Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon and Index for Inflation

Background

Alcoholic beverages are not taxed uniformly. Specifically, the alcohol content of beer and wine is taxed at a much lower rate than the alcohol content of distilled spirits. The 2017 tax act made a number of temporary changes to the taxation of alcoholic beverages. Those changes expire after December 31, 2019. Beginning in 2020, distilled spirits will be taxed at a flat rate of $13.50 per proof gallon. (A proof gallon denotes a liquid gallon that is 50 percent alcohol by volume.) A tax rate of $13.50 per proof gallon translates to about 21 cents per ounce of pure alcohol. Beer will generally be subject to a tax rate of $18 per barrel, which is equivalent to about 10 cents per ounce of pure alcohol (under the assumption that the alcohol content of the beer is 4.5 percent). The excise tax on wine that is no more than 14 percent alcohol will be $1.07 per liquid gallon, or about 6 cents per ounce of pure alcohol (assuming an alcohol content of 13 percent). (Wines with high volumes of alcohol and sparkling wines face a higher tax per gallon.) Through 2019, tax rates are generally lower for quantities of alcoholic beverages below certain thresholds for producers of all sizes.

There are additional factors beyond those rate structures that affect how alcoholic beverages are taxed. Specific provisions of tax law can lower the effective tax rate for small quantities of beer and nonsparkling wine for certain small producers. Additionally, there is an exemption from tax for small volumes of beer and wine that are produced for personal or family use. States and some municipalities also tax alcohol; those rates vary substantially and sometimes exceed federal rates.

In 2017, federal collections from taxes on alcoholic beverages totaled about $11 billion. The Congressional Budget Office projects that if current law remained in place, after the expiration of the tax rate structure that currently applies to alcoholic beverages, receipts would grow by about 2 percent per year.

Option

This option consists of two alternatives. Both of those alternatives would take effect in January 2020.

The first alternative would standardize the base on which the federal excise tax is levied by using the proof gallon as the measure for all alcoholic beverages. The tax rate would be raised to $16 per proof gallon, or about 25 cents per ounce of alcohol. That alternative would also eliminate the provisions of tax law that lower effective tax rates for small producers, thus making the tax rate equal for all producers and quantities of alcohol.

A tax of $16 per proof gallon would raise the federal excise tax on a 750-milliliter bottle of distilled spirits from $2.14 to $2.54. The tax on a six-pack of beer at 4.5 percent alcohol by volume would increase from 33 cents to 81 cents, and the tax on a 750-milliliter bottle of wine with 13 percent alcohol by volume would increase from 21 cents to 82 cents.

The second alternative would also raise the tax rate to $16 per proof gallon and eliminate the provisions that lower effective tax rates for small producers, but it would adjust, or index, the tax for the effects of inflation thereafter.

Effects on the Budget

If implemented, the first alternative of this option would increase revenues by $68 billion from 2020 through 2028, the staff of the Joint Committee on Taxation (JCT) estimates. Indexing the tax for inflation under the second alternative would raise revenues by an additional $14 billion, for a total of $83 billion over the same period, according to JCT's estimates.

The higher excise tax would reduce taxable business and individual income. The resulting reduction in income and payroll tax receipts would partially offset the increase in excise taxes. The estimates for the option reflect that income and payroll tax offset. Furthermore, research shows that when alcohol costs more, it is consumed less. Therefore, increasing the tax on alcohol would contribute to a decline in consumption, which would also reduce revenues. That effect is reflected in the estimate.

The estimates for this option are uncertain because both the underlying projection of alcohol consumption and the estimated response to the change in the tax rate are uncertain. The underlying projection of alcohol consumption over the next decade is uncertain because it depends on how taxpayers will respond to temporary changes in tax rates occurring under current law. Similarly, the estimates depend on how taxpayers would respond to the permanent changes in tax rates introduced with this option. Those estimated responses are based on observed past responses to changes in the tax rate; those responses might differ from the response to the changes considered here.

Other Effects

Research shows that the consumption of alcohol creates costs for society that are not reflected in the pretax price of alcoholic beverages. Examples of those external costs include spending on health care that is related to alcohol consumption and covered by the public, losses in productivity stemming from alcohol consumption that are borne by entities or individuals other than the consumer, and the loss of lives and property that results from alcohol-related accidents and crime. One argument in favor of raising excise taxes on alcoholic beverages is that doing so would not only reduce alcohol use—and thus the external costs of that use—but also make consumers of alcoholic beverages pay a larger share of such costs.

Moreover, reducing alcohol consumption through increased excise taxes might be desirable, regardless of the effect on external costs, if lawmakers believe that consumers underestimate the harm they do to themselves by drinking. Heavy drinking is known to cause organ damage and cognitive impairment, and the link between highway accidents and drinking, which is especially strong among young drivers, is well documented. Substantial evidence also indicates that the use of alcohol at an early age can lead to heavy consumption later in life. When deciding how much to drink, people—particularly young people—may not adequately consider such long-term risks to their health. However, many other choices that people make—for example, to consume certain types of food or engage in risky sports—can also lead to health damage, and those activities are not taxed.

An increase in taxes on alcoholic beverages would have disadvantages as well. It would make a tax that is already regressive—one that takes up a greater percentage of income for low-income families than for middle- and upper-income families—even more so. In addition, it would affect not only problem drinkers but also drinkers who impose no costs on society and who thus would be unduly penalized. Furthermore, higher taxes would reduce consumption by some moderate drinkers. Evidence on the health effects of moderate drinking is mixed, but some studies have found moderate consumption to have health benefits and increase life expectancy.

In the longer term, changes in health and life expectancy resulting from reduced alcohol consumption would probably affect spending on federal health care, disability, and retirement programs. However, such changes in health and longevity potentially go in opposite directions for moderate and heavy drinkers, so the direction and magnitude of changes in spending are uncertain.