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A Shot, a Beer and the Ever-Evolving Debate Over Taxing Sin

We’ve tried taxing drinkers, smokers and soda-guzzlers. Sometimes it helps, improving the public’s health, even if it doesn’t produce a lot of revenue. But it still raises equity and moral issues.

Coronavirus confusion reigns in Wisconsin as some bars, restaurants and tourist attractions can reopen and others are shut down
Having a drink at Papa’s Blue Spruce Resort, a bar in Lake Geneva, Wis.
(Armando L. Sanchez/Chicago Tribune/TNS)
People in Wisconsin are drinking a lot. That may not come as much of a surprise, since the state has long had a reputation as a national shot-and-a-beer mecca. But recent numbers reveal something.

The latest report from the state revenue department informs us that liquor tax revenues in Wisconsin were up 17 percent over the last fiscal year, the largest annual increase in nearly 50 years. The jump in consumption includes not just beer but wine and distilled spirits as well.

You might guess that this trend means a big revenue windfall for the state treasury, but you would be wrong about that. Wisconsin, probably because it is home to so many loyal imbibers, taxes all alcoholic beverages at a very low rate: 6.5 cents per gallon on beer, and $3.25 a gallon on hard liquor.

A large jump in consumption might mean some real money in Washington state, where the tax on distilled spirits is $31.48 a gallon, or Oregon, where it is $21.95. But Wisconsin doesn’t choose to augment its finances much at the expense of its drinkers. It does collect quite a bit more than Missouri, Pennsylvania or Vermont, which leave wine untaxed, or New Hampshire and Wyoming, which impose no direct alcohol tax at all.

The upshot, though, is that, for Wisconsin at least, a statewide drinking binge isn’t really much of an economic issue. It’s more of a health issue, and that’s the way the state’s officials are choosing to portray it. The Wisconsin Policy Forum, after suggesting a connection to the coronavirus, warns that “during such a period it is perhaps unsurprising that alcohol sales increased in Wisconsin. … Yet it is also clear that excessive alcohol use is a leading public health concern. Surveys routinely show Wisconsin residents engage in binge drinking more frequently than residents in most other states.”

There are numbers to back this up. Fatal automobile crashes connected to alcohol were up substantially in Wisconsin during much of 2020, and this occurred while the number of vehicle miles traveled was going down. The total number of alcohol-related deaths in the state rose considerably as well. Taking a longer view, the number of deaths related in some way to drinking has been rising disproportionately for years. Two decades ago, Wisconsin’s alcohol-related deaths were close to the national average. Today they are much higher.

FOR VIRTUALLY ALL OF AMERICAN HISTORY, public authorities have alternated between regulating the consumption of alcohol for revenue purposes and doing it as a health measure. When George Washington imposed a tax on whiskey in 1791, and then had to ride out to Pennsylvania to quash a rebellion against it, his administration was doing it to raise money, not seeking to sober people up. When Abraham Lincoln’s administration promulgated a similar levy in the 1860s, it was to help finance the Civil War. But when the 18th Amendment to the Constitution took effect in 1920, it had nothing to do with revenue. It actually cost the nation substantial amounts of money. The purpose, as we all know, was to improve the country’s moral fiber.

Prohibition, as we also know, was in most ways a disastrous failure. It led to widespread and corrosive flouting of the law and a massive illegal industry, and sickened and killed significant numbers of people who drank toxic alcohol concoctions. It also gave us much of the organized-crime network whose remnants we are still dealing with today. But one fact about Prohibition is much less widely known: It did cause Americans, in the aggregate, to drink less. If that had been the only consequence of the law, it would have been a success.

We don’t criminalize consumption sins at all any more, except for those involving drugs. But what about discouraging them by imposing “sin” taxes on them, and bringing a little money into the public treasury in the process? Virtually every state in the country does that.

In most of them the amount of money raised is, as in Wisconsin, relatively small. In 2018, state and local governments raised about $7.5 billion in alcohol taxes. In none of them did alcohol tax revenues constitute as much as 1 percent of the total state budget; a few of them got to 0.9 percent, but that was the most. If you add in taxes on tobacco, you reach 2.6 percent of state revenue. As the Tax Policy Center confirms, “Sin taxes make up only a small part of state budgets and have limited potential for governments.”

Most states have raised tobacco taxes dramatically in the decades since the connection between tobacco and serious illness was documented. The average state tax levied directly on a pack of cigarettes is now $1.91. In Connecticut, the highest-taxing state, it’s $4.35. Within the city limits of Chicago, it’s $7.16. And the incidence of smoking in the United States has declined precipitously. In the early 1960s, more than 40 percent of U.S. adults were smokers. Now the number is down to about 15 percent. How much of that is due to the tax burden and how much is due to anti-tobacco advertising campaigns? We don’t really know. What we do know is that despite the decline, smoking and its complications are estimated to cost more than 400,000 lives in the United States in a typical year.

The relationship between punitive tobacco campaigns and public revenue is a complicated one. The more we drive down smoking, the less tax money we bring in. In states that use that tax money to finance additional anti-smoking initiatives and other public health efforts, that leads to a cutback in the programs.

BUT THE REAL FOCUS OF THE SIN TAX DEBATE right now is on consumption of sugary beverages, which when used to excess generate a whole variety of health problems, from diabetes to heart, kidney and liver disease. This debate has been going on for more than a decade in a handful of the nation’s largest cities. As of this year, seven U.S. cities are imposing some form of special tax on sugary drinks.

The most famous controversy occurred in 2013 in New York City, where Mayor Michael Bloomberg sought to ban from sale many sweetened drinks larger than 16 ounces. It wasn’t all that draconian: You could still buy the drinks in smaller amounts, and convenience stores were generally exempt. But Bloomberg’s plan was thrown out in state court after a year. A slightly different scenario played out in Chicago and surrounding Cook County, where the County Board of Commissioners imposed a penny-per-ounce tax on sweet drinks, only to repeal it four months later amid widespread public condemnation. Reputable studies of this experiment have concluded that the tax did reduce consumption during its brief existence, possibly by as much as 20 percent.

But the best-known recent campaign against sugary drinks is the one in Philadelphia, which imposed a 1.5-cent-per-ounce tax on them in 2017. That tax has survived numerous attempts to repeal it, and has brought an estimated $200 million into the city treasury in the years since then. Assessments of its effect on consumption vary wildly, but the available evidence does point to a substantial decline in sweet-beverage drinking. In the period since the tax has been in effect, several states have passed laws pre-empting localities from doing what Philadelphia did.

Small Philadelphia retailers complained in the first year that the soda taxes had caused a crushing decline in revenue and threatened their commercial livelihoods. But the most lasting and effective argument against the tax (and against liquor and tobacco taxes) has been that it is regressive: It hurts poorer people and spares the affluent.

There’s a grain of truth in this. Low-income Americans do drink a disproportionate amount of beer and sugary soda. But they suffer only to the extent that they ignore the tax and keep buying the drinks in the volume they always have. If they cut down significantly on their consumption, they are saving money, not throwing it away.

THERE IS, OF COURSE, A MORAL ISSUE when it comes to taxing soda. Sweet drinks do cause health problems in the long run, but they aren’t lethal in the way that binge drinking and chain smoking are. Drinking sweet soda doesn’t cause drunken driving accidents, or cause its drinkers to practice domestic abuse. It doesn’t lead directly to lung cancer. One might argue that it’s a borderline problem for which personal freedom to consume ought to take precedence over health issues and revenue collection. Red meat and fried foods aren’t very good for us in the long run either, but we don’t — and won’t — impose a punitive tax on them.

Quite a few medical experts think that’s not much of an argument. The Mayo Clinic believes that sweetened drinks are dangerous enough to be placed in the same category as alcohol and tobacco. A study by the clinic in 2013 concluded that doubling the alcohol tax would reduce alcohol-related mortality by 35 percent and traffic deaths by 11 percent. It pointed to what it considered comparable benefits in placing a hefty tax on sugar-laced beverages, although it calculated that a sweet-drink surcharge might need to be to be as high as 20 percent to be substantially effective.

So what is a government morally entitled to do to penalize drinkers, smokers and soda-guzzlers? And what sorts of measures are likely to be effective? In the end, that’s not an easy question for the authorities in Wisconsin or any other state to answer.

Prohibition taught us that it’s not a good idea to pass a law forbidding people to do something most of them will do anyway. But the anti-smoking campaign has taught us that you can cut down on self-destructive behavior by taxing it heavily and running scary ads about it. If Wisconsin’s leaders are truly worried about the consequences of binge drinking, they might want to try some combination of those two strategies. That would no doubt make quite a few voters angry, but it would also save a substantial number of lives. Where to draw the line is the kind of question our elected representatives are paid to answer.
Alan Ehrenhalt is a contributing editor for Governing. He served for 19 years as executive editor of Governing Magazine. He can be reached at ehrenhalt@yahoo.com.
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