By Katherine Puliafico, MPP, 2009
In recent years California lawmakers have pushed for increases in alcohol taxes as a way to help close the budget gap. But these proposed measures continue to be defeated in the legislature. This is due, in large part, to resistance from the state’s alcohol industry. Currently, California is the biggest producer of beer and wine in the United States. In 2012 the state produced 595 million gallons of wine at a retail value of $22 billion[1]. That same year, the 363 breweries in the state produced over 687 million gallons of beer[2]. Opponents of alcohol tax increase proposals argue that they are regressive, placing a greater tax burden on lower income households, in addition to being very detrimental to the state’s alcohol industry, leading to losses in sales and thousands of jobs.
Excise taxes on alcohol have had a long and sometimes contentious history in the United States. The first internal revenue measure to be passed in the United States was an excise tax on alcohol in 1791. In response, Appalachian alcohol producers began attacking revenue collectors in what later became known as the Whiskey Rebellion[3]. Recent federal tax increases have been rare and modest. The last federal tax increase was in 1990 as part of the Revenue Reconciliation Act. At the state level, tax increases in California have also been infrequent. Before the most recent increase in 1991, taxes on wine hadn’t been increased since 1937, beer hadn’t been increased since 1959, and spirits hadn’t been increased since 1967 [4]. California’s tax rates on alcohol are well below the national averages, having the 29th lowest rate for beer, 43rd lowest for wine, and 38th lowest for spirits (Tax Foundation, 2013).
In 2009, former Governor Schwarzenegger proposed a “nickel a drink” excise tax on beer, wine, and distilled spirits as a tool to help balance the state’s budget. That year a statewide survey conducted by the Public Policy Institute of California found that 85% of voters supported the tax increase[5]. However California’s alcohol industry lobbied hard against the proposal and it was eventually rejected by lawmakers.
One of the industry’s main arguments against the tax was that lower income consumers would be disproportionately affected by the increase, thus making it a form of regressive taxation. However, a majority of the alcohol purchased in the state is by a small minority of consumers. The top 20% of individual alcohol purchasers consume 85% of all alcoholic beverages[6]. Therefore the any tax increase on alcohol would place the greatest burden on heavy drinkers, and some might argue they would appropriately assume a greater share of alcohol-related social costs. Furthermore, alcohol expenditures increase as income increases, among both normal and heavy drinkers. A 2002 study found that only 50% of people earning less than $20,000 drink alcohol, compared to 79% of people earning $80,000 or more[7].
How does a tax increase affect sales?
Opponents of the “nickel a drink” tax have argued that the tax increase would result in a 20% decrease in sales and loss of 38,200 jobs. In order to determine how a tax increase would affect sales, you must take into consideration how sensitive consumers are to changes in price. Price elasticity of demand measures the responsiveness of quantity demanded for a commodity, like alcohol, as a result of a change in price. The demand for alcohol is considered to be relatively inelastic, meaning that changes in price have little effect on overall sales. A good (product) is inelastic if its price elasticity is between 0.00 and -1.0. In other words, demand is inelastic if the percentage change in the amount demanded is smaller than the percentage change in price. The price elasticity for beer is -0.46, -0.69 for wine, and -0.80 for spirits[8]. Therefore a 10% increase in price would decrease beer sales by 4.6%, wine sales by 6.9%, and spirit sales by 8.0%.
It should be noted that price elasticity for alcohol does vary among different groups. For instance the demand for alcohol among heavy drinkers is less responsive to price, with a price elasticity of -0.28[9]. Conversely, the demand for alcohol among underage and younger drinkers is very sensitive to changes in price, with a price elasticity of -2.24[10]. Advocates often site this responsiveness in support of alcohol tax increases. In fact, a report published by the National Bureau of Economic Research found that taxes on alcohol are a very effective policy to reduce alcohol consumption among youths and alcohol-related injuries and deaths[11].
| Table 1 – Change in Consumption and Effect on Sales (2007) | ||||
|
Beer |
Wine |
Spirits |
Whole Industry |
|
| Price Elasticity |
-0.46 |
-0.69 |
-0.80 |
|
| Volume Consumed (gallons) |
690,542,050 |
127,285,000 |
51,813,600 |
869,640,650 |
| Sales Revenue |
$10,268,360,284 |
$5,118,129,850 |
$7,540,951,344 |
$22,927,441,478 |
| Increase in Retail Price (%) |
3.56% |
3.18% |
2.93% |
3.22% |
| Decrease in Consumption (%) |
1.65% |
2.20% |
2.35% |
2.07% |
| Estimated Loss in Sales Revenue |
$175,506,069 |
$115,996,705 |
$182,038,775 |
$473,541,549 |
Data Source: Beer Institute, 2008; Beverages Information Group, 2009; Wagenaar et al., 2009; Wine Institute, 2008
By factoring the price elasticity of alcohol and the percentage change in price, you can determine the projected decrease in alcohol sales (CSPI, 2004)[12]. A five-cent per drink tax increase would constitute a 3.56% increase in the retail price of beer, 3.18% increase in the price of wine, and a 2.93% increase in the price of spirits. This increase would result in a decrease of sales of beer by 1.65%, 2.20% for wine, and 2.35% for spirits. Looking at the industry as a whole, a “nickel a drink” tax increase would result in a 2.07% decrease in total statewide alcohol sales. This equates to a loss of approximately $175 million in beer sales, $116 million in wine sales, and $182 million in spirit sales, or a total of $473 million for the industry as a whole (See Table 1).
While a notable loss, these amounts are likely to be offset by the expansion of the alcohol market in California. Sales for beer, wine, and spirits have been on the rise since the early 1990s[13]. It is likely that higher alcohol taxes will have little effect on the profitability of the industry as a whole[14].
Furthermore, excise taxes on alcohol are based on volume and not value, and therefore have no automatic inflation protection. The infrequency of alcohol tax increases in California has caused the real (inflation adjusted) value of the tax to decline substantially[15]. If you adjust for inflation, the $0.20/gallon tax rate for wine and beer is worth about $0.12/gallon, in 2013 dollars. Similarly, the current spirits tax rate of $3.30/gallon is worth $1.92/gallon, in 2013 dollars (Bureau of Labor Statistics Inflation Calculator). That means that since 1991, California’s alcohol taxes have lost 40% of their original value. If the proposed “nickel a drink” tax increase had been passed, it would have only been reclaiming value that has been lost over the years due to inflation.
What about jobs?
Tax increases ultimately lead to a discussion of job losses. The alcohol industry has claimed that the 1991 federal tax increase caused a loss of 60,000 jobs in production, distribution, retail and other related fields nationwide[16]. However, beer wholesale employment actually increased during that time by 8,000 jobs. This includes increases in 1990 and 1992, the years before and after the 1991 federal tax increase. There were a small decrease in jobs in 1991, but some believe that those could be attributed to innovation and mechanization in the industry[17].
Between 2000 and 2009, alcohol manufacturing and wholesale employment in California increased by 25%[18]. Opponents believe that a “nickel a drink” tax increase would stifle the growth the industry has seen in recent years, and would result in up to 38,200 job losses[19]. The alcohol industry assumes a broad ripple effect when conducting job loss estimates. But by targeting jobs that are directly tied to alcohol production and sales, job loss estimates come in much lower. As such, this study focused on the 403,327 jobs reported in 2007 that were directly related to alcohol production and sales.
Using an equation developed in collaboration with Mills College Economics Professor, Roger Sparks Ph.D., one can measure the change in output per worker as a result of the overall change in consumption due to a price increase. That is, a production function can be used to determine the level of output, in gallons, per worker. If you then multiply that number by the overall change in consumption levels due to a “nickel a drink” tax increase, you can estimate an approximate number of jobs that would be lost as a result of the price increase. This calculation produces an estimate that a five-cent per drink tax increase would result in the loss of approximately 1,176 jobs, which equates to about a 0.3% reduction in overall alcohol industry employment in California. These jobs correlate to an estimated $26.3 million in lost wages, and $1.2 million in lost state income tax revenue. While $26.3 million may seem like a substantial loss, it is quite small in relation to the $8.5 billion in wages earned by the 403,327 alcohol industry employees considered in this study. In truth, an alcohol tax increase will likely have only a marginal effect on alcohol industry employment in California.
The social costs of alcohol consumption
In 2005 alcohol-related traffic accidents, disease, and crime cost California $19.26 billion, and resulted in additional $33.1 billion in productivity losses[20]. Given the sensitivity to price among younger drinkers, an increase in alcohol prices could significantly reduce social costs incurred by underage and younger drinkers. Drivers under the age of 22 are 100 times more likely to die in fatal automobile accidents[21]. A “nickel a drink” tax could drastically decrease these fatalities. Furthermore, it has been speculated that if alcohol taxes had kept pace with inflation since 1951, underage drinking would decline by 24%[22].
Would a “nickel a drink” tax be effective?
Alcohol tax proposals like the “nickel a drink” tax have long been considered a useful tool in balancing state budgets and reducing alcohol-related social costs. However, alcohol taxes haven’t been increased in California since 1991. While voters have been found largely to support such an increase, alcohol taxes have a hard time gaining traction in the state’s legislature. Alcohol producers in California have continued to argue that a tax increase would result in significant losses in sales revenue and jobs within the industry. But due to the relatively inelastic demand for alcohol in California, sales are only predicted to decrease by 2.07%. This estimated loss in revenue would lead to a relatively low number of job losses. Due to continued growth in the state’s alcohol industry, these losses would likely be absorbed by the growth that California’s alcohol industry is currently experiencing.
The debate over alcohol taxes is likely to continue in the years to come. However, it seems that both sides may have overstated the costs and benefits of the tax. A “nickel a drink” will bring in millions of additional tax revenue, but this revenue could be construed as merely reclaiming tax revenue lost due to rising inflation. While it has been found that an increase in price could significantly lower the rates of underage drinking, overall demand for alcohol is too inelastic to have that much of an effect on consumption levels and social costs attributed to alcohol abuse. And because alcohol and cigarette taxes represent about $1 out of every $10 earned by the state, a “nickel a drink” will do very little to address California’s budget shortfall[23]. Therefore, while a “nickel a drink” will not be nearly as detrimental to the state’s alcohol industry as claimed, other types of taxes, in combination with spending reductions, would be far more effective in balancing the state’s budget.
After receiving her MPP from Mills College in 2009, Katherine Puliafico worked as a civic engagement consultant for Bay Area non-profits like the League of Women Voters and California Forward. Currently she is working and living in Petaluma as a financial analyst for SMART, a locally funded transit agency that will construct and operate a passenger rail system in Marin and Sonoma counties.
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