by
the authors.
The key results of this analysis are summarized in Table 2. The short-
run demand for spirits is elastic with respect to own price, but beer and
wine are inelastic. Income changes have little or no effect on demand.
The cross-price effects (not shown in this table) tend to be small. These
estimated effects suggest that spirits and beer are complements, whereas
wine and beer are substitutes but the evidence from the Johnson-
Oksanen study is not very strong on this issue.
s By way of illustration, the first difference form of the equation
y,= a + bX, + ct.
IS
by. - Y.-l) = b(X, - X, 1) + c.
OCR for page 265
Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 265
TABLE 2 Estimated Elasticities for Spirits Demand in Canada
Beverage Short-Run Own Long-Run Own Short-Run
Type Price Elasticity Price Elasticity Income Elasticity
Beer
Spirits
Wine
-0.26
-1.13
-0.68
-0.29
-1.70
-1.36
-0.02
0.10
0.01
There have been no published studies using U.S. data that are com-
parable in scope and quality to that of Johnson and Oksanen. A major
limitation on studying U.S. alcoholic beverage demands is the lack of
state-level price data for beer and wine. One exception is Hogarty and
Elzinga (1972), who were able to obtain data on beer prices for two
brands; these data were entered into the public record as a result of an
antitrust suit by the U.S. Department of Justice. They used these annual
state-level data for the period 1956-1959 to estimate the following equa-
tion:
Log B = a + b Log PB + c(y) + d tog F. (3)
where
B = beer consumption per adult,
PB= price of beer,
F= percent foreign born,
Y= per-capita income.
Their results imply a price elasticity of -0.9 and an income elasticity
of 0.4. They also experimented with including a spirits price variable in
their equation but rejected it because the result implied that beer and
spirits are complements a result that they thought highly unlikely. This
study makes no special use of the panel structure of the data, and the
specification is highly inadequate to the task of controlling for non-
economic influences on beer consumption.
Price elasticities of spirits consumption estimated from U.S. state-
level data have been questioned because of problems with official data
on liquor sales. These data are based on reports by wholesalers to the
tax authorities and differ from actual liquor consumption by state res-
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Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 275
the trend in heavy drinking during the preceding 15-20 years (Jellinek
1947~; a change in drinking habits in a population will not be fully
reflected in cirrhosis mortality for this period of time. However, the
short-run response of cirrhosis to heavy drinking is not necessarily neg-
ligible. We can imagine a population to have a "reservoir" of cirrhosis
victims whose disease has progressed to a greater or lesser extent
(Schmidt and Popham, forthcoming); if this group changes its drinking
patterns, there will be some effect on the cirrhosis mortality rate within
a short time.
To the extent that cirrhosis mortality rates do serve as an indicator
of the incidence of heavy drinking, they are of considerable value in
alcohol research. A number of social and medical problems besides
cirrhosis are related to heavy drinking. If it can be demonstrated that
a particular alcohol-related policy is effective in reducing cirrhosis, then
it would be expected that this intervention is also having the effect of
reducing other problems associated with heavy drinking.
Previous Studies Relating Price to Cirrhosis Deaths
Seeley (1960) calculated intertemporal correlations between an alcohol
price variable and the cirrhosis death rate for Ontario and for Canada,
using annual data for 1935-1956. His "price" variable was an index
representing the price of a gallon of beverage alcohol, divided by average
disposable income. His work was extended to other countries and time
periods by Popham et al. (1976~. The reported correlations are typically
close to 1.0. The authors' intepretation of these findings is that con-
sumption levels by heavy, cirrhosis-prone drinkers are responsive to
price.
There are two main problems with these studies. First, the "price"
variable confounds the price of alcohol with income. The studies re-
viewed in the section above on demand for alcoholic beverages have
consistently found that average consumption responds differently to
changes in income and changes in price. Johnson and Oksanen (1977)
in particular found that drinking in Canada was highly responsive to
price but unresponsive to income. The second problem is that these
correlation results may well be the result of "third-cause" variables, not
included in the analysis, that are responsible for trends in both price
and in the incidence of heavy drinking.
Historical "experiments" with large changes in price and conditions
'2 See Polich and Orvis (1979) for an analysis of the relationship between consumption
level and the incidence of a variety of alcohol-related problems in a sample of U.S. Air
Force personnel.
OCR for page 276
276
COOK
of availability provide another source of evidence on the degree to which
heavy drinkers are responsive to such environmental factors. Prohibition
is an obvious case in point. Warburton (1932, p. 240) found that alcoholic
beverage prices during Prohibition were three to four times higher than
before World War I. Cirrhosis death rates reached their lowest level of
the 20th century shortly after World War I and remained constant at
this low level (7-8 per 100,000) throughout the 1920s (p. 213~. Further-
more, the drop in cirrhosis death rates was apparently greater for the
relatively poor than for others, a result that reinforces the notion that
high prices were at least in part responsible for the reduction in the
prevalence of heavy drinking during this erase Warburton (p. 239) re-
ports that the cirrhosis death rate for industrial wage earners fell further
than for city residents as a whole. Terris (1967, p. 2077) reports that
the age-adjusted cirrhosis death rates dropped further for blacks than
for whites between 1915 and 1920 and that these rates preserved their
new relative position through the 1920s.~4
Conclusions
Most cirrhosis deaths are the result of many years of heavy drinking.
Cirrhosis is to some extent an "interruptable" disease process, so that
a reduction in consumption on the part of a cirrhosis victim, even one
whose condition is quite advanced, will extend life expectancy. The
cirrhosis death rate may be a reasonably good indicator of the incidence
of heavy drinking in a population. Previous research has provided some
evidence to the effect that an increase in the price of alcohol will reduce
the incidence of heavy drinking and the cirrhosis death rate, although
this evidence is by no means decisive or compelling.
RESULTS OF A QUASI-EXPERIMENTAL STUDY
The nature of and justification for the quasi-experimental approach to
studying the price elasticity of demand for liquor was explained above
in the section on demand for alcoholic beverages. The same approach
is used here to measure the short-term effect of changes in the liquor
\3 Economic theory and common sense both suggest that the price elasticity of demand
for a normal commodity tends to be relatively high for households in which expenditures
on the commodity constitute a relatively large fraction of their budgets.
]4 A related bit of evidence is given in Terris (1967~. He notes that, in England and Wales
in 1950, the cirrhosis death rate increased strongly with socioeconomic class, unlike in the
United States. His explanation is that "spirits have been taxed out of reach of the lower
social classes in the United Kingdom, where only the well-to-do can really afford the
luxury of dying of cirrhosis of the liver" (p. 2086~.
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Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 277
TABLE 4 Analysis of Tax-Related Changes
Net Change Net Change Net Change
in Liquor in Auto in Cirrhosis
Rank Consumption Fatality Rate Death Rate
1-5 16 8 9
~10 8 8 9
11-15 6 9 6
1~20 4 4 3
21-25 3 5 9
2~30 2 4 2
Percent below median 76.9~o 65.8% 63.2~o
Sign test: prob-valuea <0.001 0.037 0.072
a Suppose that a price change had no effect on liquor consumption. Then each observation
on the net change in consumption associated with a tax change would have a probability
of 0.5 of being negative. This is the null hypothesis. The "prob-value" reported in the
first column is the probability that 30 or more observations out of the 39 "trials" would
be negative if the null hypothesis were true. The prob-values in the second and third
columns are defined analogously. These probabilities were calculated using the normal
approximation to the binomial distribution, applying the continuity correction. These
procedures and terminology are found in Wonnacott and Wonnacott (1977~.
tax on the death rate due to cirrhosis and auto accidents.~5 This study
uses the same 39 observations as the consumption study with one ex-
ception: data did not permit inclusion of the 1975 tax change in Mas-
sachusetts.
The results are reported in Tables 3 and 4. The formula used to
calculate the "net change in auto fatalities" is strictly analogous to the
formula used in the consumption study, with the auto fatality rate re-
placing liquor consumption per capita. The formula used to calculate
the "net change in the cirrhosis death rate" is a bit more complicated.
It can be written as follows:
3 3 3 3
~ D.+i — ~ D.-i red D,+i — ~ D. in
i=l i-~ — Medtian J?~=~ i- 3 A (6)
where
D'+i= the cirrhosis death rate in the "trial" state i years after
the tax change,
|5 Mortality rates for cirrhosis and auto accidents were calculated from frequency counts
published in National Center for Health Statistics (1975, Table 1-13) and related tables
in previous editions. Annual state population estimates were taken from Bureau of the
Census (1971, 1978~.
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COOK
and so forth. This formula permits delayed effects of the tax change on
cirrhosis to be taken into account.
The results of this analysis are summarized in Table 4. About 66
percent of the "net change" observations in the case of auto fatalities
were negative. If tax changes in fact had no effect on auto fatalities, we
would expect that only about 50 percent of these observations would
be negative. The probability that 66 percent or more would be negative
given the null hypothesis of "no effect" is less than 4 percent. Therefore,
we can conclude with considerable confidence that a liquor tax increase
tends to reduce the auto fatality rate.
About 63 percent of the "net change" observations in the case of
cirrhosis deaths were negative. The probability of this high a fraction
of negative values by chance alone is about 7 percent. It appears likely,
then, that increases in liquor tax reduce the cirrhosis death rate.
As in any statistical study, these findings do not offer definitive proof
of anything. However, the preponderance of the evidence certainly sup-
ports the conjecture that the price of liquor is one determinant of the
auto accident and cirrhosis death rates. The quasi-experimental tech-
nique employed here minimizes problems of interpretation and in par-
ticular minimizes doubts concerning the causal process that underlies
the results.
I conclude, then, that despite the questions posed at the beginning
of this section, there is good reason to believe that the incidence of
heavy drinking responds to liquor price changes of relatively small mag-
nitude. The magnitudes of these responses are highly uncertain but can
be estimated using the same techniques as were employed in estimating
the price elasticity of demand. I converted the "net change in auto
fatality rate" and the "net change in cirrhosis death rate" statistics (from
Table 3) into price elasticities. The median of these price elasticities is
- 0.7 for auto fatalities and - 0.9 for cirrhosis deaths. It seems entirely
reasonable that these elasticity estimates turn out to be less than the
price elasticity of demand for distilled spirits.
EVALUATING ALCOHOLIC BEVERAGE TAXATION
Alcoholic beverage prices have a direct effect on the prevalence of
chronic excess consumption and the prevalence of the various problems
caused by chronic excess consumption. There are three sources of evi-
dence for this conclusion: (1) numerous studies, including my own (see
the section on demand for alcoholic beverages), have found that per-
capita consumption of alcoholic beverages is responsive to price changes.
It is possible but unlikely that this observed responsiveness of aggregate
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Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 279
drinking to price is due entirely to light and moderate drinkers; (2)
large changes in price associated with the adoption of Prohibition and
other "natural experiments" of this sort have been associated with large
reductions in the cirrhosis mortality rate and other indicators of the
prevalence of excess consumption; and (3) small increases in the tax
rate for spirits appears to reduce cirrhosis and auto fatality rates.
Each of these pieces of evidence is subject to legitimate scientific
doubt. Nonetheless, I believe that, taken together, they provide a strong
case-for the proposition that an increase in the price of alcoholic bev-
erages will reduce the prevalence of excess consumption and the inci-
dence of the various problems caused by chronic excess consumption.
The magnitude of the effect that could be generated by, say, a 20-percent
increase in the alcoholic beverage price level is highly uncertain, al-
though it appears likely that the effect of such an increase would be
measured in terms of thousands of lives saved per year and billions of
dollars of savings in medical and related expenses. Since the prices of
alcoholic beverages are currently and historically controlled to a con-
siderable extent by government policy, it is appropriate to view alcoholic
beverage prices as public health policy instruments. This conclusion is
empirical, rather than normative—it is by no means equivalent to con-
cluding, for example, that it would be a good thing to raise the federal
excise tax on alcohol or that higher prices are better than lower prices.
A complete evaluation of a change in alcohol price policy requires con-
sideration of other effects in addition to those related to public health.
In particular, the distributive effects of a tax-induced increase in price
should be considered, as should the loss in consumer benefits associated
with low alcoholic beverage prices. These two types of concerns are
discussed below.
INCIDENCE
The distribution of alcohol consumption levels among individuals is very
diffuse and skewed to the right. This characterization is valid for every
population group that has been studied (Bruun et al. 1975~. Roughly
speaking, one-third of U.S. adults abstain, one-third drink very lightly
(up to three drinks per week), and the remaining third account for most
,6 there is considerable evidence that the consumption levels of the median drinker and
the, say, 90th percentile drinker are closely related, as demonstrated by comparing pop-
ulation groups that differ widely in per-capita consumption (Bruun et al. 1975~. Hence
it would appear that the consumption levels of the "typical" drinker and the "heavy"
drinker are subject to the same environmental and cultural influences, and/or that drinking
patterns are interdependent or "contagious."
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COOK
of the total consumption.~7 More precise characterizations of drinking
distributions can be calculated from two recent studies. The Rand survey
of drinking practices in the U.S. Air Force (Polich and Orvis 1979)
found that 10 percent of the surveyed population (including abstainers)
consumes 51 percent of the alcohol; 10 percent of the drinking popu-
lation consumes 47 percent of the total alcohol. DeLint and Schmidt's
(1968) study of bottle purchases from government stores in Ontario
found that 10 percent of consumers purchased 42 percent of the total
alcohols Because the distribution of consumption has this property of
concentrating a high percentage of consumption among a relatively few
people, the incidence of alcohol taxation is necessarily very unequal.
Whether this degree of inequality is good or bad depends on one's
perspective. Three questions, reflecting three rather different normative
perspectives on the incidence issue, are posed and discussed below.
How is the incidence of alcohol taxation related to the consumer's
ability to pay?
Almost $10 billion in direct taxes and fees on alcoholic beverages was
collected by all levels of government in 1976 (DISCUS 1977a). In most
jurisdictions this revenue was not earmarked for specific programs but
rather is used to help finance a wide range of governmental activities.
One traditional standard in the public finance literature is that such
general public revenues should be collected on an "ability to pay basis";
households with equal incomes should make equal contributions, and
tax contribution should increase with income. By this principle, taxes
on alcoholic beverages clearly receive low marks. Households with equal
incomes pay vastly disparate alcohol taxes, depending on their alcohol
consumption levels.
How much of a burden does alcohol taxation impose on members of
poor households?
The answer to this question is not known, but it is useful to outline
the relevant issues. First, an increase in alcohol taxes is disadvantageous
for adult individuals and household heads who drink; they would not
voluntarily choose to pay higher prices. Their dependents may be made
better off, however, depending on the response of the household's drink-
ing members to the price change. An increase in the taxes on alcoholic
beverages can either increase or reduce the total expenditures of poor
I' See report of the panel, pp. 27-28.
~8 Calculated from statistics reported in Polich and Orvis (1979, Appendix E). In making
the calculations, I used the midpoints of each interval in Table E10 and assumed a mean
of 20.0 for the top, open-ended interval.
]9 Beer and on-premise consumption were not included in this study.
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Liquor Taxes and Drinking, Cirrhosis, and A uto Accidents 281
households on alcohol, thereby leaving more or less money for food,
clothing, and shelter. For households whose demand for alcoholic bev-
erages is elastic (price elasticity less than -1.0), an increase in price
will cause a reduction in total expenditure on drinking, while expend-
itures will increase for other households. Surely poor households differ
considerably among themselves with respect to price elasticity of de-
mand. However, the evidence above suggests that the average house-
hold's demand for spirits, at least, is quite elastic; furthermore, poor
households would tend to be more elastic than higher income house-
holds. Therefore, for a high but unknown percentage of poor house-
holds, an increase in alcohol taxation should reduce expenditures for
alcoholic beverages. Furthermore, it is quite possible that a tax-induced
reduction in drinking in households that are at the high end of the
drinking distribution may lead to reduced medical expenditures and
increased earnings from employment.
Is the incidence of alcoholic beverage taxation related to the benefits
received from government?
An alternative to the "ability to pay" standard is the "benefits" stand-
ard, which states that the distribution of tax liability should be closely
related to the distribution of benefits received from government pro-
grams. To a large extent medical care, alcoholism treatment, minimum
income maintenance, and other social services are provided and financed
by government. The various health and social problems associated with
alcohol consumption place expensive demands on these services. These
problems are highly concentrated among the same group that pays the
bulk of alcohol taxes the chronic excess consumers. It is clear, then,
that there is fairly close positive association between the amount of an
individual's alcohol tax contribution and the expected value of govern-
ment services consumed by the individual for alcohol-related problems.
We view alcohol taxes as analogous to insurance premiums that are
calibrated to one determinant of risk the average rate of alcohol con-
sumption just as health and life insurance premiums are adjusted for
age.
We could label this view of the alcohol tax the "drinker should pay"
standard. This standard suggests that it is appropriate to set alcohol
taxes at a level such that tax revenues are equal to the total government-
financed costs of alcohol-related problems. Or we could choose to go
further, by the same justification, and structure taxes so that drinkers
collectively pay the total bill for the alcohol-relted externalities, in-
cluding private costs borne by other individuals (e.g., we all pay higher
premiums for private health and life insurance policies because some
insured people drink unhealthy or unsafe amounts). Aside from the
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COOK
.
.
.
.
· 1/
/
-
8
OUNCES OF ETHANOL PER DAY
FIGURE 2 Hypothetical relationship between individual's con-
sumption and resulting social harm.
problem of actually calculating the social costs of drinking, these quan-
titative standards are vulnerable to a major objection: the social harm
of drinking is not proportional to the rate at which an individual con-
sumes alcohol, so that a tax that is proportional to consumption will not
be strictly proportional to alcohol-related harms. Figure 2 illustrates a
hypothetical relationship that depicts average social cost increasing with
consumption. The relationship is not strictly proportional because it
incorporates two reasonable assumptions: (1) average social cost in-
creases disproportionately with consumption; and (2) individuals at the
same consumption level differ widely with respect to the external harm
caused by their drinking, due perhaps to differences in personality,
metabolism, drinking patterns, and so on. A tax that is proportional to
the ethanol content of alcoholic beverages will then result in light drink-
ers, and the "safer" heavy drinkers, paying more than "their share" of
the total bill for alcoholic-related social costs. Whether this arrangement
is deemed better or worse than paying these costs from general tax
revenues is a matter of preference. In my judgment' the "drinker should
pay" principle is not sufficiently compelling in itself to justify high taxes
on alcoholic beverages. But it should be kept in mind that high taxes
reduce the social costs of drinking in addition to providing a mechanism
for financing these costs.
COST-BENEFIT ANALYSIS
Besides providing a source of government revenue, taxes on alcohol
influence the volume of total sales and the distribution of that volume
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Liquor Taxes and Drinking, Cirrhosis, and Auto Accidents 283
among individual drinkers. If alcohol were not taxed, the price of al-
coholic beverages would be too low because it would not reflect the
negative externalities of drinking. The Pigovian principle requires that
the tax on an externality-generating activity be set equal to the difference
between the marginal social cost of the activity and its marginal private
cost- an approach long advocated by economists for controlling envi-
ronmental pollution. The objective of this type of tax is to "internalize"
the external costs of the activity, thereby giving agents the incentive to
curtail the activity in question to the appropriate level (i.e.,^ the level
at which every unit of the activity is valued at least as highly as the true
social cost of that unit of activity). The normative force of this principle
is undermined in the case of drinking by the fact (illustrated above in
Figure 2) that the social cost of a drink differs depending on who con-
sumes it and under what circumstances. Therefore, an increase in the
tax on alcoholic beverages will deter some drinking that is socially worth-
while (the value to the consumer exceeds the social cost) as well as some
that is not worthwhile. Given this situation and ignoring the distribu-
tional issues discussed above, the appropriate tax rate should be chosen
by comparing costs and benefits at each tax level.
The marginal social benefit of a tax increase is equal to the value of
the reduction in negative externalities that will result from reduced
consumption, plus the additional tax revenue obtained. The marginal
social cost of a tax increase is equal to the value of "consumers' surplus"20
lost as a result of the tax. In principle, the tax rate is "too low" if the
additional benefit of an increase exceeds the loss in consumers' surplus.
It should be clear that it is very difficult to implement this principle due
to the considerable uncertainty about the actual magnitudes of these
theoretical constructs. But this discussion will perhaps serve as a useful
framework for further empirical research in this area.
CONCLUSION
Public enthusiasm for government restrictions on drinking peaked in
the early years of this century when many states and eventually the
nation adopted Prohibition. Since the repeal of Prohibition in 1933 there
has been a more or less steady decline in government restrictions on
availability. Perhaps the most important aspect of this trend in recent
20 Consumers' surplus is defined as the maximum amount consumers would be willing to
pay for their current consumption levels minus the amount they actually are required to
pay. This difference is positive because consumers value inframarginal units of the com-
modity at more than their price, as reflected in the fact that demand curves have negative
slope.
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COOK
years has been the rather sharp decline in the prices of alcoholic bev-
erages (relative to average prices of other commodities) caused in large
part by the failure to increase taxes commensurate with the inflation
rate. While the public remains concerned about the "alcohol problem,"
there is a widespread belief that restricting availability is not an effective
strategy for combating this problem. For example, a recent study by
Medicine in the Public Interest (1979) concluded that state legislators
are "generally skeptical about the effect of regulations, including tax-
ation, on the incidence, patterns, or circumstances of use" (p. 31~. On
the basis of the evidence reported above, it appears quite likely that the
legislators' view is incorrect taxes do reduce total consumption and in
particular reduce those portions of total consumption associated with
auto fatalities and liver cirrhosis. If correct, these findings suggest that
legislators should view alcohol taxation as a policy instrument for com-
bating alcohol-related problems and not just a source of revenue. I am
not advocating that taxes be raised there are costs as well as benefits
to raising taxes and the evidence presented above is far short of a
complete cost-benefit analysis of a tax change. Rather the message of
my results is that the benefits do exist and should be taken into account.
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Representative terms from entire chapter:
price elasticity
