Source: Data from National Institutes of Health, Bureau of Economic Analysis and Census Bureau
Source: Data from National Institutes of Health, Bureau of Economic Analysis and Census Bureau

Why have we allowed alcohol taxes to fall?

NPR’s Planet Money has taken a look at consumer spending on alcohol. Over the last 30 years, it says, U.S. consumer spending has been unchanged, at about 1 percent of income. But the pattern of our spending is different: We spend more on going out drinking, and less on drinking at home.

Planet Money notes that this is mostly due to changes in relative prices: Alcohol at the store has gotten cheaper, but it’s gotten more expensive in restaurants. The report attributes this to Baumol’s Cost Disease:

Over time, you expect productivity gains and falling prices in manufactured goods. But a bartender today can't make drinks any faster than a bartender 30 years ago. In other words, there haven't been major productivity gains at bars. When a sector lags in productivity growth, it tends to have increasing prices.

That’s probably one factor at play. But there's another one: falling alcohol taxes. In 2009, the federal, state and local governments collected $25 in excise taxes per gallon of alcohol. (That’s not total beverage volume, but alcohol volume; for example, there’s one gallon of alcohol in 20 gallons of typical mass-market beer.) In 1982, that figure was $35, measured in 2009 dollars, a decline of 29 percent.

To put that in practical terms: a $10 reduction in the per-gallon tax means, roughly, a $1 reduction in the price of a 750ml bottle of liquor or a case of beer. (In practice, the shift will be somewhat different, as the federal government and most state governments tax beer, wine and liquor at different rates.)

On-premise alcohol sales are also subject to excise tax, but it’s a smaller percentage of the total drink price. So, when excise taxes fall in real terms, they cause a greater percentage reduction in price for retail alcohol sales than for restaurant and bar sales. Restaurants and bars, meanwhile, have to obtain licenses to sell alcohol. If these become more difficult or expensive to obtain (and, in my anecdotal experience, they have, at least in the Northeast) that will be passed on in the form of higher prices.

It makes sense that these policy shifts would push alcohol prices down at the store and up at the bar. But it doesn’t make sense that such policy shifts happened in the first place. Returning alcohol taxes to their 1977 levels (when the government collected $57 in 2009 dollars per gallon of alcohol) would raise an additional $18.5 billion in revenue across all levels of government -- and also lead to reductions in drunk driving, violent crime and disease.

Restrictive on-premise licensing, meanwhile, raises drink prices. That’s fine, and probably even desirable. But a large fraction of the price increases accrue as rents to the incumbent owners of liquor licenses. The government only benefits if it sells new licenses. Overly strict licensing also reduces competition and makes cities less interesting places to live; as Dante Ramos argues, this harms cities’ ability to attract knowledge workers.

Alcohol consumption in bars and restaurants does produce negative social effects, just like alcohol consumption at home. But if we address those effects through taxes and DUI enforcement instead of restrictive licensing, we can get more of the upsides of bars and restaurants while combating the downsides.

Over the next few years, there will have to be a deal that shrinks the federal budget deficit by, among other things, raising taxes. An increase in alcohol excise taxes, and linking those taxes to inflation, should be a part of that deal. Convincing local governments to license restaurants and bars more freely will be a tougher sell. But if localities were encouraged to impose poured drink taxes, they might become more inclined to issue licenses in order to generate tax receipts.

(Josh Barro is lead writer for the Ticker. Follow him on Twitter.)