Increase All Taxes on Alcoholic Beverages to $16 Per Proof Gallon

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Revenues 5.2 7.0 7.0 7.1 7.2 7.2 7.3 7.4 7.5 7.5 33.5 70.4

Source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2017.

In 2015, the federal government collected $9.9 billion in revenue from excise taxes on distilled spirits, beer, and wine. Different alcoholic beverages are taxed at different rates. Specifically, the alcohol content of beer and wine is taxed at a much lower rate than the alcohol content of distilled spirits in part because the taxes are determined on the basis of different liquid measures. Distilled spirits are measured in proof gallons, which denote a liquid gallon that is 50 percent alcohol by volume. The current excise tax levied on those spirits, $13.50 per proof gallon, translates to about 21 cents per ounce of pure alcohol. Beer, by contrast, is measured by the barrel, and the current tax rate of $18 per barrel translates to about 10 cents per ounce of pure alcohol (under the assumption that the alcohol content of the beer is 4.5 percent). The current levy on table wine is $1.07 per 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. Last raised in 1991, current excise tax rates on alcohol are far lower than historical levels when adjusted to include the effects of inflation. Additionally, there is currently a tax credit that lowers the effective per-gallon tax rate for small quantities of beer and nonsparkling wine for certain small producers and there is an exemption from tax for small volumes of beer and wine that are for personal or family use. States and some municipalities also tax alcohol; those rates vary substantially and sometimes exceed federal rates.

This option 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 would be raised to $16 per proof gallon, thus increasing revenues by $70 billion over the 2017–2026 period, the staff of the Joint Committee on Taxation estimates. (Because excise taxes reduce producers’ and consumers’ income, higher excise taxes would lead to reductions in revenue from income and payroll taxes. The estimates shown here reflect those reductions.) This option would also eliminate the small producer tax credits and the exemptions for personal use, thus making the tax rate equal across all producers and quantities of alcohol.

A tax of $16 per proof gallon would equal about 25 cents per ounce of alcohol. Under this option, the federal excise tax on a 750-milliliter bottle (commonly referred to as a fifth) of distilled spirits would rise from about $2.14 to $2.54. The tax on a six-pack of beer at 4.5 percent alcohol by volume would jump from about 33 cents to 81 cents, and the tax on a 750-milliliter bottle of wine with 13 percent alcohol by volume would increase from about 21 cents to 82 cents.

Experts agree that the consumption of alcohol creates costs for society that are not reflected in the before-tax 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 others besides 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 they would reduce alcohol use—and thus the external costs of that use—and make consumers of alcoholic beverages pay a larger share of such costs. Research has consistently shown that higher prices lead to less alcohol consumption, even among heavy drinkers.

Moreover, raising excise taxes to reduce consumption might be desirable, regardless of the effect on external costs, if lawmakers believed that consumers underestimated the harm they do to themselves by drinking. Heavy drinking is known to cause organ damage and cognitive impairment; and the links between highway accidents and drinking, which are especially strong among the young, are well-documented. Substantial evidence also indicates that the use of alcohol from 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 imposed no costs on society and who thus would be unduly penalized. Furthermore, higher taxes would reduce consumption by some moderate drinkers whose intake of alcohol is believed to have health benefits. (Moderate alcohol consumption, particularly of wine, has been linked to lower incidence of heart disease, obesity, and stroke and to increases in 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 go in opposite directions for moderate and heavy drinkers, so the direction and magnitude of changes in spending are uncertain.