Tax breaks for the alcohol industry and weak alcohol tax policy have led to a historic low in alcohol taxes in the United States (U.S.). A new report by the Institute on Taxation and Economic Policy (ITEP) finds that alcohol taxes have now fallen even below marijuana taxes.
According to this report, in 11 states where marijuana is legalized, the tax revenue from alcohol was lower than from marijuana. The report, from the Institute on Taxation and Economic Policy, found the 11 states where marijuana is legal received almost $3 billion in excise taxes from marijuana in 2021, compared with about $2.5 billion from alcohol excise taxes or liquor store profits.
- Marijuana excise taxes totaled $2.9 billion in 2021, compared to about $2.4 billion from alcohol excise taxes.
- In Colorado, marijuana excise taxes in 2021 amounted to $396 million while alcohol excise taxes amounted to only $53 million.
- In California, alcohol excise taxes were about half of the state’s marijuana excise tax collections, which was $832 million.
- Alcohol taxes were even lower than marijuana taxes in the states of Illinois, Massachusetts, Washington, Arizona, and Nevada as well.
Marijuana tax receipts fall way short of promises
However, marijuana excise taxes still make up only a small percentage of state budgets. For example, the total state budget of Colorado for 2020-21 was around $36 billion.
An overview compiled by SAM – Smart Approaches to Marijuana shows that marijuana tax revenue comes up short in states that commercialized, compared to promises that were made.
- Tax revenue from marijuana accounts for less than 1% of state revenues where the drug is “legal.”
- Almost every state that legalized marijuana came up short on initial revenue targets.
- In Massachusetts, the first year of tax revenue from marijuana sales was less than half of the anticipated $63M (Politico, 2019).
- Even as marijuana markets grow, research shows tax revenue quickly tapers off (Pew Trusts, 2019).
- Revenue projections are unreliable. As states seek to fill budget gaps, researchers advise against using marijuana tax revenue to fill long-term holes (Pew Trusts, 2019).
Taxes on marijuana will not compensate for the deficits in state budgets. The budget deficits in states with mature commercialized marijuana markets comprise a combined $71B (CA, CO, NV, OR, WA). The tax revenues from marijuana barely combine for $2.5B.
Colorado governor who legalized marijuana John Hickenlooper addressed the reality of the tiny tax revenue collected:
(Marijuana tax revenue) is a drop in the bucket – it’s not going to pay for early childhood education or solve any big social ill…”John Hickenlooper, former Governor of Colorado
Alcohol taxation system for Big Alcohol, not for people and communities
There are different excise rates for taxing different products for both alcohol and marijuana applied on a state level. Therefore, excise taxes vary by state. This leads to vastly different excise tax rates between states.
For example, in Colorado, where alcohol tax is much lower than even marijuana tax, the state levies a 15% excise tax on wholesale and retail marijuana transactions. Meanwhile, Colorado has one of the lowest tax rates on alcohol products: Just $2.28 per gallon of distilled spirits, 32 cents per gallon of wine, and just 8 cents per gallon of beer.
Even the highest excise tax rate on alcohol products applied by U.S. states is not enough. According to the nonpartisan Tax Foundation, the highest excise tax for spirits is in Washington DC and only amounts to $35.31, for beer the highest is just $1.29 per gallon in Tennessee, and for wine, it is only $3.23 per gallon in Kentucky.
A study in 2019 showed that even considering all tax types – including federal and state – total alcohol taxes account for only one tenth of alcohol-related costs in the United States.
The median total alcohol tax per unit of alcohol (based on all federal and state taxes) was $0.21, which accounted for 26.7% of the median cost to government and 10.3% of the median total economic cost of alcohol use.
How did U.S. alcohol taxes fall this low?
A study by Boston University professor Ziming Xuan found that out of 29 alcohol-related policies and regulations, combining limits on outlet density with increasing taxes accounts for about 50% of the policy effects.
Nevertheless, inflation has eroded alcohol taxes in the U.S. and appropriate tax policies that adjust for inflation have not been implemented. This means alcohol is now more affordable than ever before in the federal state.
A study from Boston University School of Public Health published in the Journal of Studies on Alcohol and Drugs found, that inflation has reduced American alcohol tax rates by about 70% from 1933, when alcohol started being taxed in the U.S., to 2018.
According to this study, between 1933 and 2018 tax rates declined:
- For beer, the relative value of taxes declined by 66%;
- For wine, the relative value of taxes declined by 71%; and
- For distilled liquor, the relative value of taxes declined by 70%.
Despite this erosion of taxes due to inflation, in December 2019, the United States Congress extended the major tax break by the Trump Administration for the alcohol industry, losing billions of dollars in government revenue.
- Without the tax breaks the Distilled Spirits Council (DISCUS) would have payed $275 million in higher taxes.
- A beer industry group claims they would have to pay $130 million in higher taxes.
- California wineries alone would have paid $150 million in higher taxes.
These studies reveal three flaws in the alcohol tax system in the United States – three reasons why alcohol taxes now are even lower than marijuana taxes:
- Low rates of alcohol taxes to begin with,
- Failure to adjust alcohol taxes to inflation rates to avoid affordability reductions over time, and
- Handouts to Big Alcohol in the form of tax breaks by federal and state governments.
Weak alcohol taxes and lack of adequate alcohol policies are costing American citizens
Between 2006 and 2010, the costs of pervasive alcohol harm in the United States increased. This trend is now further accelerating, given the rising number of alcohol deaths in the U.S. during the pandemic.
While the pandemic brought to the surface the rising alcohol problem in the U.S. it is not a new problem. Alcohol use has in fact been rising in the country for some time, COVID-19 only added further fuel to the alcohol epidemic.
Dr. Keith Humphreys, a professor of psychiatry at Stanford who served as a senior policy adviser on drug policy for President Obama, highlights three key facts that depict the growing alcohol burden in the U.S. today:
- Alcohol use is the third leading cause of death in the U.S.
- More people die from alcohol every year than from the entire opioid epidemic.
- Alcohol accounts for more crime than all other drugs combined.
As per CDC data, Alcohol harm cost the U.S. economy $249 billion in 2010.
Most of these costs are due to:
- Reduced workplace productivity,
- Crime, and
- Cost of treating people for health problems caused by alcohol.
Improving alcohol taxes can reduce the alcohol burden and save lives in the U.S.
There is an urgent need for the U.S. to address its growing alcohol problem. At the current state of alcohol policy, the U.S. stands to loose more lives to alcohol at a growing cost to the government.
We know which policies work to reduce these costs,” said Dr. David Jernigan, Senior author of the Baltimore study, from the Boston University School of Public Health, as per Movendi International.
Higher taxes on alcohol could help pay for itself and reduce consumption.”Dr. David Jernigan, Boston University School of Public Health
Alcohol taxation is one key measure that can be used effectively by the U.S. to reduce the existing burden and prevent future harm. It is a best buy alcohol policy solution, recommended by the World Health Organization (WHO) and backed by science. Not only is alcohol taxation highly effective in reducing the harm caused by alcohol products it is also one of the most cost-effective measures governments can implement.
Movendi International has been advocating for alcohol taxation to receive political attention commensurate with its potential to improve health, promote development and boost government revenue for many years.
Public health-oriented taxes on tobacco and alcohol are non-distortionary taxes. They have a triple benefit:
- Raise fiscal revenue,
- Reduce and prevent harm caused by tobacco and alcohol products, and
- Promote health and development by easing the health system burden and facilitating investments into healthcare and health promotion.
Besides revenue-raising objectives, the rationale for excise taxes on alcohol is to reflect their harmful external costs. The benefits of higher alcohol taxes are obvious for individuals and entire communities. The triple benefits result from:
- Reduced alcohol use,
- Preventing the initiation of alcohol use among children and youth, as well as
- Reducing the negative health, social, and economic consequences caused by the products and practices of the alcohol industry.